NBR begins first transfer pricing audit to detect any tax evasion by MNCs

After more than a decade of making transfer pricing rules, Bangladesh's National Board of Revenue (NBR) has commenced its first audit of multinational companies (MNCs) to ensure compliance with these regulations. The audit means to uncover any tax evasion tactics linked to international transactions.

The move is seen as a major step towards financial transparency, aiming to prevent 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 in a company charges another division for goods and services provided.

MNCs are legally allowed to use the transfer pricing method to allocate earnings among their subsidiary and affiliate companies.

The audit, which started 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 audit scope.

Md Jahangir Alam, NBR's member for International Taxes, confirmed that the international transactions of these three MNCs are currently under audit.

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

Using international standards in transfer pricing, authorities will check for any intentional misdeclarations intended to evade or avoid taxes, with legal measures in place if necessary, he said.

Transfer pricing provisions were introduced in Bangladesh's Finance Act in 2012 as a way to reduce tax evasion. However, despite significant discussions, the lack of access to international transaction databases delayed effective implementation.

In 2020, over 900 MNCs operating in Bangladesh were directed to submit transaction data. However, verification was frustrated as Bangladesh had no access to those companies' international databases.

The NBR official added that Bangladesh recently got access to a global transaction database with assistance from a UK-based organisation and funded by the European Union, allowing the revenue authority's Transfer Pricing Cell to commence audits last month.

Experts welcomed the initiative but cautioned that, if done improperly, it could send the wrong message to global investors. They also emphasised that the NBR's capacity should be strengthened 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. It typically involves transferring interest, profits, assets, or costs of goods to the parent company or paying for imported services, a common practice among MNCs.

Companies often shift funds from high-tax to low-tax jurisdictions/countries to reduce their tax liabilities and maximise profits. This strategy often results in high-tax countries losing expected revenue.

In Bangladesh, where corporate tax rates reach up to 45%, there are concerns that some MNCs may inflate prices on products and services in dealings with low-tax countries, moving more funds abroad and showing higher profits there, thus reducing taxable revenue in Bangladesh.

NBR sources said Bangladesh has over 1,000 MNCs, with high-transaction companies being prioritised for audits.

How transfer mispricing occurs

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

For example, a company might record a higher purchase price for goods sold from a low-tax country to a high-tax country. This reduces the profit in the high-tax country, lowering the tax owed there, while increasing profit in the low-tax country. This shift in profits effectively reduces the company's total tax payments.

Apart from pricing arrangements, MNCs may avoid tax through management expenses (headquarters and intra-firm), charges for intellectual property or intangibles (such as royalties, fees, copyrights, trademarks, patents, brand names, franchises, etc), the sharing or allocation of common costs, and mispricing of interest expenses.

Approximately 60% of transactions globally are conducted among members of group companies or affiliated entities (referred to as related parties or associated enterprises), according to a study titled "Transfer Pricing Concept: Bangladesh Perspective", conducted by Md Shabbir Ahmed, a former joint director of the Central Intelligence Cell of NBR and current commissioner of Tax Zone 15.

Experts welcome the move

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

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

According to the Organisation for Economic Co-operation and Development (OECD), 79 countries adopted domestic legislation regarding key transfer pricing principles, including the arm's length principle, till August 2023.

The NBR is conducting the audit following the arm's length principle – which refers to a business deal in which buyers and sellers act independently without one party influencing the other, according to NBR sources.

Is NBR capable of this audit?

Experts have also raised concerns about the complexity of transfer pricing audits, questioning NBR's current level of expertise.

Zaved Akhter, president of FICCI, told TBS, "It is a complicated method. Does the NBR have the capabilities? Because improper methods could send the wrong message to global investors."

Snehasish Barua advised that companies be allowed to make corrections since this is Bangladesh's inaugural transfer pricing audit.

He noted that differing opinions often arise in tax determinations and stressed the importance of ensuring that MNCs are not unfairly impacted, as it could create negative perceptions. He underscored that transparency and fairness should guide the process.

Currently, NBR's Transfer Pricing Cell is staffed with eight officials, including two based abroad, managing this audit as an additional responsibility.

Alamgir Hossain, a former member of NBR Income Tax Policy, said a more proactive Transfer Pricing Cell could enhance corporate compliance but emphasised the need to bolster NBR's capabilities to do the job properly.

Why wait 12 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, there were limitations for training, adequate staffing for audits that meet international standards, budget, or a robust transfer pricing framework at the time.

Officials said although a Transfer Pricing Cell was created around a decade ago, it was never adequately resourced, with manpower shortages and no allocated budget even for international database access.