Why the offshore tax amnesty is unlikely to work 

The Bangladesh Bank has offered tax amnesty against the return of offshore assets by paying a 7% tax. On 18 July, a Bangladesh Bank circular stated that "any form of undisclosed offshore assets can be brought into the country legally through the banking channel between 1 July and 30 June 2023 by paying a 7% tax." 

Furthermore, it was reported that the source of funds to be remitted need not be declared. 

A plausible intention behind the Central Bank's initiative may be to combat the turmoil in the foreign exchange markets arising from scarcity of foreign exchange. 

However, the initiative is open to the criticism that it may permit legitimising illicit funds and eventually act as a disincentive for honest taxpayers. On the other hand, the initiative can also be viewed as a mechanism for encouraging emigrants to bring back their financial assets and savings through legal channels. 

Nevertheless, this may not be effective since the income earnings through legal channels by Bangladeshi nationals in foreign countries can already be transferred to Bangladesh in the form of tax-exempt remittance. Therefore, Bangladeshis who have earnings and assets abroad may not find this 7% tax amnesty to be a lucrative incentive.

Considering the sudden decline in foreign exchange reserves, it is imperative to stabilise the foreign exchange market as soon as possible, but the options available to the policy makers are limited. In light of this, the tax amnesty provided by the government can still be viewed as a well-intentioned initiative. This is a crucial concern at present and it is essential to assess its likely effectiveness, since it is by no means certain, ex-ante, that money launderers will be inclined to send back their illicit financial resources from abroad. 

Prior to the offshore tax amnesty, the government provided a tax amnesty to undeclared domestic earnings several times since independence, but tax revenues through such programs have not increased significantly. 

The percentage of income tax collected from domestic sources as a result of the amnesty compared to the overall collection was not satisfactory: 6.81% in 2007-08 which then fell to less than 1% in FY 2008-09 and FY 2009-10 (0.72% and 0.70% respectively) (Ahmed 2020).

Given the dismal outcome of the tax amnesty on domestic revenues, it is unlikely that the outcome of tax amnesty initiatives on offshore resources will be effective.

Let us consider some facts and issues to assess this concern. It is well known that illicit transfers through illegal channels take place in large amounts. It should be obvious that only individuals and firms with high incomes can avail themselves of such opportunities (cf. Alstadseter et al, 2018).

The Global Financial Integrity Report (GFI, 2021) states that funds are illicitly transferred across international borders "to evade taxes and/or customs duties, launder the proceeds of criminal activity, circumvent currency controls, and hide profits in offshore bank accounts."

If such transfers are indeed meant to evade taxes and trade duties to begin with, the likelihood of reversing capital outflow by means of the offshore tax amnesty seems low.  

It is difficult to estimate the magnitude of illicit financial flows due to its covert nature. GFI carried out this task by examining the latest international trade data, officially reported by governments to the United Nations, by estimating the magnitude of trade misinvoicing. 

GFI calculated the "value gaps" occurring in the global commercial trading system by identifying the "mismatches between what any two countries had reported regarding their trade with each other." 

The annual average total value gap identified in Bangladesh's trade is about $8.3 billion between 2009 to 2018, and amounts to approximately 17% of total trade of Bangladesh (GFI 2021 Report), which also reveals the magnitude of capital flight every year. 

Trade misinvoicing and balance of payment leakages are two channels for illicit financial flows in the developing world. Illicit financial outflows through trade misinvoicing and balance of payment leakages account for 12-17%  of Bangladesh's total trade from 2005 to 2015, of which trade misinvoicing is around 7-12% of Bangladesh's total trade (GFI, 2017). 

Hence, trade misinvoicing is the largest component of illicit financial flows in Bangladesh. 

Against this backdrop, even if the central bank's ambitious approach of tax amnesty functions as intended, and if there is substantial inflow of foreign currencies resulting in significant augmentation of foreign exchange reserve, the shortage of the reserve will be addressed to some extent in the short-run but there is unlikely to be a significant effect in the long-run. 

The currency depreciation has been large and in a short span of about six months it has increased the incentive to resend funds which were transferred since early this year.

However, the present scenario is somewhat different from the previous years. For example, if the funds were transferred when the exchange rate was Tk87 to the US dollar, it could be brought to Tk95 in a short span of time — a high rate of return. 

And, if the benefit of the tax amnesty is included, the return would be even higher. Individuals may be induced to utilise the high return of this short-term capital inflow in significant part to make long-term investments in unproductive real estate assets in the absence of well-structured investment opportunities.

A thriving "hundi" or curb market makes Bangladesh's capital account more open than the policy regime suggests. This implies that foreign exchange traders can drive up the value of the Taka via curb market activity, and at a certain stage drive it back down again, depreciating it.

While such behaviour would normally be expected in an open capital account with a floating exchange rate and market competition, the ups and downs would not disrupt the market given strong monetary and fiscal policies and regulation. However, with weak policies and regulation, it can cause turbulence and yield windfall gains of the sort observed recently.

It is high time the government resolutely strengthened regulatory control as well as executed stern actions against the unscrupulous "money changers." Otherwise, the ability of a relatively small group of traders to cause large swings in the exchange rate can cause greater disruption in the future. The stock market crashes of 1996 and 2012 should serve as reminders.

References

Ahmed, Sams Uddin. "Tax amnesty schemes in Bangladesh: Some observations." The Cost and Management 48, no. 3 (2020): 35-40. 

Alstadsæter, Annette, Niels Johannesen, and Gabriel Zucman. "Tax evasion and inequality." American Economic Review 109, no. 6 (2019): 2073-2103.

Integrity, Global Financial. "Illicit financial flows to and from developing countries: 2005-2014." Washington, DC (2017).

Integrity, Global Financial. "Trade-related illicit financial flows in 134 developing countries 2009-2018." Global Financial Integrity,(2021).

Tahreen Tahrima Chowdhury is a Research Fellow at the Bangladesh Institute of Development Studies (BIDS)