A Tax Primer for Foreign Investors in Bangladesh: Incentives, TP, DTAs, Repatriation
Bangladesh’s tax code contains many regulations of interest to prospective foreign investors. This article provides an overview of some of these topics, including tax incentives available for designated economic locations and special projects, transfer pricing requirements and methods, bilateral tax treaty countries, and rules for foreign exchange and outward remittances. The National Board of Revenue (NBR) is Bangladesh’s tax authority and outlines these regulations.
This article is part of our ongoing series covering Bangladesh’s business landscape and trade and investment environment. We have previously discussed the country’s supply chain advantage, explained the legal entity options for foreign investors, opening a bank account, and detailed the intellectual property protections available.
Tax incentives for designated economic locations
Export Processing Zones
Companies that establish their facilities in Bangladesh’s Export Processing Zones will receive the following tax exemptions based on their location for five to seven years, provided that proper books of accounts are maintained, and income tax returns are submitted as per Section 75 of Income Tax Ordinance 1984.
Companies that establish their facilities in Bangladesh’s Special Economic Zones and Hi-Tech Park Zones will receive the following tax exemptions on business income for the first 10 years from the commencement date of commercial operations, provided that proper books of accounts are maintained, and income tax returns are submitted as per Section 75 of Income Tax Ordinance 1984.
Special Economic Zones and Hi-Tech Park Zones
Tax benefits for investment units
Tax exemptions on business income for the first 10 years after the commencement of commercial operations are as follows:
Tax benefits for development units
Capital gains from the transfer of share capital, declared dividends, royalties, and technical knowledge or assistance fees are tax-exempt for the first 10 years following the commencement of commercial operations.
Tax exemptions on business income for the first 12 years after the commencement of commercial operations are as follows:
Tax incentives for specific projects
Foreign technicians appointed by the Development Unit receive an income tax exemption of 50 percent for the first three years of appointment, provided that commercial operations were commenced less than five years ago.
The following tax exemptions are available to industrialists seeking to establish manufacturing plants for products like pharmaceuticals, automobiles, dyes and chemicals, bio-fertilizers, biotechnologies, etc.
Physical infrastructure facilities
The following tax exemptions are available to investors seeking to construct physical infrastructure, such as deep seaports, elevated expressways, information technology villages, water treatment plants, monorails, rapid transit, renewable energy, underground rails, waste treatment plants, roads, bridges, etc.
Business income, capital gains from the transfer of share capital, royalties, and technical knowledge or assistance fees are tax-exempt for the first 10 years following the commencement of commercial operations for companies engaged in the following Public-Private Partnership projects.
Additionally, foreign technicians appointed by the project companies receive a tax exemption of 50 percent for the first three years of appointment, provided that commercial operations were commenced less than five years ago.
- Bus depots
- Bus terminals
- Eldercare homes
- Elevated and at-grade expressways
- National highways or expressways and related service roads
- River bridges
Transfer pricing is the accounting practice that determines the prices at which goods, services, and intellectual property are transacted between related parties that operate in different geographic markets or tax jurisdictions. The transactions in question can be between different divisions, subsidiaries, or affiliates of the same company or between a parent company and its subsidiary. It is essential for multinational companies, as these often involve large volumes of transactions between related parties located in different countries.
Transfer pricing is necessary to ensure that the appropriate amount of tax is paid to the local government of the countries in which the transacting parties are located. When transactions between related parties involve higher or lower prices than the market prices of the property, goods, or services exchanged, the transactions are said to be “mispriced”.
Companies engage in mispricing to evade taxes. To reduce the overall tax burden, companies typically charge a higher price to divisions in high-tax jurisdictions to reduce profits, and a lower price in low tax jurisdictions to increase profits. However, tax authorities have strict rules against this, and the transfer prices must always be equivalent to the local market prices of the property, goods, or services exchanged.
Bangladesh’s National Board of Revenue (NBR) outlined transfer pricing regulations in the Income Tax Ordinance 1984 (Chapter XIA) and the Finance Act, 2012, and enacted them in July 2014. These rules seek to ensure that profits taxable in Bangladesh are not transferred to foreign countries or misstated by manipulating related-party transactions to evade taxes.
