Literature Review:

Theoretical framework of Transfer Pricing:

The theoretical framework of transfer pricing is based on the concept of ensuring that
transactions between related entities within a multinational corporation (MNC) are conducted
at arm's length prices. The arm's length principle is central to transfer pricing and serves as the
foundation for developing transfer pricing policies and methods. Here is an overview of the
theoretical framework of transfer pricing:
1. Arm's Length Principle:
The arm's length principle stipulates that related parties should set their transfer prices for
goods, services, or intellectual property as if they were unrelated entities engaged in similar
transactions under comparable market conditions. In other words, the prices should be
determined based on what independent parties would agree upon in an open market.
2. Functional Analysis:
Transfer pricing requires a functional analysis to determine the specific functions, assets, and
risks assumed by each related entity involved in a controlled transaction. Understanding these
aspects helps in selecting the most appropriate transfer pricing method.
3. Transfer Pricing Methods:
Various transfer pricing methods can be used to establish arm's length prices. Common
methods include:
Comparable Uncontrolled Price (CUP): Compares the price charged in the controlled transaction
to prices charged in similar uncontrolled transactions.
Resale Price Method (RPM): Calculates the arm's length price based on the resale margin
earned by the buyer.
Cost Plus Method (CPM): Determines the arm's length price by adding an appropriate profit
margin to the cost of production.
Transactional Net Margin Method (TNMM): Compares the net profit margin earned by the
tested party to that of comparable uncontrolled entities.
Profit Split Method (PSM): Allocates profits among related entities based on their contributions
to the value chain.
4. Documentation and Compliance:
MNCs are typically required to maintain detailed documentation supporting their transfer
pricing policies and methodology. This documentation helps demonstrate compliance with the
arm's length principle and is essential in the event of tax audits or disputes.
5. Advance Pricing Agreements (APAs):
MNCs can proactively seek APAs with tax authorities to obtain binding agreements on their
transfer pricing arrangements. APAs provide certainty and reduce the risk of transfer pricing
disputes.
6. Penalties and Adjustments:
Failure to comply with transfer pricing regulations can lead to penalties, interest charges, and
adjustments to taxable income.

Regulation of transfer pricing globally

Transfer pricing is a globally regulated area of taxation that aims to ensure that transactions
between related entities within multinational corporations (MNCs) are conducted at arm's
length prices, as if they were unrelated parties dealing at market prices. While the specifics of
transfer pricing regulations can vary from one country to another, there are some common
themes and international guidelines that influence how transfer pricing is regulated globally:
1. The arm's length principle is a fundamental concept in transfer pricing regulation
worldwide.
2. The Organization for Economic Co-operation and Development (OECD) plays a
significant role in shaping international transfer pricing regulations. The OECD has
published guidelines, known as the OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations, which provide a framework for countries to
develop their own transfer pricing rules. Many countries use these guidelines as a
reference when formulating their regulations.
3. Each country typically has its own set of transfer pricing regulations and legislation that
may be influenced by international guidelines but tailored to its specific tax system and
economic conditions. These regulations specify the documentation requirements,
acceptable transfer pricing methods, and penalties for non-compliance.
4. The CUP method, one of the most direct and commonly used transfer pricing methods,
involves comparing the price charged in a controlled transaction to prices charged in
similar uncontrolled transactions. This method is widely accepted internationally.
5. Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method
(TNMM), Advance Pricing Agreements (APAs), these methods are widely accepted
internationally.
Current practice of Transfer Pricing:
Despite the transfer pricing legislation being included in the law in 2014, the National Board of
Revenue (NBR) still does not have the authority to implement it through a transfer price audit.
As a result, many businesses disregard the law since they continue to operate in a flexible
atmosphere. To benefit the entire group, many multinational corporations drain earnings from
nations with lower tax rates. It is discovered that no transfer price database has been created in
Bangladesh. Additionally, it has been shown that a large number of businesses are not adhering
to the Income Tax Ordinance of 1984's transfer pricing rule because they are not aware of the
pertinent compliance.
Since they provide transfer pricing consulting to businesses with permanent establishments in
Bangladesh, consultants have precise and real expertise about this subject. In answer to this
inquiry, the consultant states that although not all businesses abide by the transfer pricing rule,
it is pleasing to note that a sizable proportion of them do. Many more firms will be added to the
list of those adhering to the transfer pricing rule within a few years. Because the NBR has not
yet begun its transfer price audit, noncompliant parties to the transfer pricing rule are not
aware. There will be a sizable number of people in compliance with transfer pricing legislation if
the NBR begins the transfer pricing audit. They further mentioned that the liaison offices and
multinational corporations (MNCs) that engage in cross-border activities are properly
documented by Bangladesh Investment Development Authority (BIDA). Because of this, NBR
may assist in gathering a list of Permanent Establishments (PE) with foreign transactions in
order to undertake a transfer pricing audit.
Due to their ignorance of pertinent compliance, a large number of businesses are not adhering
to the 1984 Income Tax Ordinance's transfer pricing requirement. (Associate Manager of a
prestigious Chartered Accounting Firm). Due to their focus on their own businesses and rival
enterprises, corporate people do not have a broad understanding of this subject. They came to
the conclusion that they have complied with the transfer pricing laws since the beginning of
2015 and claimed that they have always acted in accordance with the law and government
regulations.

