NBR begins the first transfer pricing audit to detect possible tax evasion by multinationals

After more than a decade of setting transfer pricing regulations, Bangladesh’s National Board of Revenue (NBR) has begun its first audit of multinational companies (MNCs) to ensure compliance with these regulations. The purpose of the audit is to uncover any tax avoidance tactics associated with international transactions.

The move is seen as an important step towards financial transparency, with the aim of preventing profit shifting, where companies allocate profits to countries with lower taxes, thereby reducing taxable income in Bangladesh, NBR officials said.

Transfer pricing is an accounting practice that represents the price that one division of a company charges another division for goods and services provided.

Multinational companies are legally allowed to use the transfer pricing method to distribute profits among their subsidiaries and affiliates.

The audit, which began last month, involves reviewing the global transactions of three companies – Daraz.com, Heidelberg Materials Bangladesh PLC and Procter & Gamble Bangladesh Private Ltd. NBR officials said more companies will be included in the scope of the audit.

Md Jahangir Alam, NBR Member for International Taxation, confirmed that the international transactions of these three multinationals are currently under audit.

Another senior NBR official, who requested anonymity, explained that the audit will compare the value of products and services and other payments in the companies’ transactions with those of their affiliated entities in other countries.

Using international transfer pricing standards, authorities will check for deliberate misdeclarations intended to evade or evade taxes, taking legal action if necessary, he said.

In 2012, transfer pricing provisions were introduced in the Bangladesh Finance Act as a way to combat tax evasion. However, despite significant debate, the lack of access to international transaction databases delayed effective implementation.

In 2020, more than 900 multinationals operating in Bangladesh were ordered to submit transaction data. However, the verification was frustrated because Bangladesh did not have access to the international databases of those companies.

The NBR official added that Bangladesh recently gained access to a global transaction database with the help of a UK-based organization and funded by the European Union, allowing the tax authorities’ Transfer Pricing Cell to begin audits last month.

Experts welcomed the initiative but warned that if implemented incorrectly, it could send the wrong message to global investors. They also stressed the need to strengthen the NBR’s capacity to properly conduct such complex audits.

What is transfer pricing?

Transfer pricing is a method of setting prices for transactions between companies under common ownership or control. This usually involves transferring interest, profits, assets or costs of goods to the parent company or paying for imported services, a common practice among multinationals.

Companies often shift funds from high-tax jurisdictions/countries to low-tax jurisdictions/countries to reduce their tax liabilities and maximize profits. This strategy often leads to countries with high taxes missing out on expected revenues.

In Bangladesh, where corporate tax rates are as high as 45%, there are concerns that some multinationals may push up the prices of products and services in their dealings with low-tax countries, moving more money abroad and generating higher profits, thereby taxable income in Bangladesh decreases. .

NBR sources said Bangladesh has more than 1,000 multinationals, with companies with high volumes of transactions being prioritized for audits.

How transfer mispricing arises

Transfer mispricing occurs when a multinational corporation manipulates the prices of transactions between its subsidiaries in different countries to reduce its overall tax liability.

For example, a company may quote a higher purchase price for goods sold from a low-tax country to a high-tax country. This reduces profits in the high-tax country, reducing the tax liability there, while increasing profits in the low-tax country. This profit shifting effectively reduces the company’s overall tax payments.

Apart from price fixing, multinationals can avoid taxes through management costs (headquarters and intra-firm), intellectual property or intangible asset costs (such as royalties, fees, copyrights, trademarks, patents, brand names, franchises, etc.), sharing or allocation of common costs and mispricing of interest charges.

About 60% of transactions worldwide are conducted between members of group companies or affiliated entities (referred to as related parties or associates), according to a study titled ‘Transfer Pricing Concept: Bangladesh Perspective’ conducted by Md Shabbir Ahmed, a former joint venture director of NBR’s Central Intelligence Cell and current commissioner of Tax Zone 15.

Experts are happy with the step

The Foreign Investors Chamber of Commerce and Industry (FICCI) has expressed support for NBR’s initiative, which is seen as a positive development by experts.

Snehasish Barua, tax expert and managing partner at Snehasish Mahmud and Company Limited, told TBS that many countries have successfully curbed tax avoidance by multinationals through transfer pricing audits.

According to the Organization for Economic Co-operation and Development (OECD) 79 countries have adopted domestic legislation on key transfer pricing principles, including the arm’s length principle, until August 2023.

The NBR is conducting the audit under the arm’s length principle – which refers to a business deal where buyers and sellers act independently without either party influencing the other, NBR sources said.

Is NBR able to carry out this audit?

Experts have also raised concerns about the complexity of transfer pricing audits, calling into question NBR’s current level of expertise.

Zaved Akhter, president of FICCI, told TBS: “It is a complicated methodology. Does the NBR have the capabilities? Because inappropriate methods can send the wrong message to global investors.”

Snehasish Barua advised that companies are allowed to make corrections as this is Bangladesh’s first transfer pricing audit.

Noting that divergent views often arise in tax determinations, he stressed the importance of ensuring that multinationals are not unfairly influenced, as this could lead to negative perceptions. He underlined that transparency and fairness must guide the process.

Currently, NBR’s Transfer Pricing Cell consists of eight officers, including two abroad, who manage this audit as an additional responsibility.

Alamgir Hossain, a former member of NBR Income Tax Policy, said a more proactive Transfer Pricing Cell could improve corporate compliance, but stressed the need to strengthen NBR’s capabilities to do the job well.

Why wait twelve years?

Current and former NBR officials said a lack of priority from NBR’s senior leadership contributed significantly to this delay.

According to an NBR official at the time, there were limitations in terms of training, sufficient staff for audits that met international standards, budget or a robust transfer pricing framework.

Officials said that although a Transfer Pricing Cell was established about a decade ago, it was never adequately resourced, with a shortage of manpower and no allocated budget, even for access to international databases.