Transfer Pricing under the Income Tax Ordinance 1984 in Bangladesh: A Year in Review

Transfer pricing (TP) is the determination of the price of goods and services sold between entities within an enterprise or group of companies. To gain tax advantages, entities within a group may trade products with related entities or associated enterprises. This can lead to tax avoidance — by lowering profits in an entity subject to a high tax rate while raising profits in entities that enjoy a tax haven. As a result, tax authorities can lose taxable revenue through transfer mispricing. To counter this, transfer pricing regulations came into force in Bangladesh on 1 July 2014.

Purpose: curbing capital flight

According to the Washington-based Global Financial Integrity, Bangladesh loses around USD 1.8 billion every year through capital flight. Notably, the TP regulations are not yet applicable to local entities doing business purely within the domestic market, which suggests that the rules were introduced primarily to prevent capital flight to foreign countries. Any entity situated in Bangladesh that submits a corporate tax return in 2015 or later, and that has entered into international transactions exceeding BDT 30,000,000 (approximately USD 380,000), must comply with the TP regulations set out in Chapter XIA of the Income Tax Ordinance 1984.

What the tax authority looks for

During the assessment of an entity, the tax authority typically scrutinises the return for the following:

• Prices of products or services that deviate from the market price
• A gross profit rate that is too low compared with the industry average
• A ratio of shared expenses with associated enterprises that is too high

Arm’s length pricing and methods

The pricing of international transactions must be done at arm’s length price — that is, fair market value. In addition to the OECD’s five globally recognised methods for determining arm’s length price, the ITO 1984 incorporates a further method that gives entities the freedom to apply any method, provided it yields a result parallel to the arm’s length standard.

Key requirements

An entity must:

• Maintain and keep the information, documents and records relating to its international transactions and group profile (where international transactions exceed USD 380,000 in the income year) for eight years from the end of the relevant assessment year
• Furnish a Statement of International Transactions to the income tax authority when submitting its corporate income tax return
• Obtain a certificate from a certified accountant where the aggregate value of international transactions exceeds USD 380,000

The penalty for non-compliance ranges from 1% to 2% of the value of the international transactions.

Early criticisms

The new TP regime has attracted several criticisms. The applicability of the rules has not been adequately publicised within the business sector, leaving many entities unaware of their obligations. The NBR has arranged very few training programmes to familiarise the public, investors, taxpayers, professionals and — particularly — the assessees of local enterprises with the system and its application. As a result, stakeholders largely rely on the OECD and UN transfer pricing models. The TP cell also remains under-resourced and unable to provide the infrastructural support needed to apply the requirements, which has led to misunderstandings between stakeholders and the NBR.

An evolving framework

The TP regulation in Bangladesh is still in its early stage and is not yet settled; it continues to change with each year’s Finance Act. The Finance Act 2015 inserted one penalty provision and modified a reporting requirement. For now, the NBR is showing leniency and flexibility to allow entities to become acquainted with the rules. Even so, there is significant concern that the regime may create unnecessary bureaucracy, given the already existing procedure under section 82C (final discharge of tax liability) and the minimum tax imposed on entities — which is levied on revenue regardless of profit or expenses.