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Much money leaks thru price fixing as transfer pricing law bends

Doulot Akter Mala | November 12, 2023 00:00:00

A decade has elapsed in neglect by now since Bangladesh introduced the Transfer Pricing (TP) law aimed at checking illegal profit shifting through cross-border transactions. Unfortunately, the fiscal measure has been kept ineffectual until now. The revenue authority could not scrutinize a single one of multinational companies' (MNCs) tax files yet to unearth tax evasion by way of transfer mispricing or Base Erosion and Profit Shifting (BEPS).

The National Board of Revenue (NBR) introduced transfer-pricing regulation in income-tax laws for the first time through the Finance Act 2012 which become effective from 1 July 2014. The income-tax authorities have formed a TP cell to implement the provisions. Later, the customs authority also joined forces by forming a TP cell to check trade-based money laundering following World Customs Organisation's (WCO) guidelines on customs valuation and TP.

Transfer pricing is the price paid by a firm for goods or services while purchasing it from a related entity. When a firm is buying or selling from its relative entity, there are chances that prices may not be fixed as per market principles. Rather price may be decided artificially by the parent company for getting maximum benefits, as well as avoiding tax payments. Such price fixing in intra-firm transactions to avoid taxes and to bag other benefits is defined as transfer mispricing.

Although TP is present in both international and domestic transactions by corporates, international transactions are mostly focused by the tax experts world-wide. Some 75 countries across the world have adopted TP law. In South Asia, India was the first country to formulate transfer-pricing regulations in 2001. It became fully operational in 2005-06.

Sri Lanka is the second one in the region that introduced such regulations in 2008. However, the law was not fully operational until 2015.

Countries with transfer-pricing legislation generally follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in most respects, although their rules can differ in some important details.

In Bangladesh, the TP regulation has been framed following the universal guidelines, but accommodating country's economic context, too. The issue of profit shifting through TP has been prioritized by the OECD following tendencies of corporations to send their money into low-tax regimes or tax heavens to evade corporate tax which is usually high-rated. However, Bangladesh has no estimated data on the volume of profit shifting by MNCs.

A recent report of Tax Justice Network (TJN), released on July 25, says the corporates shift $1.4 billion in profit out of Bangladesh each year. It has detected that Bangladesh is losing US$361 million worth of tax annually owing to the shifting of profits by MNCs, especially into tax havens abroad. Its report, titled 'State of Tax Justice-2023', has revealed the amount of tax loss is equivalent to 0.1 per cent of the country's gross domestic product (GDP).

It's difficult to enforce the TP regulations unless the revenue authority collects Statement of International Transaction (SIT). Again, it is not possible to collect SIT from digital platforms like google, facebook, youtube, Amazon, Netflix etc. Though the value-added tax (VAT) wing of the revenue board has made return submission mandatory by the global tech giants operating in Bangladesh, it remained handicapped to scrutinize the financial statements for a lack of expertise to track digital transaction.

The income-tax wing stands one step behind the VAT wing as it has not introduced any system yet to compile data on volumes of tax receipt from non-resident companies like Google, facebook, YouTube, amazon etc, although the tax authority collects source tax at a rate of 20 per cent at the time of profit repatriation by such companies. But the authority has yet to have data on volumes of tax receipt. Earlier, in 2020, the High Court issued a rule asking the NBR to submit a report, in the form of affidavit, every six months on its status in taxing digital platforms. However, it has not been followed through properly.

Considering the country's utmost priority to increase domestic revenue mobilization, it became imperative to assess the volume of payable and paid taxes by MNCs, for both having Permanent Establishments (PE) in virtual or physical-infrastructure form. Bangladesh, in 2018, established taxing right on the companies having physical infrastructure or presence here by amending legal provisions on PE, which includes virtual businesses, too.

Apart from MNCs, shifting wealth offshore by individuals also became rampant. Second home in Malaysia and Dubai, and Begum Para in Canada are much-talked-about topics in Bangladesh. With a desire to bring back such money, the tax authority, in financial year 2022-23, had introduced a new measure. Individuals who have wealth offshore were allowed to bring back their money paying a nominal tax. The measure has evoked huge criticism for allowing a new form of money-whitening scheme. However, none of the individuals has responded to the scheme--and it was scrapped with effect from July, 1, 2023.

