Move to check illicit transfer of funds by multinationals

FE Report (July 05, 2011)

A move is in the offing to check "irregular" transfer of funds abroad by multinational companies that caused Bangladesh US$ 35 billion in revenue loss in 1990-2008 period, according to a study of the United Nations Development Programme (UNDP).

The 'Direct Tax Act' will incorporate the measure that is likely to come into effect from July 1, 2012.

The National Board of Revenue (NBR) has decided to take the step, after it detected that some multinational companies have been evading taxes by applying new techniques known as 'transfer-pricing' in absence of a legal framework to check the 'illicit' transfer of fund.

A recent report of the UNDP said Bangladesh topped the list among the 48 least developed countries (LDCs) on transfer of illicit fund.

UNDP commissioned report on "Illicit Financial Flows from the Least Developed Countries: 1990-2008", said 48 poorest countries lost $197 billion in 1990-2008 period. It said the fund was shifted to the developed countries from LDCs.

Of the LDCs, Bangladesh topped the list as it experienced illicit transfer of $35 billion while Angola is the second one, losing $34 billion and Lesotho is in third position with its loss $16.8 billion.

Neighbouring country Myanmar, which is in the top ten list, has lost $ 8.5 billion in 1990-2008 period.

However, the tax official expressed their doubt over the amount of illicit fund transfer from Bangladesh.

"We agree that transfer- pricing caused revenue loss to the government but the amount seems too high compared to the number of multinational companies in Bangladesh," said Aminur Rahman, member (income tax policy) of the NBR.

Another senior tax official said the absence of an effective regulation for checking transfer-pricing helped some multinational companies to transfer their profits abroad.

Large Taxpayers Unit (LTU) under the income tax wing of the NBR has been pressing the revenue board for the last two fiscals to incorporate the measure in income tax law, he said.

"We cannot seek many documents to investigate transfer-pricing conducted by multinational companies (MNCs) due to lack of a legal framework," the official said.

Taxmen have found some MNCs purchased raw materials from their parent companies abroad showing higher costs than their actual prices, he said.

He said the taxmen are not trained enough to find out the new technique of tax evasion by multinational companies.

"Those companies have modern accounting system. They are updating their business strategies in keeping with the modern trend. Taxmen should be trained up on those measures to plug those loopholes," the official said.

Central Intelligence Cell (CIC), in its investigation against tax evaders, found transfer- pricing as one of the major reasons for tax evasion.

The UNDP commissioned report, written by Global Financial Integrity (GFI) with Dev Kar as the lead economist, examines how structural characteristics of the LDCs facilitate the cross-border transfer of illicit funds.

The report said illicit flows divert resources away from poverty alleviation and economic development.

The top ten countries experiencing flight of illicit capital (cumulative outflows) are Bangladesh, Angola, Lesotho, Chad, Yemen, Nepal, Uganda, Myanmar, Ethiopia and Zambia.