By Rounak Zaman
In the global business environment, it is common for subsidiaries and their parent companies to share certain services. Under these circumstances, parent companies typically provide specialized technical expertise that may not be readily available in the local market. While mechanisms such as technical service agreements exist to facilitate such transactions, they often involve complex procedures. In a forward-thinking move, Bangladesh Bank has issued this circular to streamline the process by allowing remittance of funds for such services without requiring prior approval from the central bank.
The Foreign Exchange Policy Department of Bangladesh Bank has issued this circular to guide outward remittances related to service payments by subsidiaries of foreign companies operating in Bangladesh.
1. General Guidelines on Outward Remittances
Authorized Dealers (ADs) can execute outward remittances for transactions classified under the cunt account as per the Guidelines for Foreign Exchange Transactions–2019 (GFET), Vol-1. Additionally, Bangladesh Bank considers requests for outward remittances on current account transactions not explicitly mentioned in the GFET and subsequent circulars, provided that the legitimacy and necessity of such expenses are duly established.
2. Nature of Service Trade and Related Party Transactions
Service trade differs from tangible trade as it involves transactions in a non-physical form. Subsidiaries of foreign companies in Bangladesh often procure various services from or through their parent/group companies or associated entities abroad. Given this scenario, to facilitate seamless transactions between subsidiaries and their respective parent/group entities, the following conditions shall apply:
(a) The required services should not be available locally.
(b) The parent/group company must control the subsidiary by owning more than 50% of its shares.
(c) The total gross remittable amount (before source tax deductions) must not exceed 10% of the net profit in a given accounting year.
3. Compliance Requirements for Authorized Dealers (ADs)
Before processing outward remittances, ADs must ensure adherence to the following conditions:
(a) Obtain and verify relevant contracts, including invoices.
(b) Ensure that the pricing of services is competitive in the global market.
(c) Comply with all applicable tax regulations, including deductions and payments for source tax and VAT, and adhere to transfer pricing rules.
(d) Permit periodical payments based on reasonable estimations of profit duly certified by auditors.
(e) Obtain an undertaking from the remitting subsidiary stating that adjustments will be made in the following year should actual profit deviate from the estimated amount.
4. Restrictions on Facility Usage
This authorization does not extend to remittances that require specific permissions from competent authorities. Additionally, this facility is mutually exclusive, meaning that subsidiaries cannot avail of this provision for transactions with parent/group companies if such transactions have already been generally or specifically approved under different regulatory guidelines.
5. Designated Authorized Dealer Branch for Transactions
The facility shall be availed through a specific branch of an AD designated by the applicant subsidiary. Should the subsidiary seek to change the designated AD branch, the relevant file must be transferred directly to the new AD branch upon written request by the applicant.
6. Reporting and Compliance to Bangladesh Bank
ADs must report all transactions executed under this facility to Bangladesh Bank through the online reporting module. Additionally, ADs must ensure the submission of regular monthly returns and statements as per regulatory requirements.
7. Procedure for Service Payments Exceeding the Set Limit
If a subsidiary intends to remit amounts exceeding the stipulated 10% net profit threshold, it must apply its designated AD to Bangladesh Bank along with the following documents:
(a) Draft copies of agreements or Memoranda of Understanding (MoU) to be executed between the subsidiary and the parent/group company abroad.
(b) Documentary evidence demonstrating the price competitiveness of the services obtained.
(c) Justifications indicating the necessity of procuring such services from the parent/group company abroad and proof that such services are unavailable locally.
(d) A certificate from auditors confirming compliance with source tax and VAT regulations, along with a breakdown of tax calculations and references to relevant provisions of tax laws, rules, and regulations.
Should you require any further clarification on this, please get in touch with [email protected] or +8801886119800
