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Move to tax businesses operating in tax havens

Int’l legal provisions now under review

Doulot Akter Mala | March 28, 2018 00:00:00

A move is underway for taxing the tycoons operating businesses in tax havens by incorporating international legal provisions into Bangladesh's income-tax law, sources said.

At the core of the set of provisions lies Controlled Foreign Corporation (CFC) that enables the country of origin to levy taxes on business operations in another country.

Under the provision, Bangladeshi companies having businesses in the low- tax regimes would have to pay a part of tax as per country's corporate-tax rates, officials said.

A CFC is a corporate entity that is registered and conducts business in a different country but controlled and managed by residents of the country of origin.

The drafting committee of the new income-tax law is also vetting matters of imposition of tax on mergers and acquisitions, thin capitalisation, General Anti-Avoidance Rule (GAAR), Special Anti-Avoidance Rule (SAR), Base Erosion and Profit Shifting (BEPS) which are used as international best practices in income-tax regime.

Sources said some of those provisions may be proposed to be interpolated into the budget for Fiscal Year (FY) 2018-19 as per the Income Tax Ordinance 1984.

Talking to the FE, a senior tax official said companies having 51 per cent shares of Bangladeshi owners and operating in low-tax domains or tax havens would have to pay the rest of the amount of tax as per tax rate of Bangladesh as CFC.

"There are some companies that prefer to operate businesses in the countries having lower rate of tax to maximize profit. Under CFC rules, Bangladesh would be able to collect the rest of the amount of tax as per its tax rate," he said.

For example, if tax rate of the company is 45 per cent in Bangladesh and it is paying tax in another country at 30 per cent, the company will have to pay the rest 15 per cent in Bangladesh.

Corporate-tax rate in Bangladesh is one of the highest in this region, ranging from 25 to 45 per cent. It has been alleged that some companies shift their profits and invest in the low-tax countries to avoid the high-rated tax.

According to Wikipedia, CFC rules are features of an income-tax system designed to limit artificial deferral of tax by using offshore low-taxed entities.

Currently, there is no law in the country to tax such a company though majority of countries do have it.

"We will explore the scope of imposition of income tax under the international tax rules," the official said about the move, which incidentally comes hot on the heels of contentions over huge capital flight to tax havens.

For CFC, double-taxation avoidance will be taken into consideration.

Taxation on indirect transfer of assets, transfer of profits to other companies abroad, and taxing digital economy are also under review of the new income-tax-law-drafting committee, he added.

However, the National Board of Revenue (NBR) is unlikely to place the new law on income tax before parliament in the upcoming budget session as the government is unwilling to make the crucial law in the election year.

Officials said gradually some of the provisions of the new income-tax law would be incorporated into the existing law so that people can easily accept the new one.

They said the income-tax wing has dropped its plan to appoint international consultant for the drafting of the law after the Netherlands government had pledged to support Bangladesh in this regard.

Recently, a team of the income-tax wing visited the International Bureau of Fiscal Taxation (IBFT) of the Netherlands to share knowledge of international taxation.

Earlier, the cabinet had instructed the NBR to incorporate international best practices into the new income-tax law that was scheduled to come into force from the upcoming fiscal year as per government announcement.

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