a year ago

Bangladesh loses billions to transfer pricing tricks

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Bangladesh could tap huge legitimate revenues lost to transfer mispricing by building capacity of taxmen to prevent such intra-company trade tricks also deemed linked to capital flight, according to findings.

A report on the findings says economic environment of Bangladesh is favourable for exploitation of transfer-pricing opportunity amid increased volumes of international trade, presence of multinational companies (MNCs) and absence of proper monitoring of the transactions.

Titled 'Combating Transfer Mispricing: New Avenue for Bangladesh Customs', the report has been prepared by Customs Audit, Modernization and International Tax Wing and jointly articulated by Mohammad Fyzur Rahman, commissioner of Chattogram Customs House (CCH), and Nipun Chakma, Assistant Commissioner.

The customs wing has recommended for the National Board of Revenue (NBR) to utilize both of its wings, like in many advanced and modern revenue administrations, as it is high time step was taken for proper capacity building.

Both the wings would be able to detect, track and deter transfer mispricing with a view to collecting proper revenue from the MNCs as well as combating trade-based money laundering which is closely associated with transfer pricing, the report says.

"Customs administration, in general, assumes that transfer pricing is not their domain. However, in advanced countries, tax and customs administrations are involved in combating transfer mispricing due to its linkage not only with tax avoidance but also illicit capital flow, money laundering and other financial wrongdoings," the report reads.

"….though both the customs and tax administration use different methodologies in determining the transfer price, their aims are to find out a neutral market price as if the parties were not related," the report says.

Citing different study findings, the report says Bangladesh as a Least Developed Country (LDC) is considered a vulnerable state in the fight against transfer pricing.

And reports are rife on huge capital flight, while the country faces fund shortages in the wake of a global crisis and the government goes tight-fisted in spending, including import financing.

Study findings show high rates of corporate tax and poor governance make Bangladesh more susceptible to capital flight, money laundering and other financial wrongdoings.

The country enacted Transfer Pricing (TP) law in 2014 but had yet to get any tangible outcome from the TP cell for a lack of capacity and capability of the relevant regulatory authority and reluctance to tie up with international networks.

However, customs was not involved in any action regarding the formation of TP cell and other activity whereas advanced customs administrations became a part of the fight against transfer mispricing in their own countries.

In the report, the customs wing recommended focus on capacity building of human resources by providing sector-specific training and education on cross-border trade and transaction as well as transfer-pricing methods.

It suggested imparting training on specific revenue-generating sectors--tobacco, telecommunications, pharmaceuticals, leather, cement and so--at a time.

The customs wing also recommended making necessary changes to customs and VAT acts to combat transfer mispricing.

"Formulating TP rules or guidelines or circular by elaborating procedural and documentary requirements under customs valuation, legislation, practice statement of 'Australian Customs and Border Protection Service', published in 2013, could be a useful material in this regard," the report says, citing findings.

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 volume with Bangladesh.

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.

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 artificial price setting in intra-firm transactions to avoid taxes and to get other benefits is defined as transfer mispricing.

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