january-march 2015 - icab the bangladesh accountant january - march 2015 03 md abdus salam fca...

January-March 2015

Globalization of Business and Financial Reporting

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January-March 2015

Editorial 2President’s Desk 4

ARTICLESGlobalization of Business 6and Financial Reporting- Oishee Labina Hussain ACA

Transfer Pricing: Pertinent Issues 11- Masih Malik Chowdhury FCA

Bangladesh: A Prospective Economy 15with Sustained Growth- Atiur Rahman PhD

Review of Economy in 2014 20Inclusive Development StrategiesShow Remarkable Impact- Raihan M Chowdhury

Vision 2021: 25Ten Challenges Ahead and a ContemporaryInitiative Towards MDGs and SDGs- Dipok Kumar Roy ACA

Some Adaptations to Financial Reporting 33in Response to Globalization- Thauhidul Alam

Looking Back: Trades in Mughal India 37- Mohammed Hamidul Islam FCA, ACCA

Tax Competition for FDI 43- M S Siddiqui

Scope of Improvement for Corporate 47Governance Disclosure in FinancialReporting with UNCTAD Guidelines:A Case Study on Banks in Bangladesh- 1Leena Afroz Mostofa Chowdhury | 2Sharmeen Akter

Critical Analysis of Transfer Pricing 59Regulations in Bangladesh

Why Public Sector Financial Management? 65

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accountants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

EDITORIAL BOARDChairmanMd Abdus Salam FCA

EditorHarun Mahmud FCA

MembersA F Nesaruddin FCAAkhtar Sohel Kasem FCANasir Uddin Ahmed FCAMd. Shahadat Hossain FCAGopal Chandra Ghosh FCAAmanullah Khan FCADr. Jamshed Sanyiath Ahmed Choudhury FCAMd. Liaquat Hossain Chowdhury FCASabbir Ahmed FCAMd. Sayeed Ahmed FCAMahmudul Hasan Khusru FCASnehasish Barua FCAMuhammad Aminul Hoque ACAAbdullah-Al-Mamun ACAZareen Mahmud Hosein ACAMuraheb Malik Chowdhury ACAAbu Haider Mohammed Kibria ACASK. Md. Tariqul Islam ACAShah Md. Jubaer ACADipok Kumar Roy ACAAbuzer Ghaffari ACAMohammad Mosttafa Shazzad Hasan ACABidhan Chandra Mandal ACAChairman, DRC-ICABChairman, CRC-ICAB

Member SecretaryMohammed Emdadul Haque FCATechnical Advisor-ICAB

Published by the Editorial Board of the CouncilThe Institute of Chartered Accountants of Bangladesh (ICAB)CA Bhaban, 100 Kazi Nazrul Islam Avenue, Dhaka 1215Tel : 9117521, 9112672, 9115340, 9137847Email : [email protected] : www.icab.org.bd

ORIALEDIT

The Information and Communication Technology (ICT) has made the world a global village where economies of countries are largely depended on each other. The growing interaction between the countries using ICT has been resulting from the increasing integration of trade, finance, investments, labour markets and ideas in one global marketplace.

Rapid expansion of technological changes, especially in communications technology, mode of transports, deregulation, investment in trans-border boundaries, free trade, consumers’ tastes, emerging markets in developing countries are the affecting factors of business globalization(BG).

‘Integration of economies’ is an important idea of the process of globalization. In the past, an economy was largely self-contained, and imports and exports were something that happened almost co-incidentally. Now, economies are depended closely on each other for everything like raw materials and for markets for outputs.

January - March 2015 The Bangladesh Accountant02

Many barriers to trade have been removed by the formation of regional groupings of countries such as the EU, ASIAN, SAFTA, G-8, BIMSTEC, etc. These make trade cheaper and therefore, more attractive to businesses.

Multinational companies ("MNCs") have existed for many years, but today there are many more of them and their importance to all economies has become much greater. Their success has led many businesses to change their strategic objectives and in their management thinking. So ‘thinking globally but acting locally’ is now much more common phenomenon. In this global scenario, the business players feel integrated reporting(IR) essential for faster advancement of trade and business.

Financial statement comparability has been recognized as an important characteristic of financial reporting, improving the usefulness of accounting information. Broadly, economic decision-makers emphasize that the financial results cannot be evaluated in isolation. Increase flow of cross border investment by the organizations

fortified the need for preparing and presentation of relevant, timely, accessible, comparable, understandable, and reliable financial information.

