Bijay Damase

September 8: The Government of Nepal is preparing to monitor the transactions of multinational companies doing business in Nepal. The government is trying to implement 'transfer pricing' guidelines to monitor the actual transactions and income of those companies.

According to the Inland Revenue Department, this will clearly reveal whether the multinational companies operating in Nepal have paid the taxes based on actual volume of transactions or not.

The department said that a policy to prevent tax evasion will be taken based on the record of their business and transactions in the 'transfer pricing' system.

Bimal Sapkota, director of the policy analysis branch of the Inland Revenue Department, said that this type of surveillance is being carried out to control tax evasion that may be caused by base erosion and profit shifting as well as profit fragmentation through 'transfer pricing'.

The trend of multinational companies establishing branches in Nepal is increasing recently. Officials claim that they are paying unnaturally higher rates than the prevailing rates in the market by taking services such as consulting, management and purchasing goods from the parent company.

'Transfer price' is the price paid when the business or subsidiary or affiliated companies under the same owner or common control buy and sell goods or services to each other. In such a transaction, the company can reduce its tax liability by showing that the profit of one of its own units, subsidiaries or affiliated companies has gone into losses in a planned way or transfer the profits of one company to another unit or subsidiary company.

"Transfer pricing" also helps to shift the profit earned by the company in a country with a high tax rate to a country with a low tax rate. In this, the company sells its services or goods to any unit, branch or subsidiary/affiliate within the company for money. It is like buying goods or services from the market.

Transfer pricing is considered a legal technique by which companies transfer profits to reduce the tax liability of the parent company. This practice reduces the tax expenses of companies. The state does not get the revenue it should get. Due to the increasing tendency of companies to hide a large part of their taxable income in this way in recent years, most of the countries in the world have started to control tax evasion through 'transfer pricing'.

According to the department, the draft of 'Transfer Pricing Guidelines' has been prepared. Director Sapkota informed that it is ready to be implemented. "The final guideline will come and be implemented in one or two months," he said, "The only reason for developing the transfer pricing system is to hold the multinational companies accountable for the actual transactions in Nepal."

The department believes that when the tax administration starts looking at 'transfer pricing', such companies will keep proper details and records. In the budget of the current fiscal year, it is mentioned that the 'transfer pricing' policy will be implemented from this year. According to tax officials, Google, Facebook and others are doing business outside Nepal. They do not come under the 'transfer pricing' monitoring. They have been brought under the ambit of taxation since last year by imposing electronic service tax and value added tax. The tax administration of Nepal cannot impose tax on their separate profit and loss account.

They have been levied 2 percent service tax and 13 percent value added tax since last year. Now 10/12 such companies have come under the scope of tax. Nine international companies dealing in electronic services in Nepal have already paid taxes of about Rs 9 million.

Those international companies registered with the Inland Revenue Department have paid the amount under the title of value addition only in the last fiscal year (FY) 2022/23. The process of registering such companies for tax is increasing.

In the nineties, the practice of 'transfer pricing' was widespread. Many American multinational companies, including Amazon, Apple, Google, and Starbucks, moved their profits to "tax haven" countries by adopting the method of "transfer pricing". Many countries, including the United States and Britain, started strongly opposing it. Most of these companies were fined billions of dollars after it was confirmed that they had shifted their profits with the help of 'transfer pricing'.