The National Board of Revenue (NBR) has decided in principle to set up another Transfer Pricing (TP) cell for dealing with customs duty evasion.
Some multinational companies (MNCs) evade duties and taxes by trade-based money laundering through over- or under-invoicing on import and export of goods.
The NBR formed a TP cell in 2014 for its Income Tax Wing (ITW), which is working on MNCs' tax files.
In a recent board meeting, the NBR has decided to take necessary preparation for establishing another TP cell for its Customs and VAT Wing.
The TP cell will be set up to verify authenticity of transaction values between associated enterprises. The cell will investigate trade-based money laundering through transfer mispricing, officials said.
The MNCs can shift money to their associated companies in other countries by showing higher purchase prices of imported products. Through transfer mispricing, the MNCs can reduce payable rates of taxes and duty.
The TP cell for Customs Wing will check duty evasion through mispricing of products in collaboration of two associated enterprises.
There are possibilities to evade income tax, VAT and customs duty through transfer mispricing, officials said.
In case of showing higher value of raw materials, which are duty-free, VAT on finished products may go down, causing loss of revenue, they added.
Talking to the FE, Md Masud Sadiq, the NBR Member (VAT Policy), said there is no provision in the existing customs and VAT law to check transfer mispricing.
"A committee will be formed under the TP cell to explore the scopes of working in this area in line with international best practices."
The NBR will have to frame legal provisions to check TP with changes in global business process, he added.
Currently, the customs officials check transfer mispricing under the legal provision in the Customs Act 1969 for misdeclaration of goods.
The TP cell will review customs acts of the neighbouring countries, including India and Sri Lanka, and recommend ways to proceed in this area, Mr Sadiq also said.
The TP cell will also seek help of the World Customs Organisation (WCO) in this regard, he added.
Officials said the cell will work in a coordinated way with the ITW TP cell.
However, the ITW TP cell is yet to start auditing MNCs' tax files to find out tax evasion through mispricing.
Officials said the NBR will have to work for building capacity of its income tax, customs and VAT officials to work on TP-related issues.
Taxmen have to develop their expertise to check technique of base erosion and profit shifting (BEPS) for tax evasion.
Currently, the Netherlands is supporting ITW officials to develop skills on TP.
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