Investors, companies, and markets want harmonized way of presentation of information about business on a global basis so that they could make comparative analysis of the information. So, harmonization should converge to the best possible standard, that is, the method that best reflects the underlying economics of transactions, rather than to any particular national standard.

Experts opined that the reporting method should not differ depending on country, industry, size of company, or any other consideration and managers should not be permitted choices of reporting methods for similar transactions. It is true that adopting high quality harmonised reporting standards might be a necessary condition for high quality information.

One of the key strategic goals of the Institute of Chartered Accountants of Bangladesh (ICAB) is to ensure compliance with the requirements of

Thinking globally!

The Bangladesh Accountant January - March 2015 03

Md Abdus Salam FCAChairman, Editorial Board

International Federation of Accountants membership – in particular the Statements of Membership Obligations (SMOs). International Federation of Accountants (IFAC) covers the quality assurance of audit and assurance firm, professional education in line with International Education Standards, International Standard on Auditing, Code of Ethic, International Public Sector Accounting Standards, Investigation procedures and Disciplinary Measures and International Financial Reporting Standards. For its compliance with IFAC SMO Action plan, ICAB has been appreciated by IFAC officially in several times. So ICAB is very much confident on the method it has been

following for Chartered Accountancy Profession in Bangladesh for inspiring the business confidence in Bangladesh.

In Bangladesh ICAB members engaged in financial sectors (both public & private) of the country are working in various aspects of accounting and auditing like budgetary control, internal audit, statutory audit, management audit, etc. in accordance with the International Financial Reporting Standards (IFRS) and the International Standards on Auditing (ISA). The standards have already been adopted by ICAB as Bangladesh Financial Reporting Standards (BFRS) and Bangladesh Standards on Auditing (BSA).

The articles in this issue of The Bangladesh Accountant will certainly give an in-depth understanding of globalization of business and financial reporting.

Under my chairmanship, this is the first issue of the Journal to be published and I look forward to receive your valuable opinions and suggestions to enrich the contents of The Bangladesh Accountant.


hunting program at ICAB Center for Advanced Level Students to join the Company. We look ahead to see MNCs to join this mission.

ICAB has also organized CPD Seminar on ‘IFAC current Initiatives’ in January and where Hathorn, Member, IFAC Board had presented the key-note paper. Another CPD Seminar on ‘Audit of the Bank and Financial Institutions’ has been organised in end of March 2015. ICAB is now fully compliant with IFAC SMO’s. As we all know that ICAB already follows globally compatible IFAC QAD guidelines in collaboration with ICAEW. ICAB provides rigorous training through its CPD for its members which would also gain further momentum from March 2015.

Members of ICAB also participated in trainings and workshops outside ICAB wherin they can exchange their own expertise with others in pragmatic, academic & professional session. ICAB has facilitated the workshop organized by IDRA for Chief Executive Officer (CEO), Chief Finance Officer (CFO), Head of Internal Audit and representatives from External Audit firms pertaining to Life Insurance Companies. This was

the brainchild of ICAB, sowed during our courtesy call in IDRA. It was later culminated by IDRA into a mega event-workshop, & was largely attended. Thanks to IDRA.

ICAB consistently updates its syllabus in consonance with changes in syllabus of Institute of Chartered Accountants of England and Wales, (ICAEW), UK. After three years, ICAB successfully held its 20th convocation event wherein Hon’ble President of the People’s Republic of Bangladesh Janab Md. Abdul Hamid graced as Chief Guest. It was largely attended by Past Presidents of the Institute who enjoined the program making it our most prestigious memories in February 2015. The Hon’ble President highly appreciated the role of Chartered Accountants in our National economy. A total of 336 newly qualified CAs received their certificates. In the December 2014 examination session of ICAB 26 examinees passed & became ACAs. The results have been published recently. I heartily congratulate them-Bravo! A large number of excelling students also passed in the Knowledge & Application Levels of the Institute’s December 2014 examinations. I believe quality of our members

are on rise in performing excellence and quantity in number.

