Mastering Transfer Pricing in Bangladesh
Your definitive guide to the Income Tax Act 2023, ensuring compliance, mitigating risk, and optimizing your international transactions.
What is Transfer Pricing? A Simple Explanation
Imagine a large company, "Global Corp," which has a factory in Germany and a sales office in Bangladesh. The German factory (Parent Co.) sells goods to the Bangladeshi office (Subsidiary). The price at which this internal sale happens is the **"transfer price."**
Because both entities are part of the same group, they could set this price artificially high or low to move profits from a high-tax country to a low-tax one, reducing their total tax bill. This is called **profit shifting** or **transfer mispricing**.
The Core Principle: Arm's Length
To prevent this, tax authorities worldwide, including in Bangladesh, enforce the **Arm's Length Principle (ALP)**. This principle states:
"The price for transactions between related companies must be the same as it would be if the two companies were completely independent and negotiating in an open market."
In short, transfer pricing regulations are designed to ensure that multinational companies pay their fair share of tax in the countries where their economic activities actually take place.
The Legal Framework: Income Tax Act, 2023
Bangladesh's transfer pricing regime, introduced in 2014 and now governed by Chapter XI (Sections 108-117) of the Income Tax Act, 2023, aims to prevent profit shifting and ensure the nation receives its fair share of tax from multinational enterprises (MNEs).
Section 108: The Arm's Length Principle
The core of the legislation. It mandates that any income or expenditure from an international transaction between associated enterprises must be computed based on the arm's length price (ALP), which is the price that would have been agreed upon between independent parties.
Section 110: Defining 'Associated Enterprise'
The definition is broad, covering direct or indirect control. Key criteria include: one enterprise holding 25% or more voting power in another; a loan from one enterprise constituting over 50% of the other's total asset book value; or the practical ability of one to control the decisions of the other.
Section 111: Defining 'International Transaction'
Any transaction between two or more associated enterprises, where at least one is a non-resident. This includes sales, services, loans, cost-sharing arrangements, and the use of tangible or intangible assets. It also covers "deemed" international transactions where a transaction with a third party is influenced by an associated enterprise.
Section 109: Computation of ALP
Outlines the five prescribed methods (plus an 'other method') for calculating the Arm's Length Price. The 'most appropriate method' must be selected based on a detailed functional and economic analysis.
Section 112 & 113: Documentation & Reporting
Mandates maintaining specific, contemporaneous documentation (TP Study) and furnishing a report from a qualified accountant to substantiate the ALP and the methodology used.
Section 117: Statement of Transactions
Requires every person with international transactions to furnish a detailed statement (TP Return/Schedule) along with their annual income tax return, irrespective of the transaction value.
The End-to-End Compliance Process
A successful transfer pricing strategy follows a structured, multi-step process. This ensures that pricing is not only compliant but also defensible under scrutiny from tax authorities.
Background & Transaction Analysis
Gather comprehensive information about the MNE group, the local entity's operations, industry dynamics, and the specific details of all international transactions with associated enterprises, including their nature, terms, and value.
Functional Analysis (FAR)
Conduct a deep dive to map the Functions performed, Assets employed, and Risks assumed by each party. This critical step determines the economic substance of the transaction and helps characterize the entities involved (e.g., full-risk manufacturer vs. contract manufacturer).
Selection of the Most Appropriate Method
Based on the FAR analysis, choose the most reliable transfer pricing method (e.g., CUP, RPM, TNMM) that best fits the transaction and for which reliable comparable data is available.
Benchmarking & Economic Analysis
Identify comparable independent companies or transactions through database research. Analyze their financial data to determine an arm's length range of prices or profit margins. The taxpayer's results must fall within this range.
Contemporaneous Documentation
Prepare a comprehensive TP Study that documents every step of the analysis. This report is the primary evidence to support the company's transfer pricing policies during a tax audit.
Reporting & Filing
File the prescribed statement of international transactions (TP return/schedule) along with the annual income tax return and submit the mandatory accountant's report.
A Deep Dive into Transfer Pricing Methods
The Income Tax Act, 2023 specifies five primary methods. The selection is a critical decision driven by the FAR analysis, the entity's characterization, and the availability of reliable data.
