The National Board of Revenue has moved to curb tax evasion by scrutinising the transactions of multinational companies with their associated enterprises overseas.
The tax administration issued an order last week to form a unit to audit transactions of companies that abuse a mechanism, known as transfer pricing or TP, to manipulate prices of imports from their associated enterprises abroad.
Transfer pricing is the price at which divisions of a company transact with each other for goods or services. TP is not illegal, but 'transfer mispricing' is, said analysts.
The latest effort will help NBR to boost its revenue collections, now falling short of fiscal-year targets.
The nation lost $1.4 billion a year between 2001 and 2010 due to illicit capital flight, according to a Washington-based Global Financial Integrity.
A TP occurs when two related companies—such as a parent company and a subsidiary, or two subsidiaries controlled by a common parent—engage in international trade with each other for goods and
Sometimes, related entities of a multinational company show artificially high prices for an imported product or service in an attempt to deflate profits and evade taxes. The practice is known as transfer mispricing, a way of price manipulation or fraudulence.
"The order to form the cell is a step forward to curb TP abuse. We will now form the unit with five or six officials as part of our plan to implement the rules by July next year," said a senior official of NBR, seeking anonymity.
The move came one and a half years after the rules on TP were framed.
NBR also assigned Md Shabbir Ahmed, one of its joint commissioners, to coordinate the TP efforts.
The tax authority framed the rules on TP in July 2012 as several studies revealed an illicit outflow of capital from Bangladesh in the past decades through various ways, including transfer mispricing, which causes the state to lose huge sums of taxes.
As per the NBR order, the cell will suggest and coordinate training of taxmen to help build capacity on TP issues so that they can audit transactions by foreign companies with related firms and determine the 'arm's length prices' in relation to any international transaction.
Firms will need to provide proof that transactions have been done on the basis of 'arm's length price'—a price at which two independent or unrelated entities trade with each other.
The arm's length price reflects the price of a genuine negotiation in a market and it is usually considered to be acceptable for tax purposes, according to Tax Justice Network (TJN), a UK-based independent organisation.
But when two related companies trade with each other, they may wish to artificially distort the price at which the trade is recorded, to minimise overall tax bills. This might, for example, help it record as much of its profit as possible in a tax haven with low or zero taxes, adds the TJN.
The NBR official said companies in Bangladesh related with other firms abroad will have to pay more taxes if the value of its transactions is above the arm's length price of a particular product or service.
TP officers (TPOs) will be appointed to audit and determine arm's length prices, said the official.
The cell will also coordinate efforts to build awareness and train stakeholders on TP, a mechanism practiced in around 70 countries, including India and Sri Lanka in South Asia.
It will also assist the tax policy wing of NBR to make TP administrative guidelines for taxmen, and establish contacts with tax authorities in other countries to exchange information on TP.
The cell will also collect data and build database on the issue, according to the NBR order.
Under the rules, which became effective from July 1, 2012 international transactions above Tk 3 crore a year by a multinational or its associated entities from Bangladesh will come under scrutiny of taxmen.