To strengthen our fraternity and good relation, ICAB has also been maintaining liaison with different international accounting bodies and forums like SAFA, CAPA and IFAC as before. ICAB delegation has also participated in ICAI Conference, different committee & task force meetings and SAFA Board Meeting in Bangalore, India. In SAFA Board & few committee meetings in Nepal we also took part in the end of March. I had the opportunity to make a presentation on ‘SME-Bangladesh Perspective’ in the 3-day ICAI Conference in Bangalore, India. On the sideline, we had a number of meetings with President & CEOs of the International Integrated Reporting Council (IIRC) , CPA Ireland and the CEO of ICA Australia for signing MoU. We expect & aspire to explore possible cooperation with IIRC & CPA Ireland in near future.

We are firm & determined to move ahead with our mission to excel better in profession. We shall deliver the best through this Journal for the augmentation of knowledge to benefit the profession in particular & the economy at large.

Readers please accept my spontaneous gratitude for your patience in coming over my modest submissions.

Let me hope:AšÍi gg weKwkZ Ki AšÍiZi‡nwbg©j Ki, D¾¡j Ki, my›`i Ki‡n|

Financial Reporting:InternationalPerspectives

PRESIDENT’S DESK

A good planning is half done-which urges timely initiatives. Starting on time would probably lead you to receive this copy of ‘The Bangladesh Accountant’ January-March issue just after first quarter of 2015, if not during the quarter. This demonstrates the timely effort of the Editorial Board & its erudite Chairman. I highly appreciate the Board’s endeavor for an ahead of time performance. Congrats & Bravo!

The first quarter issue of The Bangladesh Accountant is expected to be a blend of reflections regarding business and financial reporting. Fellow members of fraternity, especially the most recent members in ICAB, your judgment, advice, and inspiring words for “The Bangladesh Accountant” will always be treasures for its progress.

The ICAB Journal is the platform where members of the Institute and the writers demonstrate their professional & pragmatic thoughts to promote & innovate matters of accounting, finance and pertinent issues for the economy.

In the backdrop of emergence of regional/ sub-regional economic forums getting increasingly interlinked, stronger & countries

becoming more globally inter dependent, the theme of this issue of the Journal is indeed timely and befitting. In the era of demand-supply interactions & global free market predominance, Bangladesh economy has excelled very good by its good & competitive edge. To expedite the further advancement & to excel better, it is essential to harness international scopes & potentials by extending our role to integrated reporting. In that event managers have to prepare financial statements in particular environment where investors are uniform in thoughts and the information comparisons are easier. Bangladesh should extract benefit of globalisation rather than getting along it setting aside our own interest for others & own agenda of development.

As the President – 2015, I am constantly trying to touch new heights of excellence in my modest way. In these 3 months, the ICAB’s relationship with different stakeholders including government’s ministries and divisions has been rejuvenated. This happened out of meetings with hon’ble Finance Minister, Chairman- Parliamentary Standing Committee of Jatiyo Sangshad, honb’le Planning Minister, Health & Family Welfare Secretary, Senior Secretary-Commerce Ministry, Education Secretary , BSEC

Chairman, ICT Division Secretary, Bangladesh Bank Governor, Chairman- IDRA, DG- NGO Affairs Bureau, Bangladesh Association of Publicly Listed Companies (BAPLCs), and Chairman, REB among others. The meetings had taken place over professional discussions that cropped up many pertinent & beneficial issues. In almost all the meetings ICAB reiterated its firm & reassured commitment towards professional development. We apprised the authorities about our consistent efforts.

The ICAB training wing newly named as “ICAB Center for Professional Excellence” has been initiated from this year to impart training, workshops & seminars on professional issues anew & afresh. It will pick up recurrent discussions with stakeholders & regulators and at the same time undertake need based schemes in ICAB. The Centre has been paying due attention & taking intensive efforts to organize a number of training and workshop events in these 3 months. These are workshops on “SAP ERP -FI/ CO", Code of Ethics for Professional Accountants", “Advanced Excel & Financial Modeling”, & “Transfer Pricing” for our members. Avery Dennison, a multi-national company also conducted a talent

Masih Malik Chowdhury FCAPresident-ICAB


hunting program at ICAB Center for Advanced Level Students to join the Company. We look ahead to see MNCs to join this mission.

ICAB has also organized CPD Seminar on ‘IFAC current Initiatives’ in January and where Hathorn, Member, IFAC Board had presented the key-note paper. Another CPD Seminar on ‘Audit of the Bank and Financial Institutions’ has been organised in end of March 2015. ICAB is now fully compliant with IFAC SMO’s. As we all know that ICAB already follows globally compatible IFAC QAD guidelines in collaboration with ICAEW. ICAB provides rigorous training through its CPD for its members which would also gain further momentum from March 2015.

