Project Report

On

ADOPTING TRANSFER PRICING REGIME IN BANGLADESH

Rationale and the Needed Initiatives

“ADOPTING TRANSFER PRICING REGIME IN BANGLADESH

Rationale and the Needed Initiatives”

Submitted to:

Nafiz Sarwar Islam

Senior Lecturer

Department of Business Administration

East West University

Submitted by: Md. Rajib Ahmed

ID: 2008-2-10-155

Department of Business Administration

East West University

Md. Mezbaur Rahaman

ID: 2008-2-10-040

Department of Business Administration

East West University

EAST WEST UNIVERSITY

Letter of Transmittal

August 6, 2012

Nafiz Sarwar Islam

Senior Lecturer

Department of Business Administration

East West University

A/2, Main Road, Aftabnagar, Dhaka-1212

Subject: Submission of Internship Report.

Dear Sir It is my great pleasure to submit our project report “Adopting transfer pricing regime in Bangladesh: rationale and the needed initiatives”. We have tried our level best in order to analyze this topic based on all the recent updated information as much as possible.

We have gathered a lot of experience about the activities during our project period for analyzing our topic. It was great to gather some knowledge about transfer pricing regime in Bangladesh. We have tried our best to make this report an outstanding one. But still there might be shortcoming regarding this report.

It will be my pleasure to clarify any matter regarding this report. We thank to you for allowing me the opportunity to undertake the task and for your sincere guidance and cooperation.

Sincerely yours’

____________

Md. Rajib Ahmed

ID: 2008-2-10-155

____________

Md. Mezbaur Rahaman

ID: 2008-2-10-040

Acknowledgement

The successful accomplishment of this Project Report is the outcome of the contribution and

involvement of a number of people, especially those who took the time to share their thoughtful

guidance and suggestions to improve the report.

At the beginning, we would like to pay my gratitude to the entire Almighty for the almighty for

giving me the ability to work hard under pressure.

We have the deepest gratitude to our respectable supervisor Nafiz Sarwar Islam, Senior Lecturer,

Department of Business Administration, East West University. We are thankful to him for his

continuous support and supervision, suggestions and providing us with valuable information that

was very much needed for the completion of this presentation.

Finally our sincere gratitude goes to my family, friends and classmates who helped us whenever

we needed.

Executive Summary

The purpose of this report is providing a clear understanding and overall analysis of transfer

pricing. Research for this report included an overview of transfer pricing, general transfer

pricing principles, transfer miswriting, emergence of transfer pricing regulation in Bangladesh,

existing rules and its potential. Besides in-depth knowledge and understanding of current

practice of Transfer Mispricing, Objectives of Transfer Pricing Regime, rationale for adopting

transfer pricing regime in Bangladesh, importance of it both from the perspective of tax

agencies and many of the multinational corporations with cross‐border operations are

also included. It covers mainly five chapters: Introduction, Literature review, Methodology,

finding and analysis and conclusion with a number of sub-chapters.

The major findings indicate that Bangladesh is a fast growing economy with increasing

exposure to the risk of mispricing in cross border transactions and having enormous loss of tax

and capital each year due to mispricing in international transactions. Besides The growing size

of country’s informal economy and the need to limit money laundering and discourage

terrorist financing have also added urgency to the task of maintaining country’s financial health

and stability. While it is clear that putting in place a transfer pricing regime, which is

modern, transparent, globally accepted and geared towards good governance is likely to

encourage foreign direct investment (FDI), not discourage it. Perhaps time has come for

Bangladesh to adopt an appropriate and adequate transfer pricing regime without further delay.