1. Comparable Uncontrolled Price (CUP) Method
The most direct method, comparing the price in a controlled transaction to that of a comparable uncontrolled transaction. It is preferred for commodity transactions but requires stringent comparability.
Pros
- Most direct and reliable method if comparables exist.
- Recommended by the OECD for commodity transfers.
Cons
- Requires strict product and contractual comparability.
- Reliable data is often difficult to find publicly.
2. Resale Price Method (RPM)
Ideal for distribution and resale activities where no significant value is added to the product. It focuses on the gross margin earned by the reseller.
Pros
- Focuses on functional comparability, not exact product matches.
- Useful for analyzing limited-risk distributors.
Cons
- Differences in accounting policies can distort gross margins.
- Difficult to apply if the reseller adds significant value (e.g., through marketing intangibles).
3. Cost Plus Method (CPLM)
Typically used for manufacturing and the provision of routine services. It determines the arm's length price by adding a comparable gross mark-up to the supplier's costs.
Pros
- Cost base is often easier to determine than market prices.
- Best for analyzing contract or toll manufacturers.
Cons
- Requires consistent accounting and cost allocation between tested and comparable parties.
- Less reliable if unique intangibles are involved.
4. Profit Split Method (PSM)
Applicable for complex, highly integrated transactions where contributions from both parties are unique and valuable (e.g., shared development of a high-value intangible).
Pros
- Considers the unique contributions of each entity.
- Avoids the need to find one-sided comparables.
Cons
- Application can be subjective and complex.
- Requires detailed financial data from all involved AEs, which may be difficult to obtain.
5. Transactional Net Margin Method (TNMM)
The most widely used method due to its flexibility. It compares the net profit margin of the tested party (relative to sales, costs, or assets) with the margins of comparable independent companies.
Pros
- Less sensitive to minor product differences than CUP.
- Publicly available data on net margins is often more accessible.
Cons
- Net margins can be influenced by factors unrelated to transfer pricing.
- Reliability depends heavily on the quality of comparable data.
Comprehensive TP Documentation: Your Shield in an Audit
The burden of proof rests entirely on the taxpayer. Contemporaneous, detailed documentation is not just a legal requirement—it is the cornerstone of a successful audit defense. The documentation waiver for transactions under BDT 3 crore does not absolve the taxpayer from the responsibility of ensuring prices are at arm's length.
Mandatory Documentation Checklist (as per Rule 73)
MNE Group ownership structure and global business profile.
Business and financial profile of the local assessee enterprise.
Details of all international transactions (contracts, terms, value).
Complete FAR analysis for the assessee and AEs.
Economic, market, and industry analyses.
Rationale for selecting the 'most appropriate method'.
Selection of the 'tested party' and justification.
Detailed comparability analysis (search strategy, comparables selected/rejected).
Workings and calculations for determining the ALP.
Any assumptions, policies, or price negotiations impacting the ALP.
Penalties for Non-Compliance
The tax authorities in Bangladesh impose stringent penalties for non-compliance with transfer pricing regulations, underscoring the importance of meticulous record-keeping and reporting.
Failure to Maintain Records
A penalty of up to 1% of the value of each international transaction for which required information, documents, and records were not properly maintained.
Failure to Furnish Report
A penalty of up to 1% of the value of each international transaction if the taxpayer fails to furnish the required accountant's report under Section 113.
Non-Compliance with Arm's Length
If a transaction is not proven to be at arm's length, leading to an understatement of income, a penalty of up to 2% of the value of each such transaction can be imposed, in addition to the tax on the adjusted income.
Failure to Submit TP Return
A substantial penalty of up to BDT 300,000 (3 Lakh Taka) may be levied for the failure to submit the prescribed statement of international transactions with the annual tax return.
How LegalSeba LLP Can Help You Navigate Transfer Pricing
Transfer pricing is a complex and high-stakes area of tax law. Our team of experienced tax professionals at LegalSeba LLP provides end-to-end solutions to ensure your business remains compliant, defends its pricing policies, and minimizes tax risks.
TP Study & Documentation
We prepare robust, contemporaneous transfer pricing documentation that meets all NBR requirements and serves as your primary line of defense.
Benchmarking Analysis
Using global databases, we conduct detailed benchmarking studies to establish and justify your arm's length pricing.
Audit Defense & Representation
We represent your interests during tax audits, responding to queries from tax authorities and defending your TP policies.
