NBR takes new step to curb foreign firms' illegal fund transfer

Foreign companies are likely to be penalised for failing to submit statements of transactions above Tk 3 crore with their associated overseas entities.

The National Board of Revenue took the measure to curb illicit fund transfers and tax evasion.

The penalty will be equivalent to 2 percent of the value of each international transaction, according to the Finance Bill 2015 placed in parliament for passage. The rules make it mandatory for foreign firms to turn in the transaction reports along with tax returns to the NBR.

The NBR hopes the move will dissuade transfer pricing (TP), an accounting method that allows multinational companies to shift net profits or losses to offshore or low-tax countries to maximise their earnings.

For instance, two subsidiaries of a company, one based in a high-tax country and another in a low tax haven, can engage in trade with one another.

The low-tax subsidiary can quote abnormally high prices from the high-tax subsidiary for goods/services to manage the maximum net profits for the parent company, an unethical practice which many multinational firms resort to.

In the face of growing concerns of illegal outflow of funds, the NBR in July 2012 introduced the TP law.

Illegal fund transfers eat away 1.1 percent of the country's gross domestic product, according to a study by the Global Financial Integrity, a Washington-based research organisation.

The illegal transfers are equivalent to 38.5 percent of the combined official development assistance and foreign investment the country received between 2008 and 2012, the report said.

The misuse of TP is one of main reasons behind the unlawful capital flight, according to taxmen.

In response, the NBR in April assigned a team of seven officials to audit the multinational companies' financial statements and their international transactions.

In the outgoing fiscal year, the revenue authority made it mandatory for firms or persons to give statements of their international transactions in a prescribed form along with income tax returns.

The statements have to be certified by chartered accountants. 

The companies will have to furnish data of their transactions based on fair market or arms length prices.

An NBR official said the submission of statements of international transactions by foreign firms will give them an idea of the number and extent of transactions. 

“Based on the statements, we want to carry out audits through which we will detect if there was tax evasion or not.”

The official expects the companies to voluntarily comply with the TP rules, which will help the state get more revenue.