Opportunities and challenges faced by MNCs

Multinational corporations (MNCs) operate in a complex and dynamic global environment, and
they encounter both opportunities and challenges as they expand their business operations
internationally. Here is an overview of some of the key opportunities and challenges faced by
MNCs:
Opportunities for MNCs:

1. One of the primary reasons for MNCs to expand internationally is the opportunity to
access new markets and customer segments. This can lead to increased sales and
revenue.
2. International expansion allows MNCs to diversify their revenue streams and reduce
dependence on a single market or region, mitigating risks associated with economic
downturns in specific areas.
3. Operating in multiple markets can provide economies of scale in production,
distribution, and procurement, potentially reducing costs and increasing profitability.
4. MNCs can tap into foreign sources of labor, raw materials, technology, and knowledge
that may not be available or cost-effective in their home countries.
5. MNCs can leverage their global presence to transfer technology and innovation across
borders, leading to improved products and processes.
6. International expansion can help MNCs gain a competitive advantage by offering
unique products or services, leveraging their brand, or capitalizing on their expertise.
7. Careful structuring of international operations can enable MNCs to optimize their tax
liabilities and take advantage of favorable tax regimes.

Challenges for MNCs:

1. Managing operations in diverse cultural environments can be challenging, as it requires
an understanding of local customs, attitudes, and business practices.

2. MNCs must navigate complex and ever-changing regulatory environments in multiple

countries, including tax laws, trade regulations, labor laws, and environmental
regulations.

3. Political instability, economic volatility, and changes in government policies can create
uncertainty and risk for MNCs operating abroad.

4. Global supply chains are susceptible to disruptions, such as natural disasters, trade
disputes, and global events like the COVID-19 pandemic, which can impact production
and distribution.
5. MNCs are exposed to currency exchange rate risks, which can affect their revenue,
costs, and profits when dealing with multiple currencies.

6. Entering new markets often means facing competition from well-established local firms,
requiring MNCs to adapt and differentiate themselves.

7. Balancing resource allocation across various markets and business units can be
complex, and MNCs must make strategic decisions about where to invest and divest.

8. MNCs must adhere to varying data security and privacy regulations across different
countries, which can be particularly challenging in an era of increasing data breaches
and cyber threats.

9. MNCs may face ethical and reputational risks related to issues such as human rights
violations, environmental practices, and corporate social responsibility, which can
impact brand image and consumer trust.

10. Managing transfer pricing and navigating international tax regulations to ensure
compliance while optimizing tax efficiency can be complex and require specialized
expertise.