Transfer pricing law to be made effective from July 1

The National Board of Revenue (NBR) is going to introduce transfer pricing regulations from July 1, 2014 in a bid to check tax avoidance by multinational companies.

The Transfer Pricing Law, approved through the Finance Bill-2012, remained in process of preparing ground work for its successful implementation.

It will help the taxmen check capital flight by the multinational companies (MNCs) to the countries where tax rates are comparatively low.

During the last two years, the tax authority prepared themselves to enforce the law as it needed extensive audit of tax files of multinational companies.

 “Many of the MNCs use the strategy to transfer local profits showing inflated price through transfer mispricing. They shift profit to the countries where tax rates are comparatively low,” said a senior tax official.

Such tax avoidance will be checked through enforcement of the law, he added.

 “It is not evasion or corruption of MNCs. There were loopholes in the existing law to detect the avoidance,” he said.

There would be a benchmark price of procurement of products to identify trans-border mispricing, the official said.

Centre for Policy Dialogue (CPD) Research Director Dr Fahmida Khatun welcomed the law suggesting its proper implementation.

 “A significant amount of capital is going out of the country. Successful implementation of the law would help stop the capital flight,” she said.

According to a study of CPD, Bangladesh is the fourth among 29 countries that lost US$359 million in tax in 2005-2007 period due to transfer mispricing.

Appreciating tax compliance of MNCs, Dr Fahmida said enforcement of the law would ensure a level-playing field for compliant companies.

Metropolitan Chamber of Commerce and Industry’s (MCCI) Tariff and Taxation Subcommittee chairman Adeeb H Khan FCA, hailed the TP law but expressed doubt over its proper implementation. “TP law is effective in many countries across the world. But, its proper enforcement is necessary for not harassing MNCs,” he said.

He expressed deep concern over increased harassment of large taxpayers by the taxmen through improper use of the TP law.

Responding to a query on impact of TP law on foreign direct investment (FDI), Dr Fahmida said it is not a major factor for FDI as TP law is enforced in other countries too.

 “It is not a barrier for FDI if other factors work properly,” she said.

Tax authorities said there is a necessity of improving capacity of the field-level taxmen further for proper enforcement of the law.

The NBR would start the TP work on phased and incremental basis. A TP cell has been formed to do the ground work for implementing the law.

According to an implementation plan of the NBR, only limited numbers of MNCs will come under TP audit in the first one or two years. Gradually, the number of companies will be increased.

With the technical assistance of the International Monetary Fund (IMF) and the International Finance Corporation (IFC), the NBR has prepared the implementation programme of the TP law.

Two international experts, Arcotia Hatsidimitris of the IFC and Nakayama Kiyoshi of the IMF have contributed to the drafting process of the law to meet international standard.

In two phases, nearly 50 NBR officials participated in training conducted by the IFC and the IMF.

Tax officials said tax avoidance by transfer ‘mispricing’ was a major concern of the taxmen over the last two decades.

Taxmen had found many examples of profit shifting through inflated price in procurement by MNCs, but could not bring them to book due to absence of a law.

After introducing the law, taxpayers will continue to submit tax returns to the circle offices, but taxpayers, who have international transaction or ‘arms-length price’, will be referred to TP unit, he said.

TP cell officials will determine the price and send a report to the circle office to complete assessment on the basis of decision by the TP official.

According to the TP law, MNCs’ international transactions will be monitored and assessed carefully by an expert group of taxmen. Their accounts and records will be maintained separately as per the prescribed forms of taxmen.

“For every person who has entered into international transaction or transactions, if the aggregate of value, which as recorded in the books of accounts, exceeds Taka 30 million during an income year, shall furnish, on or before the specified date in the form and manner as may be prescribed, a report from a chartered accountant,” the transfer pricing law said.

The Deputy Commissioner of Taxes (DCT) may impose the penalty of maximum 1.0 per cent of the value of each international transaction in case of failure to keep, maintain or furnish information, documents or records to him or failure in complying with the notice. The DCT can impose a penalty up to Tk 0.3 million for failure in furnishing report by chartered accountants (CA), as per TP law.