Members of ICAB also participated in trainings and workshops outside ICAB wherin they can exchange their own expertise with others in pragmatic, academic & professional session. ICAB has facilitated the workshop organized by IDRA for Chief Executive Officer (CEO), Chief Finance Officer (CFO), Head of Internal Audit and representatives from External Audit firms pertaining to Life Insurance Companies. This was

the brainchild of ICAB, sowed during our courtesy call in IDRA. It was later culminated by IDRA into a mega event-workshop, & was largely attended. Thanks to IDRA.

ICAB consistently updates its syllabus in consonance with changes in syllabus of Institute of Chartered Accountants of England and Wales, (ICAEW), UK. After three years, ICAB successfully held its 20th convocation event wherein Hon’ble President of the People’s Republic of Bangladesh Janab Md. Abdul Hamid graced as Chief Guest. It was largely attended by Past Presidents of the Institute who enjoined the program making it our most prestigious memories in February 2015. The Hon’ble President highly appreciated the role of Chartered Accountants in our National economy. A total of 336 newly qualified CAs received their certificates. In the December 2014 examination session of ICAB 26 examinees passed & became ACAs. The results have been published recently. I heartily congratulate them-Bravo! A large number of excelling students also passed in the Knowledge & Application Levels of the Institute’s December 2014 examinations. I believe quality of our members

are on rise in performing excellence and quantity in number.

To strengthen our fraternity and good relation, ICAB has also been maintaining liaison with different international accounting bodies and forums like SAFA, CAPA and IFAC as before. ICAB delegation has also participated in ICAI Conference, different committee & task force meetings and SAFA Board Meeting in Bangalore, India. In SAFA Board & few committee meetings in Nepal we also took part in the end of March. I had the opportunity to make a presentation on ‘SME-Bangladesh Perspective’ in the 3-day ICAI Conference in Bangalore, India. On the sideline, we had a number of meetings with President & CEOs of the International Integrated Reporting Council (IIRC) , CPA Ireland and the CEO of ICA Australia for signing MoU. We expect & aspire to explore possible cooperation with IIRC & CPA Ireland in near future.

We are firm & determined to move ahead with our mission to excel better in profession. We shall deliver the best through this Journal for the augmentation of knowledge to benefit the profession in particular & the economy at large.

Readers please accept my spontaneous gratitude for your patience in coming over my modest submissions.

Let me hope:AšÍi gg weKwkZ Ki AšÍiZi‡nwbg©j Ki, D¾¡j Ki, my›`i Ki‡n|

A good planning is half done-which urges timely initiatives. Starting on time would probably lead you to receive this copy of ‘The Bangladesh Accountant’ January-March issue just after first quarter of 2015, if not during the quarter. This demonstrates the timely effort of the Editorial Board & its erudite Chairman. I highly appreciate the Board’s endeavor for an ahead of time performance. Congrats & Bravo!

The first quarter issue of The Bangladesh Accountant is expected to be a blend of reflections regarding business and financial reporting. Fellow members of fraternity, especially the most recent members in ICAB, your judgment, advice, and inspiring words for “The Bangladesh Accountant” will always be treasures for its progress.

The ICAB Journal is the platform where members of the Institute and the writers demonstrate their professional & pragmatic thoughts to promote & innovate matters of accounting, finance and pertinent issues for the economy.

In the backdrop of emergence of regional/ sub-regional economic forums getting increasingly interlinked, stronger & countries

becoming more globally inter dependent, the theme of this issue of the Journal is indeed timely and befitting. In the era of demand-supply interactions & global free market predominance, Bangladesh economy has excelled very good by its good & competitive edge. To expedite the further advancement & to excel better, it is essential to harness international scopes & potentials by extending our role to integrated reporting. In that event managers have to prepare financial statements in particular environment where investors are uniform in thoughts and the information comparisons are easier. Bangladesh should extract benefit of globalisation rather than getting along it setting aside our own interest for others & own agenda of development.

