Transfer pricing is the determination of prices at which goods, services and intangible property are transacted between related parties.
The term ‘transfer price’ refers to the price at which a division/subsidiary of a company transact with each another division/subsidiary for goods or services. It takes place when two related companies, such as a parent company and a subsidiary, or two subsidiaries controlled by a common parent, engage in international trade with each other for goods and services.
When transactions are mispriced through showing of lower or higher prices than arm’s length (actual market) prices, the transfer mispricing happens. To put it differently, when related entities of a multinational firm show artificially high prices for an imported product or service in an attempt to deflate profits to evade taxes, the practice is known as ‘transfer mispricing’.
Initiatives from Income Tax Wing
The NBR has adopted transfer pricing regulations/rules by incorporating a chapter on transfer pricing in its Income Tax Ordinance (Chapter XIA) through Finance Act 2012. Aim of the new rules is to ensure that profits taxable in Bangladesh are not transferred to foreign countries (especially in low –taxation countries) or understated (or losses overstated) by manipulating intra-company/related company transactions.
To access the Bangladesh transfer pricing legislation, click here (Chapter XIA of the Income Tax Ordinance, 1984).
Transfer pricing regulations in Bangladesh have been made effective from 1 July 2014 by SRO 161-Law/Income Tax/2014. To access the SRO (এস,আর,ও নং ১৬১, আইন/আয়কর/২০১৪, তারিখ, ২৬ জুন, ২০১৪ খ্রি) concerning the date on which transfer pricing became effective, click here.
Under the new rules, any international transaction above Tk. 3 crore by a multinational or its associated entities from Bangladesh will come under scrutiny of the National Board of Revenue (NBR). A report from a chartered accountant will have to be submitted to the NBR for transactions above Tk. 3 crore in a financial year.
The NBR has established a Transfer Pricing Cell to audit transactions by firms.This cell has been working to educate tax officers and tax payers about the newly introduced transfer pricing regulations as well as to create awareness among the stakeholders.
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 subject to fulfilment of conditions
Initiatives from Customs Wing
The NBR has also adopted Customs Valuation (Determination of the Value of Imported Goods) Rules, 2000 in a bid to determine the arm’s length pricing of any transactions (i.e. price actually paid or payable -the transaction value) instead of using discretionary practices of determining prices. The Customs authorities also ask for supporting documentation to confirm the information contained in the value declaration.
To access the Customs Valuation (Determination of the Value of Imported Goods) Rules, 2000, Click here.
The Customs Valuation Rules was framed as per the Agreement on Customs Valuation of the World Trade Organization. To download the WTO Agreement on Customs Valuation, visit Click here.
To enable customs administrations to deal effectively with the issue of the relationship between customs valuation and transfer pricing, the World Customs Organization has developed a Guide to Customs Valuation and Transfer Pricing. To get more on info on WCO docs on transfer pricing, visit www.wcoomd.org.