BANGLADESH'S ECONOMIC TRANSITION: REFORMING FISCAL POLICIES FOR A COMPETITIVE EDGE

Bangladesh stands on the brink of a major economic shift as it prepares to graduate from Least Developed Country (LDC) status in 2026. Although it will usher in an array of opportunities as developing countries are considered to be more stable and attractive for longer-term investment (on account of better infrastructure, governance and market potential, wider access to international loans and capital financing opportunities) compared to LDCs, this transition would pose some challenges as well, such as not availing LDC-specific trade benefits, concessional financing and special treatment. The country must, therefore, gear up for a more competitive global landscape.

 

To reap the benefits of this graduation, the government is focusing on measures to attract higher foreign direct investment (FDI). The recently concluded BIDA Investor Summit created the much-needed buzz within the international investor community. While it is encouraging to see the interest generated in the country's economy, the actual figures of investment need to be tracked in the forthcoming days to see whether it matches the sentiment. As per official figures 1, Bangladesh received USD1.47bn as FDI during FY 2023-24. In the same period, other middle-income economies have had far more investments (for example, in 2024, Vietnam had a total FDI of USD25bn 2 and Cambodia ~USD 8.1bn 3).

 

Thoughtful and investor-focused fiscal policies, supported by tax reforms that are clear, consistent and in line with international practices is the need of the hour. Some of the measures which might aid investor confidence are deliberated herein.

 

Tax incentives: Certainty, flexibility and practicality

In Bangladesh, tax incentives are typically introduced during the national budget process and become effective for a short term, say, a year or two, with annual extensions declared close to the sunset date. This approach makes it almost impossible for investors to have an adequate amount of time to consider whether they can set up a new industry. Many industries have a long gestation period spanning several months, if not years. Adequate time should be allowed after declaring incentives in order to invite the interest of investors and to enable them to plan and set up a new industrial enterprise. Moreover, flexibility in the period of incentives (say, 10 out of the first 15 years) would allow the industry to maximise the benefit.

 

Tax treatment of profits in JVCAs

Joint Ventures, Consortiums or Associations (JVCAs) of foreign entities are commonly seen in the execution of infrastructure projects, profits from which need to be routed through local branch offices for repatriation. The existing tax law has certain ambiguities regarding the taxability of such profits received by the branch office, creating a risk of double taxation. A clearly stipulated mechanism on the tax incidence in respect of the entire fund flow under the JVCA model (such as timing of taxation, quantum, mitigating and multiple layer taxation) could provide the much-needed certainty.

 

 

 

 

Royalties and FTS payments

Newly set up enterprises need to cross charge royalties and fees for technical services (FTS) to overseas group companies for technology transfer, brand, SOP and know-how, as per transfer pricing (TP) regulations, consistent with global principles. The current thresholds for expense deductibility (10% of profits) and remittance mechanism (6% of previous year's turnover) create a limitation for new-age industries which are heavily dependent on technology support from the parent. Typically, in the initial years, companies would generally have low turnover and might be incurring losses, thereby limiting their ability to avail the desired technology and brand support, imperative for their growth. With TP laws already in place which brings in the control on the quantum of remittance, due consideration may be given to the relevance and requirement of these thresholds in alignment with economic substance and international practices.

 

Furthermore, most Bangladesh tax treaties do not deal with the taxation of FTS, leading to divergent views and long-drawn litigation. An attempt should be made to bring the FTS taxation clause within the ambit of tax treaties to provide more certainty and tax benefits to investors.

 

 

 

 

Other measures

Currently, company information is not easily accessible. Making essential data publicly available would help investors conduct due diligence and assess potential local joint venture partners more effectively. Separately, if initial investment is allowed to be brought in shortly after company incorporation (similar to liaison office and branch registration), it could potentially fast track the process of new company set up.

 

Conclusion

Certainty in policies, flexibility in implementation and practicality in alignment with globally accepted norms of business can act as major drivers to boost investor confidence, while ramping up Bangladesh towards its development journey. A collaborative approach in policy formulation involving the industry, trade bodies and knowledge partners during such a transformation phase can bring in well-rounded reforms, aiding long-term sustainable growth and stability.