Table of Content

Chapter 1: Introduction………………………………...………………………………..09-14

1.1 Transfer Pricing…………………………………………………………….09-10

1.2 Transfer Pricing Regime in Bangladesh…………………………………...11-12

1.3 Origin of the Report………………………………………………........….…..13

1.4 Objective of the Study…………………………………………….........……...14

Chapter 2: Literature Review…………………..……………………………………….15-19

2.1 Importance of Transfer Pricing Regime in Bangladesh…………….…….…...16

2.2 Objectives of Adopting Transfer Pricing Regime………….....……..……..17-18

2.2.1 Safeguarding Revenue and Capital……………….…………….....….17

2.2.2 Tracking and Monitoring Transactions……………......................….18

2.2.3 Acquiring the Power of Information……………………...….……18-19

Chapter 3: Methodology……………………………………………………..…...…….20-22

3.1 Research Methodology…………………………….…………..…….…….....20

3.2 Research Inquiry…………………………………….….…….……........……20

3.3 Research Method…………………………………….……..…………...…….21

3.4 Sources for Data Collection…………………………………...…...…………21

3.5 Limitations in Research………………………………..…..…..………….21-22

Chapter 4: Findings and Discussion……………………………………………..…….23-84

4.1 An Overview of Transfer mispricing…………………………..…...…….23-40

4.1.1 Illegal Capital Flow, Trade Mispricing and Tax Evasion…...……23-25

4.1.2 Concept of Transfer Pricing……………………………………...…….25

4.1.3 Practice of Transfer Mispricing…………………….……………..26-29

4.1.3.1 Loss of Tax Revenue…………………………………….……..26

4.1.3.2 Capital Flight………………………………………...……..27-28

4.1.3.3 Money Laundering……………………………………….....28-29

4.1.4 Conducive Environment for Transfer Mispricing…………………29-37

4.1.4.1 Incentives within the Global System……………………….30-36

4.1.4.2 Weak Institutional and Regulatory Capacity………………….37

4.1.5 Steps towards Transfer Pricing …………………………………….38-40

4.1.5.1 Agency to Administer Transfer Pricing ……………….………38

4.1.5.2 Transfer Pricing Regulations…………………………..….. 39-40

4.2 Understanding transfer pricing regime ……………………………………41-44

4.2.1 Transfer Pricing Administration Framework …………………………41

4.2.2 Subjects of Transfer Pricing Administration……………………….....42

4.2.3 Transfer Pricing Organization……………………………………... 42-42

4.2.4 Regulatory Framework …………………………………………………43

4.2.5 Transfer Pricing Terminologies ………………………………………...44

4.3 Documentation Process …………………………………………………….45-49

4.3.1 Transfer Pricing Methods ……………………………………………….45

4.3.2 Transfer Pricing Documentation …………………………………….45-47

4.3.3 Transfer Pricing Audit ………………………………………………47-48

4.3.4 Transfer Pricing Database ………………………………………………49

4.4 Global Experience …………………………………………………………..50-53

4.4.1 Asian Experience ………………………………………………………..51

4.4.2 Toughest Tax Agencies ………………………………………………52-53

4.5 Rationale for adopting transfer pricing regime in Bangladesh …………….54-65

4.5.1 Evidence of Tax Loss and Capital Flight in Bangladesh …………...56-59

4.5.2 Transfer Pricing Risk Factors for Bangladesh ……………………59-63

4.5.3 Presence of Transfer Pricing in Trade Partner Countries ……………63

4.5.4 Domestic Tax Rate Variations …………………………………….64-65

4.6 How Transfer Pricing Regime Can Help …………………………………….66-70

4.6.1 Minimizing Loss of Tax and Capital ……………………………….66-68

4.6.2 Strengthening Capacity………………………………………………... 68

4.6.3 Contributing to Other Areas of Governance …………………………...69

4.6.4 Issue of Efficiency and Fairness………………………………………. 70

4.7 Adopting an Appropriate Transfer Pricing Regime in Bangladesh ………...….7-84

4.7.1 Study and Analysis …………………………………………………..71-72

4.7.2 Setting the Stage ………………………………………………………...72

4.7.3 Transfer Pricing Legislation …………………………………………72-77

4.7.4 Organizational Arrangement ………………………………………...77-82

4.7.5 Data Support Environment ……………………………………………...82

4.7.6 Taxpayers’ Education ………………………………………………82-83

4.7.7 Transfer Pricing Delivery …………………………………………...83-84

Chapter 5: Conclusion……………………………………………………………………85-88

Chapter 6: References…………………………………………………………...………..89-96