As the President – 2015, I am constantly trying to touch new heights of excellence in my modest way. In these 3 months, the ICAB’s relationship with different stakeholders including government’s ministries and divisions has been rejuvenated. This happened out of meetings with hon’ble Finance Minister, Chairman- Parliamentary Standing Committee of Jatiyo Sangshad, honb’le Planning Minister, Health & Family Welfare Secretary, Senior Secretary-Commerce Ministry, Education Secretary , BSEC

Chairman, ICT Division Secretary, Bangladesh Bank Governor, Chairman- IDRA, DG- NGO Affairs Bureau, Bangladesh Association of Publicly Listed Companies (BAPLCs), and Chairman, REB among others. The meetings had taken place over professional discussions that cropped up many pertinent & beneficial issues. In almost all the meetings ICAB reiterated its firm & reassured commitment towards professional development. We apprised the authorities about our consistent efforts.

The ICAB training wing newly named as “ICAB Center for Professional Excellence” has been initiated from this year to impart training, workshops & seminars on professional issues anew & afresh. It will pick up recurrent discussions with stakeholders & regulators and at the same time undertake need based schemes in ICAB. The Centre has been paying due attention & taking intensive efforts to organize a number of training and workshop events in these 3 months. These are workshops on “SAP ERP -FI/ CO", Code of Ethics for Professional Accountants", “Advanced Excel & Financial Modeling”, & “Transfer Pricing” for our members. Avery Dennison, a multi-national company also conducted a talent


What is Globalization?

The concept of globalization refers to the growing interaction of organizations, resulting from the increasing integration of trade, finance, investments, labour markets and ideas in one global marketplace.

Globalization is the growing economic interdependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows and also through the more rapid and widespread diffusion of technology.

The most important element of this process is the cross border investment flows. Thus for cross border investment flows to function properly, there is need for organizations involved to prepare and make available relevant, timely, accessible, comparable, understandable, and reliable financial information. Accessibility, timeliness, comprehensibility, and comparability qualities of financial reporting can only be achievable through the major components of globalization, which are harmonization of accounting standards and information technology, which combine to form the financial reporting.

Globalization andFinancial Reporting

Oishee Labina Hussain ACA

Harmonization of accounting standards is a process of establishing a single set of principles which are guidelines in the preparation and presentation of financial report. This is done so as to enhance comparability between financial reports of organizations over the world, it’s also to encourage uniformity and comprehensibility of the financial reports by its users. Information technology on the other hand is the way business is conducted and the way in which financial information is disseminated. Today, whole or substantial part of business transactions including preparation and presentation of financial reports take place in electronic environment by the use of many technological innovations.

The Phenomenon of Globalization of Business

It has been suggested that the globalization process was started to some extent deliberately by political decisions. However, it was also caused and/or supported by technological, social, and economic developments. The intensified cross border transfer of resources, such as assets, capital, and knowledge, is in part a result of the liberalization policy of many state governments after World War II. The growing cross-area and cross-country social exchange was also made possible


through technological inventions and achievements (e.g. telecommunications, mass media, the Internet, transportation etc.). The exchange processes are accompanied by a growing interdependence between citizens from different communities through the emergence of global risks (e.g., nuclear weapons, global warming, global diseases etc.) which connect the destinies of peoples and organizations with each other.

Nature of Globalization of Business

Due to the ongoing process of globalization, organizations and individuals are willing to invest beyond the borders of their nations, an effective and useful financial information is therefore appropriate. This is because knowledge about organization’s performance is necessary in making investment decision. Decisions about global trade movements are among the most important strategic decisions taken by the business.

Effects of Globalization of Business

As the world is seen as a market place rather than specified countries by the present trade culture, so also organizations are seen as the traders in this market. Before these traders can function in the market there is need for quality financial information to be prepared and presented by each of these traders in such a way that it will be assessable and understandable by its users as well as being comparable among the traders in the market.

Due to the importance attached to assessable, comparable, and understandable financial reports, organizations have therefore embraced the major components of globalization which include: information technology and harmonization of international accounting standards.

Financial Reporting

The term ‘financial report’ refers to all the relevant financial information of a business

DUE TO THE

ONGOING PROCESS OF

GLOBALIZATION,

ORGANIZATIONS AND

INDIVIDUALS ARE

WILLING TO INVEST

BEYOND THE BORDERS

OF THEIR NATIONS, AN

EFFECTIVE AND

USEFUL FINANCIAL

INFORMATION IS

THEREFORE

APPROPRIATE. THIS IS

BECAUSE KNOWLEDGE

ABOUT

ORGANIZATION’S

PERFORMANCE IS

NECESSARY IN

MAKING INVESTMENT

DECISION.


enterprise, presented in a structured manner and in a form easy to understand. Financial report includes not only the financial statements but also other forms of information such as annual reports filed with the security and exchange commission (SEC), new releases, and management forecasts. It is a process of presenting financial data of a company's position, operating performance, and funds flow for an accounting period.

