The National Board of Revenue is set to establish a transfer pricing (TP) cell for its customs wing to deal with duty evasion, money laundering and other customs-related offences by multinational companies through manipulation of the transfer pricing system.
There are 921 MNCs operating in the country.
Customs wing of the revenue board is now preparing a framework for the TP cell, the second one after the NBR in 2014 established such cell for its income tax wing.
Officials said that the NBR in its fifth board meeting held on December 26 last year decided to form the TP cell for customs to scrutinise the authenticity of values of transactions between associated enterprises and investigate trade-based money laundering through misuse of the transfer pricing system.
An MNC may engage in under-invoicing and over-invoicing practices while transferring prices to its associated companies located in other countries for purchasing goods and services for either reducing the level of payable duties and other taxes or siphoning off money from the importing country, they said.
They said that prices of goods and services for customs assessment should be determined by market forces like the prices between two independent enterprises.
But there are possibilities that the determination of the prices is influenced by the relationship between the associated enterprises, they added.
A senior customs official said that transfer price for an imported product or service set at a higher level than the market level might cause money laundering as well as reduce the income tax liability.
On the other hand, if the price of imported goods and services is set at a reduced level than the actual price, the revenue board would get lower amount of customs duties and other taxes, he said.
Setting the prices of imported goods, including raw materials, at a higher level also causes reduction in the rate of value addition of finished goods in the importing country, affecting overall VAT collection at the domestic stage, he said.
He said that now there was no mechanism in customs act, rules and regulations to check misuse of the transfer pricing system.
The TP cell of the income tax wing deals only with money laundering and income tax-related issues, he added.
Generally, customs officials at customs houses and land customs stations crosscheck whether there are any cases of misdeclarations — over invoicing or under invoicing in import and export — for duty assessment purpose.
They use the customs value as the basis for determining the liability of customs duty of imported goods.
Customs officials usually scrutinise the transaction value suspected for under invoicing and raise the customs assessment value if they find the declared value lower than the normal.
They cannot prevent laundering of money if the importer declares the customs assessment value at a higher level as the money is paid through the banking channel.
The rate of value addition in the domestic market also becomes thinner if the cost of raw materials becomes higher, the officials said.
A senior customs official told New Age that they were working to set up the cell and framing the terms of reference for the cell.
He said that the proposed cell that might be put under the leadership of NBR member (VAT audit and intelligence) would review the existing laws and regulations to make it adaptable to the transfer pricing system.
The cell will also maintain communication with relevant agencies including the income tax TP cell.
The proposed cell will also work to establish a database on TP and carry out investigation to prevent trade-based money laundering.
Officials said that the existing TP cell of the income tax wing was scrutinising the status of international transactions by the multinational companies operating in the country.
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