4 months ago

Detecting the round-tripping of FDI in Bangladesh

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As capital flight from Bangladesh has long been a reality, so has also been talk of bringing back or recovering the siphoned-off money, especially in the last couple of years. The feasibility of recovery is, however, remains a moot question as it presupposes a decisive effort backed by strong political will, in the first place.

There are also no reliable statistics on the amount of money illegally transferred from Bangladesh to other countries. Various guesstimates-- estimate based on a mixture of guesswork and calculation--provide different figures in the connection. During the presentation of its recommendations for the national budget for FY24, Bangladesh Economic Association (BEA) last year said that at least Tk 12 trillion was drained out of the country in the previous 50 years. In other words, the annual average illegal outflow of money from the country comes to Tk 240 billion. According to Washington-based Global Financial Integrity (GFI), Bangladesh lost approximately US$ 8.27 billion annually between 2009 and 2015 due to trade mis-invoicing. It means the value of imports was inflated by over-invoicing and the value of exports under-reported by under-invoicing to evade taxes and illegally transfer money from the country. The errors and omissions of the annual balance of payments (BoP) in the past fiscal year (FY23) recorded a negative value of $3.95 billion, which is also considered one of the estimates of capital flight.

Due to using different methods to calculate or estimate the amount of capital flight or illegal fund transfers, figures of the estimated amount vary. Some argue that whatever the available statistics of the illicit financial outflow from the country, all are underreported, meaning the actual amount is much more. So, when the issue of recovering money siphoned abroad comes into discussion, it is about a portion of the amount that is actually considered for realistic reasons.  

Be it capital flight or illicit financial outflow, a portion of the amount is traceable in some cases due to transferring through the formal channels. Now, if the transfer of money occurs officially, it can't be termed illegal. As a portion of the legally transferred money is tax-evaded, some illegally earned incomes enter formal channels. Thus, a complex situation arises.

To recover some of the money stashed abroad, the government, in FY23, announced three special tax treatments. These were: 15- percent tax for immovable property not repatriated to Bangladesh, 10 per cent for movable property (including cash and cash equivalents) not repatriated to the country, and 7 per cent for cash and cash equivalents repatriated to Bangladesh. As predicted, not a single person did use any fiscal provisions for repatriating the money transferred abroad illegally. The measures were later discontinued.

Some experts argue that when a better alternative is available, why anyone would take the hassle of paying taxes and the risk of being listed as a money smuggler. The 2.5-percent cash incentive on remittance is an easy route for them to return a portion of the stashed-away money. As there is no question on the source of remittance earnings, some can easily use the channel. Though there is no statistical evidence, it is presumed that a small portion of the stashed money re-entered the country in the form of remittances sent by non-resident Bangladeshis (NRBs).

Another way to bring back some of the stashed money is the round-tripping of foreign direct investment (FDI), mostly from tax havens or offshore jurisdictions. The round-tripping of FDI is the flow of domestic funds channelled through offshore hubs back into the local economy through direct investment. In other words, money siphoned or stashed away from Bangladesh to any other country and then coming back as FDI from tax havens is known as round-tripping. It is well known that a portion of FDI flows into many developing countries, including China and India, but FDI actually belongs to their domestic capitals that have gone abroad.

There is no concrete evidence in hand to say that such a round-tripping is actually taking place in Bangladesh, although some indicators are there. The flow of FDIs from the tax havens is a strong indicator of funds flowing back and forth. By using statistics available with Bangladesh Bank, it is found that combined net inflow of FDI from 15 tax havens stood at US$77 million in FY11 which was around 10 per cent of total FDI in the year under review. More than a decade later, net FDI from these tax havens was recorded at $616 million in FY23 and the ratio of total inflow of net FDI in the country increased to 19 per cent.  Nevertheless, not all the FDI from tax havens is round-tripping as some multi-national entities (MNEs) also have their registered offices in these countries. So, FDI of such MNEs are not round-tripping. 

Tax havens happen to be countries like Bermuda, British Virgin Islands, Cayman Islands, Mauritius, Panama, Switzerland, Singapore and the United Arab Emirates (UAE) that offer foreign businesses and individuals minimal or no-tax liability for their bank deposits. The countries, also known as secrecy jurisdictions, specialise in enabling individuals to hide their wealth and financial affairs from the rule of law and provide legal opportunities to park money stashed in other countries. Those who stashed away the money usually open companies having registrations in the tax-haven countries. Thus, they get legal business entities. Now, these entities come to Bangladesh to invest in the form of foreign investors. The company receives all the tax benefits and other incentives as a foreign investor. Thus, the money, once illegally transferred outside the country, comes back.

Detecting the round-tripping requires more rigorous data and other relevant information. After analysing these data and information, it is possible to identify the actual amount of domestic money that re-enters the country as undercover FDI. Policymakers need to look into the matter and initiate necessary action.

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