VietNamNet Bridge – Adidas made its debut in Vietnam in 1993, but only in 2009 did it officially set up Adidas Vietnam, a 100 percent foreign-invested company owned by Adidas International B.V. It opened 50 shops all over the country just after two years, employing 80,000 workers.

Adidas has few competitors in Vietnam, which helps to explain why it had earned over $1 billion by early 2012. However, over the years, the sportswear manufacturer has been repeatedly reporting losses because the huge turnover has not offset high expenses.

In 2012, Adidas was added to a list of the enterprises suspected of conducting transfer pricing to evade tax. It then faced a tax inspection.

The inspection could not find convincing evidence, but did find many unreasonable expense items that had helped the enterprise declare losses.

The unreasonable expense items included international marketing, management costs, goods procurement and royalties.

The spending on international marketing gobbled up a big part of Adidas Vietnam’s revenue. The company had to pay 4 percent of net revenue for pictures for ad campaigns provided by the holding company Adidas AG.

The inspectors also found the unreasonable management costs declared by Adidas Vietnam. The company not only had to pay salaries to the managers in Vietnam, but also to regional managers in Singapore and Germany.

Meanwhile, the purchase costs were incredibly high. Though having adequate capacity to import goods directly from foreign partners, Adidas Vietnam still hired Adidas International Trading B.V to conduct the transactions related to goods procurement, and had to pay a fee of 8.25 percent of the transactions’ value.

Regarding the royalties, though Adidas Vietnam is not a producer, it still has to pay royalties to the holding company, which was 6 percent of the net revenue.

Adidas Vietnam registered its business as an importer and distributor of sportswear and sports shoes under the wholesale mode. Therefore, it was surprising that it had to pay money to support retailers. The expense items were taken into account as sale expenses.

Each of the expense items, as found by inspectors, costs dozens of billions of dong a year. The huge expenses, leading to high production costs, created big losses for the company.

As Adidas repeatedly reported losses, it did not have to pay corporate income tax to the State. An official of the Ministry of Finance’s Inspection Division No 1 noted that the profit made by Adidas Vietnam would have been very high if it had not paid unreasonable expenses, because the selling prices of Adidas’ products in Vietnam were triple the cost prices.

Despite big losses, Adidas still keeps pouring money into Vietnam. In the first half of 2014, like Puma and Nike, Adidas shifted a large amount of orders from China and Bangladesh to Vietnam.

VTC