Transfer pricing (‘TP’) is the determination of price for goods and services sold between entities within an enterprise/ group of companies. In order to avail tax advantages entities within a group may trade products to related entities/associated enterprises. This may result in tax avoidance by lowering profit in an entity subjected to high tax rate and raising profits to entities enjoying tax haven. Consequently, tax authorities may lose taxable revenues for transfer mispricing and due to which TP regulations came into force in Bangladesh from 1st July 2014.

As per Washington-based Global Financial Integrity, Bangladesh is losing USD 1.8 billion every year through capital flight. Furtherance, it is to be noted that that the TP regulations in Bangladesh are yet to be applicable for local entities doing business in local ambit, so it is safe to comment that the TP regulations has been implemented primarily for the prevention of such capital flight to foreign countries. Thereby, any entity situated in Bangladesh who is submitting corporate tax return in 2015 and onwards and has entered into international transactions over BDT 30,000,000 (approx. USD 380,000) needs to comply with the TP regulations as listed in Chapter XIA of Income Tax Ordinance 1984.

During the assessment procedure of an entity, generally the tax authority keeps an eagle eye for the following characteristics of the return which are:
• Price of products/services deviated from the market price.
• Gross profit rate is too low compared with industry average
• Ratio of shared expenses with associated enterprises is too high.

In determination of pricing for international transactions this is to be done at arm’s length price, i.e. fair market value. In addition to OECD’s five globally recognized methods of determination of arm’s length price, the ITO 1984 also incorporates another method by virtue of which entities have been allotted the freedom to apply a method provided that such method yields a result parallel to the arm’s length method.

The key requirements that an entity is required to follow are:
• Maintenance and keeping of information, documents and records pertaining to the international transactions and group profile (when international transactions exceed USD 380,000 in the income year) for a period of eight years from the end of the relevant assessment year.
• Furnishing of Statement of international transaction to the income tax authority at the time of submission of the corporate income tax return.
• Certificate from a certified accountant when the aggregate value of international transactions exceeds USD 380,000. The amount of penalty for non-compliance ranges from 1-2% of the value of the international transactions.

Amongst some criticisms of the new TP regime, noteworthy are that the applicability of the TP has not been adequately advertised amongst the business sector of the country as a result of which many entities are still in the dark. Furtherance, NBR has arranged very few training schemes to make the public, investors, taxpayers, professionals and particularly assessees of local enterprises to be acquainted with the system and its easy application. As a result the stakeholders are mostly relying on the OECD and UN transfer pricing model. Besides, the TP cell is still inadequate to provide the infrastructural support required to apply the TP requirements, as a result of which several misunderstandings have arisen between the stakeholders and the NBR.

The TP regulation in Bangladesh is still in its preliminary stage and not conclusive and is seeing changes with the implementation of Finance Act every year. One penalty provision was inserted by the Finance Act 2015 and other provision of reporting requirement modified by the same Act. Currently the NBR is showing leniency and being flexible regarding the TP regulations to allow the entities to get acquainted. But there is still significant concern that the TP regulations will result in unnecessary bureaucracy because of the already existent procedure of s. 82 C (Final discharge of tax liability) and the minimum tax imposed on entities which is being imposed on the revenue regardless of the profit or expenses.

by------ Belal Chowdhury