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Demystifying transfer pricing
March, 29th 2017

We need to understand transfer pricing to create a welcome environment for investors

Taxation has become a dynamic and crucial issue in the global world. As countries become more connected through the advent of technology, tax authorities have to create more complex regulations in order to keep pace.

One such regulation is transfer pricing (TP), which aims to reduce tax avoidance through cross-border transactions. Transfer pricing refers to the pricing of cross-border transactions between two related entities.

When two related entities enter into any cross-border transaction, the price at which they undertake the transaction is the “transfer price.” Due to the special relationship between related entities, the transfer price may be different than the price that would have been agreed between unrelated parties. Price between unrelated parties in an uncontrolled conditions is known as the “arm’s length” price (ALP).

Globalisation and the rapid growth of international trade has made inter-company pricing an everyday necessity for the vast majority of businesses. However, the growth of national treasury deficits and the frequent use of the phrase “transfer pricing” in the same sentence as “tax shelters” and “tax evasion” on the business pages of newspapers around the world have left multinational enterprises in a storm of controversy.

Tax authorities have made the regulation and enforcement of the arm’s length standard a top priority. A key incentive for challenging tax-payers on their transfer prices is that the authorities see transfer pricing as a soft target, with the potential to collect significant tax revenue.

Since there is no absolute rule of thumb for determining the arm’s length price for an international transaction, there exists huge disagreement as to whether the correct amount of tax has been paid in a particular jurisdiction.
Global regulations and Organisation for Economic Co-operation and Development (OECD)

Most of the world’s major nations have implemented transfer pricing regulation in their respective tax codes, and those who have not are contemplating to do so.

Given that transfer pricing is a new subject for the Bangladesh tax authorities, our tax department may consider investing time in the skills development of the officers

The dispute of transfer pricing has been so enormous over the years, that OECD, with the help of G20 countries, have developed the principle of Base Erosion and Profit Shifting (BEPS) with specific action points on transfer pricing issues. This is primarily because of the new norm of transparency and accountability of all the multinationals operating globally.

Bangladesh is also a part of the over 80 countries who have joined the BEPS inclusive framework and committed to the implementation of the minimum standards of the BEPS package.
Bangladesh TP regulations

Bangladesh TP regulations are relatively new, inserted in the Finance Act, 2012 with effect from July 1, 2014.

TP principle will have enormous significance for both inbound and outbound multinationals operating in Bangladesh.

These multinationals will now have to comply with TP provisions, formulate proper TP policies, and defend aggressive positions taken up by tax authorities of Bangladesh.

The TP guidelines is a part of Chapter XIA of the Income-tax Ordinance 1984 as amended by the Finance Act, 2012.

The legislation provides that “the amount of any income, or expenditure, arising from an international transaction shall be determined having regard to the arm’s length price.”

The Bangladesh TP regulations are in line with the best practices followed by various countries across the globe with very few minor changes based on local requirement.

Multinationals operating in Bangladesh are required to file a Statement of International Transactions when one has entered into cross-border international transaction.

Further, if the transaction exceeds a certain threshold criteria (which now stands at Tk3 crore) one is required to file an accountant’s report as and when asked by the revenue authorities, and also to maintain and produce the TP documentation to the revenue authorities when called for.

Multinationals in Bangladesh may feel that TP regulations are a tool to curb capital outflow from the country, which may not be the correct perspective.

TP regulations should be seen in the light that it has been brought for more transparency, accountability, and best practices. Since Bangladesh is one of the fastest growing economies in the world, it is a welcome move to address profit/revenue shifting.

In order to be a competitive economy which attracts large investments, one needs to accept the global tax regulations, and the environment which is prevailing in the tax world to bring in more transparency and accountability.

Bangladesh tax authorities should aim to strike a balance between being aggressive and subjecting every tax-payer to a TP adjustment with an intent of collecting taxes, as opposed to following a well thought out approach based on the merits of the case.

This would send out the correct signal to the foreign investor community, as Bangladesh is currently a fast growing economy with GDP growth rate at more than 7%.

Any arbitrary step with just the intent to collect additional revenue may tarnish the image of Bangladesh as an attractive investment destination.

With the advent of BEPS and adoption of the country-by-country reporting structure (as recommended by the OECD), most countries are considering transfer pricing regulations as one of the tools to counter shifting of profits outside the country.

Given that transfer pricing is a new subject for the Bangladesh tax authorities, our tax department may consider investing time and energy in the skills development/competency building of the tax officers.

This will go a long way to ensure the readiness of the tax officers to face the complexity involved in transfer pricing audits, and ensuring a welcome environment for existing multinationals as well as new investors.

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