Current practices, regulatory environment, impacts and effectiveness of Transfer Pricing regulation in Bangladesh

Transcription

1 Current practices, regulatory environment, impacts and effectiveness of Pricing regulation in Bangladesh Sadia Afroze Associate Professor Department of Accounting & Information Systems Md. Mobarock Hossain Audit Assistant, Rahman Rahman Huq KPMG in Bangladesh Fatema-Tuz-Zohra Assistant Professor Department of Accounting & Information Systems University of Dhaka Abstract As transfer pricing concept is very new in Bangladesh, there are few studies on this topic. Due to the robustness of this issue, it required to be studied more. The primary focus of the research is to look over the current practices, regulatory environment, impacts and effectiveness of transfer pricing regulation in developing countries to suggest a better business and regulatory environment in the developing countries especially. The study has been conducted within the boundary of Bangladesh through interviewing of six industry experts from the diverse arena. The research found that at present in Bangladesh, the law for transfer pricing is much strict but not the same case in implementation and action. Ensuring compliance with transfer pricing regulation is the primary motivation for filing transfer pricing in Bangladesh as MNCs always try to keep their legal issues tracked with a clean record and maintain group reporting mandatorily. pricing strategy differs between internal and external use. Keywords: pricing, pricing strategy, pricing in Bangladesh. 29 ISSN , VOLUME-46, NUMBER-06, NOVEMBER-DECEMBER 2018

2 Introduction In an international transaction there will be two or more entities, termed as associated enterprise shall be engaged. The idea of transfer pricing mostly evolved through the international trade over the time as a way to pass the cost as price from one entity to another. Paragraph 1.42 of the OECD Guidelines states that in transactions between two independent enterprises, compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed) (OECD, 2009). The main objective of transfer pricing is to ensure the fair share of profit between crossborder related entities ultimately ensuring national interest and justice due to the facilitator. The strategic objectives of international transfer pricing fall into three regions such as internal managementoriented objectives, taxation-related objectives, operational objectives among which tax issue is the most dominant(cravens, 1997). An Ernst & Young study of 850 multinational corporations in 24 countries found that 40% of all respondents reflected TP to be the most vital tax issue facing their organization, which ordered higher than any other tax concern (Ernst & Young, 2007). Shifting profit and capital under the guise of crossborder transactions is a practice common in all over the world where tax evasion is the biggest driver of trade mispricing. Christian Aid (2009) estimates that developing countries losing over USD 160bn of tax revenues yearly primarily through TP strategies. VietNamNet Bridge published, Experts estimate that foreign-invested enterprises (FIEs) TP causes a loss of revenue of $170 billion a year to Vietnam and developing countries. The African Union report (2007) estimates that around 30% of Sub-Saharan Africa's GDP has been moved to tax havens. The Leverhulme Center (2014) recognized over $3 billion price-fixing of South African rough diamond trade through price manipulation in The research found that the primary motivation of entities for using transfer pricing is to ensure compliance regarding the strict requirement of compliance with local regulation. Only a few good companies are the exception here as they do it for ensuring good governance. Research Objective & Methodology The main research objective of the study is to understand the effectiveness and practices of Pricing in a developing country, Bangladesh. Qualitative Research methodology was followed to achieve the objective of the study. Interviews of six industry experts were taken to have knowledge regarding actual scenario of transfer pricing from their experience. The respondents were selected from three sides: Revenue Authority, Tax practitioners in different MNCs and Auditors. For selecting the respondents convenient sampling was followed. The panel consisted of- Name Organization Type Position R1 Revenue Authority Member R2 Big Four/ Big Four affiliate firm Senior Manager R3 Tire manufacturing MNC Tax and Vat Manager R4 Oil extracting MNC Tax Analyst R5 FMCG MNC Tax Manager R6 Big Four/ Big Four affiliate firm Associate Manager By undertaking an in depth analysis of the feedback from the interviews the conclusion has drawn. Pricing Strategy The respondents of the study revealed that transfer pricing is mainly a component of corporate strategy shredded with the issue of controlling profit sharing and related strategy. It is also used as a management control mechanism to ensure competitiveness internally known as internal transfer pricing which is hardly in effect. As there is no motivation of profit in internal transfer pricing for example department to department cost transfer being a cost-to-cost transfer does not require the need for any particular TP strategy. In such case, transfer pricing might have a backward effect through affecting the pricing of the products. Furthermore, companies usually do maintain several sets of books for the different purposes. Respondent R1 found that many companies are seen to prepare two sets of books, one for tax purpose and one for management purposes. Respondent R6 informed that the practice of transfer pricing in Bangladesh is mainly depends on the management intended objectives which they want to achieve. In tax strategy, if the revenue earning country is a lower tax region than the group s tax region, then the profit might be used to net off payables in the revenue-earning region. Further, in most cases, it has been seen that the profit is used to invest in further lower tax regions from the invested country where governments continually balance the 30 ISSN , VOLUME-46, NUMBER-06, NOVEMBER-DECEMBER 2018

