Why business goes to court?
Why tax disputes increases day by day?
Why the businesses and the taxmen could not resolve the disputes out of court premises?
What are the reasons?
Last year in October, the Financial Express published a report, ‘increasing corporate cases block Tk 60b in unpaid taxes’. It is just one of such many tax news.
Can you imagine how many businesses involve with this unpaid tax?
Very few. Half of the amount is outstanding to only 25 corporate taxpayers.
But court cases are not few. Total court cases are around 500.
The presence of such scenario is not only in our country. Same scenarios also exist in other countries. And the percentage of increasing is also very significant.
163% unresolved cases have increases since 2016 according to Organization for Economic Co-operation and Development (OECD) which was published in EY Tax Insights in May by Bill Millar.
The report also revealed that 80-90% unresolved cases are due to transfer pricing issues.
What are the reasons for increasing disputes?
Businessmen and taxmen could not reach to a point that’s why disputes arise. This is the simple answer.
Why it happens?
The taxmen disallowed expenditures and demand more tax. This is the objection from taxpayers’ side.
But the disputes arise between taxmen and the businessmen are not so easy. The issues arise between the two parties are more complex in nature and due to lack of clarifications by the National Board of Revenue (NBR).
The lack of clarification I said because the above mentioned disputed amount is mainly for few issues. And NBR clarifications may help to resolve those issues.
The nature of Tk 60b disputes are mostly common i.e. Zakat fund, provision for bad debts on classified loan of banks, excess-profit tax provision for banks and Subscriber Identification Module (SIM) tax to cell phone operators.
In the above four issues, the taxmen disallowed all the four items during tax calculations. Here only the provisions for financial institutes are the complex issues.
And other two issues are due to lack of clarifications.
Businesses donated to Zakat Fund and demanded as tax allowable expenditures.
And another issue is SIM tax. Mobile operators’ sale SIM lower than government tax and the tax paid to government born by them which they treated as a cost due to subsidies on SIM tax.
In both cases they have incurred expenditures or made loss but could not show during tax calculation.
These are the main reasons for the tax disputes.
Every year government is increasing the size of budget and hence requires more money.
How they will get this money?
Of course by increasing tax collection from taxpayers. And that’s why government is going stricter in tax law enforcement to raise revenues.
And the taxpayers have the different views which raise the conflicts with tax officials.
Transfer pricing is the main factor
The above issues are limited in our national boundaries. But when come to the issue of transfer pricing which is more complex than raise the concern how the tax authority will handle it.
Now most of the businesses have the global presence. And they are expanding their businesses all over the world for more benefit and most of their activities are more complex.
Many say multinational companies shifting their profit in less tax rate countries by using weakness in tax laws.
The businesses are doing it by over pricing the products or services.
We know that there is a full chapter on transfer pricing in our income tax ordinance but the method mentioned there, have the option to get benefit by the business.
What will be in the future?
So we understand that in future we will face many complex issues. Transfer pricing is the one complex area, lots of new issues will be faced in future by our tax authority.
Businesses are going outside their national boundaries.
Last month EY published a survey report in which they showed that 65% businesses are interested to go outside for business.
Why they are interested to go outside?
It’s simple, expand their business in new market, diversified their products.
And of course the most important issue is cost reduction. That’s why now a days outsourcing is famous word to us.
And indirectly the benefit of tax issue.
Labor cost shifting the locations
We all know that the products of China were less expensive compare to other countries manufacturing products.
But now we have regularly seen on the news that big multinational companies are shifting other countries from China due to increase of labor cost.
Yes China had a low labor cost few decades ago, but days changed.
Now multinationals are shifting in Vietnam, India, Indonesia and Bangladesh.
We know that Bangladesh is an attractive place for low wages. And therefore our garments are competing in international markets.
Besides the garments industry, Bangladesh has taken many mega projects in infrastructure development.
BEZA has initiated to set up 100 economic processing zones which will also attract huge foreign investment.
These all will involve inter-company transactions among many countries in the same organizations. And all of these will do by business to create complexity so the regulatory authority will face problem to trace the origin of transactions.
It is not that businesses are doing business to evade tax, business search the benefit lays in the existing laws. And they only try to use those benefits for the company.
Moreover, our national private companies are growing bigger. They are also going outside. They are going in global territory.
So it is predicted that in future tax disputes will increase in number and the nature of those disputes will be more complex.
Technology changes the business idea
Not only the business, a person who has internet connection can involve in financial transactions with any people across the world.
Technology is the main factor in this complexity.
Online business, e-commerce, trading across the world, online earnings all of such economic activities are the example of such financial transactions. These transactions involve more jurisdictions.
So it understands that tax disputes will not be only limited in our boundaries, will involve other countries and have to negotiate with international expert team.