It goes without saying that adoption of such decision without impact analysis would not help check illicit financial outflows. Before introducing any fiscal measure, the revenue board needs to assess the perspective, feasibility and potential of tax collection through ensuring tax justice.

Furthermore, investment should be made in skill development of taxmen to track virtual transaction. For this, the tax authority would need digital infrastructure, advanced technology and technical know-how. Existing legal tools and steps to combat illegal financial outflow have to be implemented by adopting sustainable measures.

Though there are several allegations and concerns over illicit financial outflow, the anti-money- laundering taskforce's role in curbing the irregularities is not adequately visible. Centering the upcoming national elections, investors are in a wait-and-see approach while a vested quarter is active to siphon money off to tax heavens.

The decade-old TP regulations need to be updated as per BEPS principle of the OECD. Mode of virtual transactions has been changed due to adoption of cryptocurrency, fourth industrial revolution or 4IR. Detection of loopholes in the existing TP regulations would be possible if the law is enforced properly.

Unfortunately, the tax authority has not yet audited MNCs' tax files to raise any tax demand. Some updated features are missing from the existing TP law. Access to international database would be needed to crosscheck the furnished data of MNCs in their tax files.

Instead, the MNCs, including a mobile-phone operator, four readymade garment exporters and two branch offices of a global electronics brand, have voluntarily paid Tk 100 million after five years of enforcing TP regulation. Some 120 MNCs have submitted their SITs to the NBR, although the cell found the number of MNCs in Bangladesh to be around 1,000.

Both income-tax and customs wings have TP cell to check tax evasion through cross-border transaction. However, the efforts remained on paper only. The TP cell of income tax has been reconstituted more than five times while head of international taxation or member for more than eight times in the last one decade.

There is no denying that scrutinsing tax files of MNCs and tech-giants needs expertise in international tax rules and laws. Officials in TP cell should be dedicated to only dealing with international taxation and should have work for at least three to five years to develop expertise. MNCs can afford high-paid accountants for preparing their financials. Tax authority would have to develop their skills to detect the tactics of those international expert accountants to evade taxes.

A finding of customs wing, earlier, has said Bangladesh could tap huge legitimate revenues lost out to transfer mispricing by building capacity of taxmen to prevent such intra-company trade tricks also deemed linked to capital flight.

Bangladesh customs authority in its report says Bangladesh as a Least Developed Country (LDC) is considered a vulnerable state in the fight against transfer pricing. Titled 'Combating Transfer Mispricing: New Avenue for Bangladesh Customs', the report shows high rates of corporate tax and poor governance make Bangladesh more susceptible to capital flight, money laundering and other financial wrongdoings.

It has also recommended the formation of joint working group for TP, comprising customs and income- tax officials, and conducting a joint-audit programme on TP aiming to recover lost revenues. Customs suggested rejuvenating the existing joint group of customs (JGOC) forum with India and negotiating with the Indian counterpart inclusion for TP in the discussion agenda.

The government could arrange mutual-assistance agreements with foreign countries, based on strategic importance and trade volumes with Bangladesh.

The customs recommended establishing customs wings in Bangladesh embassies or high commissions of important trade- partner countries to investigate TP, trade fraud and trade-based money-laundering cases.

Absence of required infrastructure and forensic lab, inadequate financial support or investment in developing the TP cells, and mainly lack of willingness on part of the government to enforce such law, in excuse of foreign investors' confidence, are cited as the major reasons for this failure.

True, FDI in Bangladesh remained stagnant at 22 to 25 per cent of GDP during the last three years. But, investment climate is not satisfactory in other countries, too, due to global turmoil following the Ukraine war. To attract FDI, Bangladesh needs to ensure legal compliance of investors too. Tax evasion by an MNC creates an uneven competition for another MNC that is tax-complaint. Companies evading taxes can offer their manufactured products at lesser prices compared to that of tax- complaint one paying corporate taxes regularly. So, enforcement of TP would rather encourage investors giving a positive impression on law-and-order situation of Bangladesh.

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