3 desire to offer a competitive tax environment for Foreign Direct Investment (FDI). Knowledge of Pricing The interviews further revealed that in pursuit of the knowledge of entities personnel regarding the transfer pricing, the practitioners think that roughly 10% of the MNCs in Bangladesh, being concerned company are properly organized and have knowledge about transfer pricing mainly due to having foreign training over the relevant matters. So considering the sheer size of the number of businesses there is almost zero knowledge regarding transfer pricing being a highly technical C-suite issue, though personnel has fair enough knowledge about local taxation. On a market perception it has been seen that on an average 60% of employed personnel knows more or less about tax though there is both positive and negative perception toward it and the other 40% hardly has a minimum idea about taxation. The scenario is considered one of the major hurdle in collecting tax revenue in Bangladesh. Also, there is a major understanding gap between different parties regarding tax and transfer pricing. Rules and regulations for Pricing Focusing on the concerned issue, the National Board of Revenue(NBR) introduced a regulation on Pricing. It was first included in the Finance Act 2012, which had been effective from 1 July The practitioners think that the rules and regulations in the MNE s regarding transfer pricing are up to enough effective depending on the context of both companies and government. Though transfer pricing law in Bangladesh excludes domestic transfer pricing, it might also happen inside the border. India has a law for domestic transfer pricing as they have a differential tax rate in different states. Department of Revenue in India sometimes in some cases earns more tax revenue from transfer pricing adjustment than applying the company tax rate as per respondent R6. Considering business, economy, and geographical area of Bangladesh domestic transfer pricing is not feasible in Bangladesh. Further, the study found through the concern of respondents that there is a possibility of shifting money outside Bangladesh through different NGOs having a different purpose than a business and mostly regulated by a different set of laws. Justifying the arm's length price As choosing the method for justifying the arm's length price in a transaction is judgmental, a company needs to justify the price following various methods using the rejection-based approach as suggested by Income Tax Ordinance The following methods have been approved by Section 107C of Income Tax Ordinance, 1984 for the calculation of the arm s length price: i. Comparable uncontrolled price (CUP) method ii. Resale price method (RPM) iii. Cost plus method (CPM) iv. Profit split method (PSM) v. Transactional net margin method (TNMM) vi. Such other methods as may be prescribed The respondent R4 shared that among the methods not all are used equally where the Transactional Net Margin (TNMM) is much popular due to its coziness in applying. It is an obviously costly process to justify transactions matching every element of a single transaction whereas comparing the levels of profit is comparatively easier. That is why TNMM is commonly used popularly known as the last resort though all other methods needed to be justified before. Pricing in Bangladesh The practitioners found from their experiences and relevant laws that the mechanism works like the transactions need to comply the guideline in determining the price which needs to be justified through the proof to ensure the restriction in the profit erosion of the company and lose the revenue of the country. The nationality of the parent of MNEs hardly increases the likelihood of being audited by the Revenue Department. Only Bangladeshi companies are to be audited by NBR having no scope of auditing any company for transfer pricing. Lack of good governance, insufficient security of capital, financial secrecy practice and encouragement of the inflow of illegal capital by good governance countries, weak institutional capacity, weak regulatory framework, inter and intrajurisdiction tax rate difference, business remodeling and 31 ISSN , VOLUME-46, NUMBER-06, NOVEMBER-DECEMBER 2018

4 Pricing Study Cell Formulating Pricing Legislation and Guidelines Setting up Pricing administrative structure Creating Pricing support environment Feedback, Review, Adjustment Pricing Team several Pricing officers Pricing Unit several Pricing teams Feedback, Review, Adjustment Directorate of International Transaction several Pricing units and other units dealing with international taxation issues Inception Organization Delivery: Early Years Growth and Maturity restructuring, and increasing mobility of intangible related transactions are key factors responsible for the existence and the rise of transfer mispricing as described by a respondent (R1) from Bangladesh taxation authority. An NBR survey has found that 921 foreign companies, including multinationals, carry out transactions with their associated entities overseas to buy goods and services, of which, companies have been reporting international transactions for the last several years(the Daily Star, 2018). Till this date in Bangladesh, there has been no audit related to transfer pricing. Obviously in case of audit, MNCs will get priority having largest crossborder transactions. The reason for not auditing any company yet for ensuring fair transfer pricing might be the capacity limitations of NBR as it has no separate organizational set up to deal with transfer pricing issues. A better business practice Implementation of a proper TP mechanism in a tax regime helps a country to ensure a smooth development of the economy. Deterring capital plight from national border contributes well to the economic development of a country. It also ensures fairness in business dealings through a proper TP mechanism and application of the regulation. If the economy gets the fair share of the profit, it helps to grow businesses in a level playing field. Every policy has its pros and cons and here is no different. If Bangladesh goes for stricter implementation of transfer pricing regime, it might grow the tax revenue almost twice and again it might at least in short-term lose its competitive edge of business and share of global trade and investment. Bangladesh is already strict in transferring dividend out of the border, which is said to be taxed up to 55% in accumulation (Financial Express, January 2018), and that is why companies use royalty to send money outside Bangladesh. As respondent (R2) informed that there are only four ways to send money outside Bangladesh and royalty is one of them. Previously Bangladesh Bank has been allowing around 5 to 7 percent of profit to send out of the country as royalty but in reality, the practice says the rate should not be more than 2 to 3 percent (research estimation) whereas companies are lobbying to increase the rate. At present,the rate is at the discretion of Bangladesh Investment Development Authority (BIDA), which is yet to come up with any new rate. To discuss the implementation of TP strategy the first thing comes that, there is hardly any company interested to implement TP mechanism for various reasons related to cost and compliance as the respondents (mainly R1) expressed their concern. There is a constant pressure over management to increase profit and investors want to take as much profit out of their investments from the host 32 ISSN , VOLUME-46, NUMBER-06, NOVEMBER-DECEMBER 2018

