Though late, the National Board of Revenue (NBR) has come up with a plan to stop transfer pricing. Transfer pricing means illegal transfer of money by companies, specially by the multinational ones, from one country to another through various transactions like buying and selling of capital goods, raw materials etc. They over-invoice goods when they buy if they want to shift incomes from a country with a high tax rate to a country where the tax rate is low. They under-invoice when they sell to their own subsidiaries in the low-tax country.
However, transfer pricing is much more complex than what is being done through over-invoicing or under-invoicing. Then the issue of commission and fees for technical services the multinational companies pay to the parent company or overseas subsidiaries should also come under scrutiny.
It is said that a huge amount of money gets transferred from one country to another annually through transfer pricing. If transfer pricing takes place, one party loses and the other party wins. Say, for example, if a multinational company resorts to transfer pricing from Bangladesh, who will lose in this case? Definitely, they are the Bangladesh tax authority, and the small Bangladeshi shareholders of the company concerned. If transfer pricing takes place, the profit of the company will go down. The tax authority will receive less tax from it, as it is paid on the gross profit of the company.
Also, the tax authority will have less of other taxes like VAT and surcharges, as these are levied on the volume of transactions done by the company. Who does benefit from transfer pricing? Definitely, they are the overseas shareholders. The overseas shareholders in cases of the most famous and famed multinational companies are the same. They are citizens and institutions of the advanced countries like the USA, Europe and Japan.
Many of the multinational companies that do business in Bangladesh did not sell equities to local people. In these cases, public interest is even more neglected. Giving ownership through equity sale is one of the best ways of serving the public interest.
Another issue is that some multinational companies take a huge amount of money out of Bangladesh in the name of royalty and technical fees. Documents about royalties are never published for public inspection. The issue of technical fees also remains covered by shadows and darkness.
However, as the NBR now is prepared to unearth transfer pricing, we can hope that Bangladesh's money will no longer land in foreign lands illegally, or the so-called legal transfers through purchase and sale of raw materials and capital goods will come under strict scrutiny.
The NBR has the required law in this respect and as we know from the media reports, it has got its staff trained abroad to make them efficient to unearth the truth in this case. At least, the companies will think twice before resorting to transfer pricing any more.
In fact, what the NBR is doing now should have been done long ago. There are reports that Bangladesh loses more than a billion dollars every year through transfer pricing. We eagerly and earnestly wait for foreign investment, but the irony is that we care less about our own money that is being taken way illegally by the multinational companies.
In many other countries, the multinational companies face huge fines and appropriation because of transfer pricing. But we did not hear anything here like fining a company for transfer pricing.
Transfer pricing is nothing but stealing somebody's money. Here 'somebody' is Bangladesh and its citizens. Bangladesh is an easy place for doing business. Nobody is there to ask whether business is done lawfully and ethically. The NBR should see that the companies feel encouraged to show more profits in their balance sheets here in Bangladesh and also distribute more profits through dividends.
Also, Bangladesh should re-examine its tax rates including corporate tax and VAT. These taxes must be competitive globally. Otherwise, there will be a tendency to get money transferred to the low-tax countries. Some countries are having very low taxes compared to that of Bangladesh and some territories even have zero taxes. These countries and territories offer tax havens for global investment registrations. Bangladesh is to compete against those countries and territories for receiving and retaining global investments.
The writer is a Professor of Economics, University of Dhaka,
abuahmedecon@yahoo.com