Need for Globalization of Accounting Standards

As financial and product markets become global, the need for a global set of accounting information to facilitate global transactions has really become overwhelming. If the standards are adopted internationally then all the regulators, auditors, analysts, management teams, etc. know that they have a single set of standards to understand and implement. This allows all of those entities to focus resources on making that single set

of standards work in the intended manner. Without that strong knowledge base, even well-intentioned practitioners just may not have the skill set to properly implement the standards. Harmonisation of accounting standards makes the basis of accounting clear to stakeholders all around the world.

A framework is the skeleton or outline for anything. Financial framework is a guideline for the preparation of financial reports. The main aim of reporting the activities of an entity is to permit informed judgement and make decision. Accountants perform different functions, management must comply with the required financial report regulations in order to present true and fair reports.

The demand for guidelines to regulate financial disclosure arose due to incomparability of financial statement because of different principles and methods followed by similar companies over the years. Often there are many

methods of treating a particular item with varying degree of acceptance. Thus, there arose the need for standardization to enable users of financial statement to understand and compare them properly.

Harmonization of accounting standards is a process of establishing a single set of principles which are guidelines in the preparation and presentation of financial report. This is done so as to enhance comparability between financial reports of organizations all over the world and also to encourage uniformity and comprehensibility of the financial reports by its users. Information technology on the other hand is the way business is conducted and the way in which financial information is disseminated. Today, whole or substantial part of business transactions including preparation and presentation of financial reports take place in electronic environment by the use of many technological innovations.


Thus, organizations and individuals across the world make their investment decision through the use of organization’s relevant, timely, accessible, comparable, understandable, and reliable financial information as a guide.

Hence, it becomes important for organizations to prepare and present their financial information in a way that is relevant, timely, accessible, comparable, understandable, and reliable. All these qualities of financial information can be achieved through the adoption of globalization's major components in the preparation and presentation of financial reports. These

components include information technology and harmonization of accounting standards. The manner in which organizations all over the world prepare and present their financial information for the purpose of trade and investment has been influenced by the process of Globalization. The process of presenting and preparing financial information of a business enterprise in a structured manner and in a form easy to understand is known as financial reporting.

Globalization and Information Technology

Information technology (IT) is playing a vital role in the current

process of globalization. It combines progress in electronics, computing, and telecommunications to establish a highly dynamic process of storing, processing, transmitting and presentation of information. Emerging economies around the world are today covered by the communication range through technological advances in cyberspace, in the computer and telecommunications field. This has serious implication for how business is done worldwide. Individuals and organizations are now realizing that they do not have to be physically present in any particular location in order to transact business. The promotion

confidence in the financial information being provided using harmonised financial reporting, this can be a crucial factor in securing a new supplier, obtaining finance, reducing the cost of borrowing, and arriving at an acquisition or cooperation agreement.


The Author is an AssociateChartered Accountant & Partner ofHussain Farhad & Co.Chartered Accountants

of global business organization is facilitated by the fact that technically, managers can reach any part of the world from any given location and in just a little time. Information technology has thus facilitated increased global interdependence. It has altered the structure of the world economy in that resource movement around the world which is critical for growth and sustained global welfare has become fast and efficient.

Conclusion

The world is changing rapidly in terms of business and strategic decisions are becoming increasingly sensitive. The need for global reposition, migration, expansion and withdrawal is crucial to the survival of the business. Businesses no longer affect one country only. Their strategic decisions and movements can have impacts on businesses all over the world.

Hence the need of proper and effective financial information is fundamental. The comprehensibility, comparability, timeliness, accuracy, source and nature of information all contribute to the effectiveness of the information. All these attributes of information can be successfully

achieved only through the globalization of the financial reporting system.

Having financial information that is universally understood and comparable to other companies’ information and similar information generated by other geographic zones can affect the success of the business, improve relationships with customers, suppliers, investors and bankers. If these business partners have more

Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price. Legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned by the parent corporation company. Certain jurisdictions consider entities to be under common control if they share family members on their boards of directors. Transfer pricing can be used as a profit allocation method to attribute a MNC’s net profit (or loss) before tax to other countries of its doing business.

