Most multinationals dodge TP law, deprive govt of due taxes

Around 85 per cent of the foreign companies operating in Bangladesh and executing international transactions hardly share their incomes with the host nation, thus allegedly contributing vastly to capital flight.

According to an investigation, most of those companies operating in their branch, liaison and representation offices in Bangladesh are not submitting statement on international transaction (SIT) as per income-tax law.

Taxmen have no idea as to how much money is transferred surreptitiously from Bangladesh with a motive to evade payment of local taxes as there is no study or research in the country in this regard, officials concerned confirmed.

However, a Washington-based research and advisory organisation, GFI, reported that unrecorded capital flow from Bangladesh amounted to some US$61.63 billion between 2005 and 2014, mainly through under-invoicing and over-invoicing.

Of the total illicit capital outflow ($61.63 billion), a major portion amounting to $56.83 billion passed through trade mis-invoicing at different customs points, observed the report, titled 'Illicit Financial Flows (IFFs) to and from Developing Countries: 2005-2014'.

The rest, $4.8 billion, could not be tracked in the balance-of-payments data, it said.

A Financial Express investigation finds these companies are taking advantage of inadequate skills of taxmen and lack of access to global database.

A legal framework, known as transfer pricing (TP) law that came into force three years back, is yet to yield any tangible result to check illegal cross-border transactions.

Tax officials suspect some of the MNCs are using BEPS (Base Erosion and Profit Shifting) technique due to high rates of corporate tax in Bangladesh.

They are allegedly showing high price on import of raw materials from their parent companies in a bid to shift profits to the countries where corporate tax rates are comparatively lower.

Bangladesh's trade openness also creates scope for the MNCs to shift their profit to maximise the gains, paying lesser amount of tax, stakeholders say about the tricks of the trade.

As a member of the World Trade Organisation (WTO), Bangladesh is moving towards removing barrier to facilitate trade, an approach believed to be creating such room for evading taxes or repatriating their incomes without much transparency.

The country's taxmen, in a survey, have found that less than 150 multinational companies submitted their statement of international transaction (SIT) although some 1,000 MNCs, including branch, liaison and representation offices, operate in Bangladesh.

Tax officials said they will find out whether the companies have opened tax file as local taxpayers.

Tax authorities could not start audit of tax files of the MNCs under the law for a lack of capacity of the tax department and Dhaka's "reluctance to tie up with the international networks", say experts.

The Transfer Pricing (TP) Act was passed by parliament in 2012 and came into effect in 2014 to act as an effective regime in this potential financial filed.

The TP law empowers the tax authority to scrutinise international financial transactions by the taxpayers and obligate them to keep record in a prescribed form to check profit shifting through transfer-mispricing mechanism.

However, two initiatives to tie up with the international networks for imparting capacity- building training with the support of OECD and information sharing by joining as associates of BEPs remained stalled.

Institute of Chartered Accountants of Bangladesh (ICAB) president Dewan Nurul Islam, also managing director of advisory firm Grant Thornton Consulting Bangladesh Limited, said the tax authorities need to prepare themselves in global standards for effective and hassle-free implementation of TP law.

"Using discretionary power to determine arm's-length price of imported raw materials may cause unusual harassment of the MNCs," he argued.

The National Board of Revenue (NBR) had earlier signed a memorandum of understanding (MoU) with the Organisation for Economic Cooperation and Development (OECD) for imparting training to the tax officials for next two-three years.

Implementation of the MoU is now uncertain after the tax authorities failed to proceed as per agreements in time, the officials concerned admit.

Also, a proposal of the secretary-general of the OECD to finance minister AMA Muhith for enlisting Bangladesh as a BEPS (base erosion and profit shifting) associate appears to have been shelved.

Getting associated with the OECD oversight mechanism could have enabled Bangladesh by this time to effectively check the tax evasion by way of interlinking and sharing information with its 35 member-countries, the agreements suggest.

BEPS refers to tax-planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low-or no-tax locations where there is little or no economic activity.

In the letter, the OECD secretary-general requested the Bangladesh government to respond as to whether Bangladesh is interested to be a BEPS-project associate.

When asked, officials concerned said the government did not show any interest in the offer.

BEPS tactics are allegedly used by MNCs to gain competitive advantage over enterprises that operate at a domestic level.

Executive director of the Center for Policy Dialogue (CPD) Mustafizur Rahman said investment in developing global networking and information sharing is necessary to curb tax evasion through cross-border transaction.

"The auditing of MNCs' tax files under TP law should be evidence-based and should be harassment-free," he added.

The formation of the TP cell is the tangible progress which is a first step to execution of the TP law, he added.

Four major issues that need further steps include human resource development, strengthening institutional capacity, international networking and access to global database.

He cited the global financial integrity (GFI) report that said a huge amount of capital flows out from the country.

"The government can get manifold returns on its investment on the TP issues," he said, adding that it would be financially viable investment as the significant amount of tax evasion could be unearthed.

Bangladesh is considered a vulnerable state to capital flight due to high rates of corporate tax. Profit shifting to the low-tax regime is a global concern that prompted the government to frame the TP law.

The National Board of Revenue (NBR) had planned to start audit of the MNCs' tax files under the TP law from the beginning of the 2017 calendar year. But, sources in the NBR said, the government high-ups are still confused over execution of the law in fear of negative impact on the minds of foreign investors.

Taxation subcommittee convener of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) Humayun Kabir said the scrutiny of the MNCs' international transactions should be target-oriented and based on facts and evidences.

"Any of the scattered or desperate moves may give negative signal to the foreign investors," he added.

The root cause of profit shifting should be indentified to make Bangladesh more favourable for foreign investment, he suggested.

According to official documents relating to trade, major trade partners of Bangladesh, including the European Union (EU), China, the United States, India, Singapore, Japan, Malaysia, Canada, Hong Kong, South Korea, Australia and Thailand, have adopted transfer-pricing regime and are conducting auditing to check capital flight.

Tax avoidance is often said to be high in Bangladesh that reflects the poor tax-GDP ratio below 10 per cent while South Asian countries have on average 12 per cent.

The revenue board has in the past three years taken a few steps in its bid to implement TP law. The steps are the formation of TP cell and a team of experts as TP officer (TPO) and employing of resource pool comprising field-level tax officials who have expertise in international taxation.

The board has also imparted some short training to the TPOs to work on detection of cross-border financial transactions, BEPS by the MNCs in their respective tax zones.

A research paper of CPD, a leading private think-tank, termed transfer-pricing audit 'complex task'. It has insisted that it is through audit that the instances of transfer mispricing are unearthed and the amount of tax evasion determined.

"Transfer-pricing audit is a complex task involving multidimensional skills in the area of investigation and analyses. Auditors must have sound knowledge of economics, business, finance, banking, accounting and taxation. Audits should be thoroughly professional, and should conform to international standards," the paper notes.

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," reads the transfer-pricing law.

The law leaves the scope for the deputy commissioner of taxes (DCT) to 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), says the TP law.

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