5 country. According to respondent R5, MNCs want only to maximize their group profit and that is why the issue of transfer pricing still remain primarily tax driven. Ernst & Young (2005) controversies start to grow from when it has started fattening one side of the world illegally costing the other part. Findings, Limitations, and Conclusion Bangladesh is a lucrative field for multinational operation having hundreds of enterprises of multinational interest are operating in the country. pricing regulations are new to Bangladesh and the practice has not been started yet. There is no significant event of filing scrutiny of TP department of NBR since the law have been passed, although according to the law they can go for audit if they feel the need to do so varies with the nature of a company. The practitioners experienced that at present in Bangladesh, the law for transfer pricing is much strict but not the same case in implementation and action. Ensuring compliance with transfer pricing regulation is the primary motivation for filing transfer pricing in Bangladesh as MNCs always try to keep their legal issues tracked with a clean record and maintain group reporting mandatorily. pricing strategy differs between internal and external use. Selection of methods are very judgmental and requires detailed knowledge about performing of proper transfer pricing functional analysis, which ultimately helps in to find proper entity characterization. It could be accepted that the interviewees may keep some data down because of the dread of uncovering something that is viewed as an upper hand. Likewise, on the off chance, that there were matters these interviewees did not have any desire to uncover, it would not have had any effect on whether it was unknown or not. pricing has far more implications with quantitative information, which is also true in the case of research. In Bangladesh, at present any quantitative information about transfer pricing is not publicly available. With the development of regulatory enforcement and database of transfer pricing researchers will be able to come up with new insights. References A Hogg, D McNair and S Pak. (2009) False Profits: Robbing the poor to keep the rich tax free, Christian Aid. Customs, T., & Report, S. (2018). NBR to narrow scope of tax evasion. Retrieved from Cravens, K. S. (1997). Examining the Role of Pricing as a Strategy for Multinational Firms. International Business Review. Deloitte Touché Tohmatsu. (2004). Strategy Matrix for Global Pricing. Noudettu osoitteesta Ernst & Young. (2006) Global Pricing Surveys. Ernst & Young. (2007). Global Pricing Survey: Global Pricing Trends, Practices, and Analyses. Ernst & Young. Government Of The People's Republic Of Bangladesh. Income Tax Ordinance (1984). (1984). Income Tax Ordinance. GOVERNMENT OF THE PEOPLE'S REPUBLIC OF BANGLADESH. Income Tax Ordinance (1984). National Board of Revenue (NBR), Bangladesh. (2018). Retrieved from OECD. (2010). OECD Pricing Guidelines for Multinational Enterprises and Tax Administrations. OECD. Rahman, M.; Ahmed, M. S.;& Khan, T. I. (2011). Adopting transfer pricing regime in Bangladesh:Rationale and the Needed Initiatives. Dhaka: Centre for Policy Dialogue (CPD). pricing: tighter reporting norms for multinationals notified. (2018). Retrieved from news/transfer-pricing-tighter-reporting-norms-for-multinationalsnotified/article ece The Leverhulme Centre for the Study of Value. (2014). Rough and polished: a case study of the diamond pricing and valuation system. The Leverhulme Centre for the Study of Value. United Nations. (2013). United Nations Practical Manual on Pricing for Developing Countries. United Nations. United Nations Economic and Social Council. (2007). Annual Report In Conference of African Ministers of Finance, Planning and Economic Development. Addis Ababa, Ethiopia. Vietnam fails to collect $170 billion in tax because of transfer pricing - News VietNamNet. (2018). Retrieved from vietnamnet.vn/fms/business/189677/vietnam-fails-to-collect billion-in-tax-because-of-transfer-pricing.html 33 ISSN , VOLUME-46, NUMBER-06, NOVEMBER-DECEMBER 2018