Under transfer pricing rules, international transactions above BDT 30 million by a multinational company, or its associated entities in Bangladesh, in any given financial year will be inspected by the NBR and require a report from a Chartered Accountant at the end of each financial year. Failure to do so will result in a penalty not exceeding BDT 300,000.
Individuals and legal entities that have transacted internationally must provide a statement of international transactions to the local tax authorities and their annual income tax returns. Failure to do so will result in a maximum penalty of two percent of the value of each international transaction.
The transfer pricing return must disclose the following:
- The total expenses incurred, and revenues generated from international transactions by item
- The total value of international transactions
- The nature of the transactions
- The transfer pricing method used to determine arm’s length prices
- The percentage of international transactions under each item compared to the total value of international transactions for that category
Following OECD guidelines, Bangladesh transfer pricing legislation prescribes the following methods for the determination of arm’s length price:
- Comparable Uncontrolled Price Method (CUP): This method compares the price charged for property, goods, or services transferred in a controlled transaction to that charged in an uncontrolled transaction in comparable circumstances.
- Resale Price Method (RPM): This method analyzes the price of a property, good, or service that a related sales company charges to an arm’s length buyer to determine the gross margin that is retained to cover the sales company’s selling, general, and administrative expenses and still make sufficient profit. The remaining profit is considered the arm’s length price of the property, goods, or services exchanged.
- Cost Plus Method (CPM): This method is typically applied to manufacturing, as it relates to tangible property, goods, and services. It conducts a price analysis of a related party manufacturer or service provider in a controlled transaction. It then adds an acceptable mark-up to this cost, which provides a gross margin amount suited to the transaction’s circumstances. This gross profit mark-up is then compared to those earned by other similar companies.
- Profit Split Method (PSM): This method can evaluate related party transactions involving tangible and intangible property, trading activities, or financial services. It divides profits from controlled transactions among the associated enterprises based on the relative value of their contributions as evaluated by market data.
- Transactional Net Margin Method (TNMM): This method compares the net profit margin relative to an appropriate base in controlled transactions to that earned in uncontrolled transactions or other similar companies. It is used to evaluate related party transactions involving tangible and intangible property or services.
- Any other method where it can be demonstrated that:
– None of the above methods can be reasonably applied to determine the arm’s length price for the international transaction.
– Such other method yields a result consistent with the arm’s length price.
Bilateral tax treaties
Bangladesh has signed bilateral tax treaties with the following 33 countries to address issues related to double taxation.
Foreign exchange laws
Bangladesh’s foreign exchange regulations are covered under the Foreign Exchange Regulation Act 1947. Under this Act, only authorized dealers (ADs) are permitted to exchange foreign currency. An AD is a financial institution that facilitates transactions in the foreign exchange market and ensures that these transactions are carried out per the Bangladesh Bank’s guidelines.
Registered money changers are sometimes available at hotels for the convenience of tourists. Still, these offer limited services and are merely intermediaries between foreign currency buyers and the AD.
The Bangladesh Bank is responsible for administering foreign exchange transactions in Bangladesh and issues AD licenses to scheduled banks.
Foreign individuals may bring an unlimited amount of foreign currency into Bangladesh. However, amounts greater than USD 5,000 require a Foreign Money and Jewelry form declaration to be made to Customs when entering. The amounts brought in may be freely taken out, provided that the appropriate declarations have been made. Additionally, foreign individuals may repatriate their invested capital, profits, capital gains, dividends, and approved royalties and fees through ADs after obtaining approval from the Bangladesh Bank and paying the requisite taxes to the local tax authorities. They may also freely remit 75 percent of their basic salary to their respective countries of origin.
Foreign Branch and Liaison Offices may repatriate the balance available in their foreign currency bank accounts without restriction. Foreign Branch Offices and Private Limited Companies (PLCs) may repatriate profits after paying the appropriate amount of tax, the highest rate of which is 30 percent. Foreign PLCs may repatriate Technical and Royalty fees up to six percent of the previous year’s turnover, or US$10,000 per year per contract without restriction. For remittances above six percent, permission from the Bangladesh Investment Development Authority and Bangladesh Bank is required. PLCs may repatriate dividends after paying tax at 20-30 percent rates.
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