Bangladesh Transfer Pricing Regulations Finance Act, 2014

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1 30 October 2014 Global Tax Alert News from Transfer Pricing EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Bangladesh Transfer Pricing Regulations Finance Act, 2014 The transfer pricing regulations in Bangladesh have been made effective from 1 July 2014 by the Finance Act, These regulations were originally introduced in the Finance Act The National Board of Revenue (NBR) is the taxing authority and the tax laws have been introduced as: Section 107A to 107J of the Income Tax Ordinance, 1984 (the Ordinance) Rule 70 to 75A of the Income Tax Rules, 1984 (the Rule) This Alert outlines the provisions in these tax laws. Associated Enterprise Section 107(A)(2) The pricing of any income or expense arising from international transactions between associated will need to be determined with regard to the arm s length principle, using methods prescribed under Bangladesh transfer pricing legislation. According to Section 107(A)(2), an associated enterprise is an enterprise that at any time during the income year has any one of the following relationship with the other enterprise: (a) One enterprise participates directly or indirectly or through one or more intermediaries in the management or control or capital of the other enterprise (b) Same person or persons participates directly or indirectly or through one or more intermediaries in the management or control or capital of both (c) One enterprise holds directly or indirectly shares carrying more than 25% of the voting power in the other enterprise (d) Same person or persons controls shares carrying more than 25% of the voting power in both (e) The cumulative borrowings of one enterprise from other enterprise exceeds 50% of the book value of total assets of that other enterprise

2 (f) The cumulative guarantees provided by one enterprise in favor of the other enterprise exceeds 10% of the book value of total borrowings of that other enterprise (g) More than half of the board of directors or members of the governing board of one enterprise are appointed by the other enterprise (h) Any executive director or executive members of the governing board of one enterprise is appointed by or is in common with the other enterprise (i) Same person or persons appoint more than half of the board of directors or members in both (j) Same person or persons appoint any executive director or executive members in both (k) One enterprise has the practical ability to control the decision of the other enterprise (l) The two are bounded by such relationship of mutual interest as may be prescribed International Transaction Section 107(A)(5) Transfer pricing provisions are applicable to the following types of international transactions between associated, at least one of them being a nonresident: Purchase, sale or lease of tangible or intangible property Provision of services Lending or borrowing money A mutual agreement or arrangement for cost allocation or apportionment in connection with a benefit, service or facility provided or to be provided Any other transaction having a bearing on the profits, income, losses, assets, financial position or economic value of such If an enterprise enters into a transaction with a third party, where there is a prior agreement between the third party and the associated enterprise, or if the terms of the relevant transaction are determined in substance between the third party and the associated enterprise, then such transactions shall be deemed to be an international transaction. Enterprise means a person or a venture of any nature and also includes a permanent establishment of such person or venture. Methods for computation of Arm s Length Price Section 107(C) Bangladesh transfer pricing legislation prescribes the following methods for the determination of arm s length price: Comparable Uncontrolled Price Method (CUP) Resale Price Method (RPM) Cost Plus Method (CPM) Profit Split Method (PSM) Transactional Net Margin Method (TNMM) Any other method Where it can be demonstrated that none of the first five methods can be reasonably applied to determine the arm s length price for an international transaction, Section 107C allows the use of any other method that can yield a result consistent with the arm s length price. For the purpose of determining a comparable uncontrolled transaction, Rule 71(3) provides that data relating to the relevant financial year should be considered. However, the proviso to the Rule permits the use of data relating to the period prior to the relevant financial year if it can be substantiated that such data bears such facts that could have an influence on the analysis of comparability. As per the proviso to section 107C, transfer pricing provisions shall not apply if it results in lowering the total income computed by virtue of complying with the arm s length principle. The Bangladesh transfer pricing provisions do not provide any tolerance band when determining the arm s length price for benchmarking international transactions. Documentation requirements as per Rule 73 A detailed list of the documentation requirements are listed in Rule 73. Some of the key documentation requirements are: Profile of the multinational group including the consolidated financial statements of the group 2 Global Tax Alert Transfer pricing

3 Profile of each member of the group including business relationships between each member Profile of each associate enterprise including tax registration numbers and financial statements of any associated enterprise operating in Bangladesh Business description The nature and terms (including prices) of international transactions Description of functions performed, risks assumed and assets employed Record of any financial estimates Record of uncontrolled transaction with third parties and a comparability evaluation Description of methods considered Reasons for rejection of alternative methods Details of transfer pricing adjustments Any other information or data relating to the associated enterprise which may be relevant for determination of the arm s length price As per Rule 73, the above-mentioned information and documents shall be kept and maintained for a period of eight years from the end of the relevant assessment year. The above documentation requirements shall not be applicable in case of an assessee where the aggregate value of international transactions entered into during an income year, 2 as recorded in the books of accounts does not exceed Taka 30,000,000 (approx. US$ 390,000). 3 Statement of international transactions Section 107(EE) The Finance Act, 2014 has inserted a new section 107EE by virtue of which every person who has entered into an international transaction shall furnish, along with the return of income, a statement of international transactions in the form and manner as prescribed under Rule 75A. Accountants report Section 107(F) Under Section 107F, every person who has entered into an international transaction or transactions the aggregate value of which exceeds Taka 30,000,000 (approx. US$ 390,000) during an income year shall furnish, on or before the specified date, in the form and manner as prescribed under Rule 75, a report from a Chartered Accountant. Transfer pricing penalties Section 107(G), 107(H), 107(I) For failure to keep, maintain or furnish any information or documents or records as required by Section 107E, the tax officer may impose a penalty on the taxpayer not exceeding 1% of the value of each international transaction. Such penalty shall be levied without prejudice to the provisions of chapter XV of the Ordinance, which deals with imposition of penalties. For a failure to comply with the notice or requisition under section 107D of the ordinance by the Deputy Commissioner of Taxes, the tax officer may impose a penalty on the taxpayer not exceeding 1% of the value of each international transaction. For a failure to furnish a report from a Chartered Accountant as required by section 107F of the Ordinance, the tax officer may impose a penalty on the taxpayer of an amount not exceeding Taka 300,000 (approx. US$ 3,900). APA opportunity/safe harbor rules Currently, there is no formal APA program or safe harbor rules in Bangladesh. Endnotes 1. The Finance Act, 2014 was introduced on 30 June As per section 2(35) of the Income Tax Ordinance, 1984, income year has been defined to mean the financial year opted by the assessee. 3. As per conversion rates applicable on 15 September 2014 which is 1 Taka = US$. Global Tax Alert Transfer pricing 3

4 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), Kolkata Dinesh Agarwal Sachin Agarwal Amit Poddar Ankur Goel Global Tax Alert Transfer pricing

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