Transfer pricing rules in the offing
Bangladesh is set to enforce transfer pricing rules to curb tax evasion and overseas fund transfers by multinational and foreign firms, officials said.
The National Board of Revenue will start auditing income tax files of multinational companies from next fiscal year.
Last month, the tax administrator assigned seven of its officials to form a “transfer pricing cell” to check illicit capital flight or profit transfers by foreign companies through transfer mispricing.
Once implemented, Bangladesh will be the second country in South Asia with a full-fledged law on transfer pricing, said Md Shabbir Ahmed, coordinator of the transfer pricing cell at the NBR.
He spoke at a workshop on transfer pricing organised by the Institute of Cost and Management Accountants of Bangladesh (ICMAB) at its auditorium in the capital yesterday.
NBR Chairman Md Nojibur Rahman said transfer pricing is an important area that is increasingly getting attention globally.
“In Bangladesh, the challenge for the NBR is to make international and multinational companies compliant,” he said.
Transfer pricing is the determination of prices at which goods, services and intangible property are transacted between related parties.
When the pricing of transaction within associated enterprises is fair and rational, there is no problem, Ahmed said.
“But when transactions are mispriced through showing of lower or higher prices than actual market prices, the transfer mispricing happens,” he said, adding that such mispricing is a serious concern for the tax authorities.
He said two subsidiaries of a company — one based in a high-tax country and another in a tax haven — can engage in trade with one another.
The low-tax subsidiary can quote abnormally high prices from the high-tax subsidiary for goods and services to manage maximum after-tax profits for the parent company — an unethical practice many multinational firms resort to, Ahmed said.
The United Nations Conference on Trade and Development (UNCTAD) estimates that more than 60 percent of global trade occurs within multinational groups.
That creates the potential for failing to declare profits and to shift profits from high-tax to low-tax jurisdictions. This is often done through tax evasion. But sometimes it is also done through legal forms of tax avoidance and manipulation — including trade and transfer mispricing, according to the World Bank.
A recent UNCTAD study indicates that about $100 billion in annual tax revenue is lost to developing countries in transactions directly linked to offshore hubs.
Capital flight through transfer mispricing from the developing world is estimated at ten times the size of aid it receives and twice the debt service it pays, according Swedish agency, Forum Syd.
To fight transfer mispricing, developed countries and most of the middle-income countries have already adopted transfer pricing rules. Developing countries are also catching up.
Globally, 75 countries, including Bangladesh, have adopted transfer pricing regime, Ahmed said.
ICMAB President ASM Shaykhul Islam urged the tax administrator to amend the Finance Act 2015 for using the expertise of ICMAB members in preparing transfer pricing statement and other financial documents.
There are some 175 multinational companies operating in Bangladesh which would come under the scanner of the transfer pricing cell.
ICMAB Secretary Md Abdur Rahman Khan also spoke.