Tax evasion by big companies, especially the multinationals, by way of manipulated transfer pricing has for sometime been a problem with the National Board of Revenue (NBR). Although transfer pricing is a legally acceptable mechanism largely practised by international business houses all over the world, the manipulation resorted to for avoidance of tax payments is certainly illegal. So, what is known as transfer pricing assumes the character of 'transfer mispricing' when manipulation takes place. Transfer pricing is the price at which various wings/departments of a company transact with each other for goods or services. It usually takes place when two or more related companies or subsidiaries controlled by a common parent company engage in international trade with each other. Manipulation occurs when these related entities show artificially high prices for an imported product or service in an attempt to evade taxes and facilitate flight of capital. Incidents of capital flight are frequent when exchange rates are unstable. It is often most intense during periods of currency devaluation or just after an exchange rate crisis.
It is commonly held that as a result of the practice of mispricing, the country is being deprived of a major chunk in tax revenue every year. This has been found well proven in the findings of international financial research bodies. One such is the Global Financial Integrity, a Washington-based firm, the findings of which say that between the years 1990 and 2008 an otherwise unbelievable amount of $34.12 billion was involved in flight of funds illegally from Bangladesh under cover of transfer pricing. The implication for Bangladesh in terms of revenue loss as a consequence of the capital flight is around $1.8 billion a year during the period. The scale of this malpractice is by any measure intimidating. It is good to see that the authorities have at last sat up. The government was working on the longstanding problem for sometime. Work on the issue started more than two years ago since the publication of the Finance Act 2012. In keeping with a provision of the Finance Act, the NBR has now framed the rules in this connection.
Well framed rules, one believes, are an effective tool for the NBR to methodically examine and detect cases of irregularities -- so long let loose despite the knowledge of criminality. To be able to get on with the task, capacity building is the foremost requirement. An expert group of tax officials should be engaged to monitor and assess international transactions of multinational companies. There is also the need for strengthening coordination among agencies, including among others the central bank, for carrying out prompt and thorough investigation into capital flight. Also it is important that vigilance on the part of the NBR is targeted to bring desired discipline and transparency in the overall operational practices of these enterprises, rather than causing an uproar that might eventually be counter-productive. Standard international practices in this respect should be followed in order to work out a sound mechanism capable of curbing the much talked-about malpractice.
Reining in transfer mispricing
FE Team | Published: September 03, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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