Most of the developed countries are focusing on skilled people. They are preparing themselves to tackle future complex issues.
But what’s about us?
Where is our position?
We have to think about it from now. Have to emphasis to create expert team for better negotiation with other countries.
Because, each country will try to gain more benefit than other countries. So who have expertise will win in the negotiation.
How much capable we are?
So, do we have expert team to resolve the complex tax issues which will be arise in future?
Then the national interest issue will be the prime factor for each country. Each country will try to get more financial advantage than others.
So, in that circumstance our main obstacle will be lack of skilled resources.
Do we have enough expert employees in NBR? How many employees in the top positions have technical background to understand the complex accounting treatments?
The accounting standards applied by the multinational companies are also complex. Hedge accounting, financial instruments, leases and many other accounting related issues are very difficult.
To handle the above accounting treatment multinational companies hired professional accountants who smartly handle such issues. And multinational companies regularly arrange training program to update them so that they could apply it appropriately.
Whether our tax authority arranges any such training for the employees who are engaged with the tax recovery from such multinational companies?
Another most important issue is that in private company though it is very small, in accounts department, an accounting or finance background candidate is recruited by the company. So they have the knowledge about accounts related issues.
But in NBR, from field level to top position the employees are mixed up from different academic background.
Science and arts background have the chance to appoint in the NBR different posts. Day by day they will be promoted in the senior positions and will deal with those complex accounting treatments.
I am not discouraging the selection process, I am just telling about the real scenario what is going on now in our tax department.
But the job is very technical.
Yes you can argue with me that individual tax calculation can do from any background people.
Agree with you as the unemployment pressure is very high in Bangladesh so different background candidates can do the job.
But hope you will agree with me that in technical sector like tax recovery from corporate taxpayer, professional people are much needed.
What the government can do?
Government can appoint professionals from CA, CMA or ACCA background in the large tax unit who will only deal with business tax issues.
The government employees will do as now they are doing. Only the professional accountants will handle the business related complex issues.
Now you can say that it is not required to employ professional people as the companies required to submit their tax return including with audited financial statements.
If taxmen consider it then there will be no disputes in future.
But it is only the imagination.
What will be the next solution for businessmen?
Defensive is the best cure.
Yes you have the right to go court for justice.
But what other country people think about court?
The EY Tax Insights included that in China, companies rarely choose to go to court. Because it seems that you are uncooperative with taxmen which may hamper business relationship with government.
It also harms a company’s in-country reputation.
So what are the other options?
As you are doing business for foreseeable future and have to maintain good relationship with government entity so the court system should always be considered the last resort.
Now the question is if you do not choose to go court then how you will resolve your tax disputes?
In that case you can try to resolve tax disputes out of court premises.
It will help you in many ways, reduce time to resolve pending issues, trusted relationship will be build up with taxmen; legal expenditures will be reduced significantly.
The most important issue is that you can do business in a tension free mood which will help you to more focus on your business.
In our national tax law, we have an option to choose Alternate Dispute Resolution (ADR) where both parties can go for resolve pending tax issues.
But only going there will not reduce the pending cases. Both parties have to intention that they will come here with more transparent and cooperative behavior to resolve tax disputes.
Another tax resolve way is independent audit by professional accounting firm. But the benefit can only be applied by taxmen if they wish.
In whatever system, either ADR or independent audit, businessmen have to cooperate with taxmen or with the independent auditor who will be appointed by the NBR.
If the business can make them believe by presenting accurate information with valid documents then the pending issue will be resolved very quickly. Otherwise these all efforts will have no benefit for any of the party.
It is not only the part of businessmen.
The taxmen should also be opened and cooperative to the taxpayers so that they can trust the taxmen willingness to resolve tax disputes.
Yet such cooperation is not visible which is very much needed from both parties.
What are the way forwards?
It will take time.
These all implementation will require specialist knowledge. The nature of activities varies from business to business.
Minimum standards related to dispute resolution should also be harmonized.
And the most important point is that the decision will often depends on a series of subjective judgments.
In that case to reach a point by both parties is difficult because of different point of view. If it can be narrow down with helping mind from both parties then the task will be much easy.
NBR may set a reasonable time frame to resolve the tax disputes.
And regular monitoring and reviewing should be performed by NBR to speed up the tax disputes in time to resolve pending tax case.
NBR has already initiated to speed up to resolve these disputes. They have informed that a separate unit will be formed who will only be dedicated to work only these disputes.
They have also sought cooperation of attorney general’s office in these regards.
But these are for the current disputes but if the NBR could not clarify the ground why they are disallowed the expenditures then again such issues will arise and same things will be happened.
For these reasons, NBR should clearly clarify the issues with reasonable grounds.
And of course be prepared to tackle upcoming complex business issues.