Unrealistic transfer prices (TP) do not affect the overall enterprise directly. However TPs become a concern when they are misused to lower profits in a division of an enterprise or unit of a corporate group that is located in a country that levies high taxes. Through TP, one unit can raise profits in a country that is a tax haven because it levies zero or low taxes. Transfer pricing is the major tool for corporate tax avoidance. It is effectively used to avoid tax & optimise the profit following the loopholes & gaps of tax regulation. As such it is rightly referred to as Base Erosion for Profit Shifting (BEPS).

Transfer Pricing: Pertinent IssuesMasih Malik Chowdhury FCA

Profit Allocation

Transfer prices amongst divisions of an enterprise is likely to reflect allocation of resources amongst divisions / segments. The transfer prices are set at arm's length standard as like as charges between unrelated parties.

Different countries impose different corporate tax rates. A cross boundary corporation can set a goal of minimizing the overall taxes to be paid. It would set transfer prices to allocate more of the worldwide profit to the countries with lower tax. Many countries have imposed penalties on corporations for TP misuses. When the countries’ Revenue Oversight & Collection body consider that they are being deprived of taxes due to TP effect & reducing taxable profit, raids on TP users are increased. Obtaining data and initiating meaningful actions to limit tax avoidance is however a difficult task. This is because the participating countries are sovereign entities. Inter country check on avoids & access between nations are difficult if not impossible.

Regulations in Practice by Countries

As of 2011, over 70 countries have adopted transfer pricing rules till recently.



Transfer pricing rules in most countries are based on the “arm’s length principle” – that is to establish transfer prices based on analysis of pricing in comparable transactions between two or more unrelated parties dealing at arm’s length. The OECD has published guidelines based on the arm's length principle. These are followed, by many of its member countries while adopting those rules in whole or in part. The United States and Canadian rules are similar in many respect to the OECD guidelines. On the local perspective however, certain points of material difference prevail. Brazil and Kazakhstan, however follow TP rules distinct from others.

Economic Theory

The economic theory behind optimal transfer pricing is very pertinent. The word optimal is to indicate or track the transfer pricing that maximizes overall firm profits in a theoretical world with zero taxes. This is theoretical, because it takes account of many risks whatsoever for capital, development, externalities or other

issues. The transfer prices in practice used by multinational corporations are influenced by many other factors. These could be performance measurement, efficacies of accounting systems, duties, levies, taxes & quota etc. All these are to be considered well when deciding on optimising benefits of TP.

History

In the post great depression years after 1930 & onwards Transfer Pricing adjustments had become a feature of many tax systems. As we know that U.S. and most major industrial countries who are members of OECD have reached into some guidelines on TP by 1979. A comprehensive transfer pricing guidelines with a White Paper was resulted in USA in 1988. In 1990-1992 proposals emanated & finally became regulations in 1994 in USA. The OECD issued the first draft of its current transfer pricing guidelines way back in 1995. Those TP guidelines of OECD countries got amendments & changes in course of time. Some tailoring or modifications to those were made

AS OF 2011, OVER 70 COUNTRIES HAVE ADOPTED TRANSFER PRICING RULES TILL RECENTLY. TRANSFER PRICING RULES IN MOST COUNTRIES ARE BASED ON THE “ARM’S LENGTH PRINCIPLE” – THAT IS TO ESTABLISH TRANSFER PRICES BASED ON ANALYSIS OF PRICING IN COMPARABLE TRANSACTIONS BETWEEN TWO OR MORE UNRELATED PARTIES DEALING AT ARM’S LENGTH.


countries in two principal ways. Those are guidelines issued instructing field offices about the conduct of transfer pricing examinations and adjustments, and factors to be examined differ by transfer pricing method. The guidelines cover, issues among others like : Administrative matters, Required taxpayer filings and documentation, General transfer pricing principles, including comparability, Guidelines on how to conduct examinations, Advance pricing and cost sharing agreement administration, Controlled foreign corporation examinations, Thin capitalization & General anti-avoidance.

Fraud

Fraudulent transfer pricing, sometimes called transfer mispricing is also known as transfer pricing manipulation. This refers to trade between related parties at prices meant to manipulate markets or to deceive tax authorities.

by countries to match their own perspective.

Arm's Length Standard

There are clear practical difficulties in implementing the arm's length standard. For items other than goods, all other items of concern are not homogenous. Stipulations of sale may vary also from transaction to transaction. Market scenario and other pertinent conditions are also dependent on geographical locations or time. Some systems give a preference to certain transactional methods over others for testing prices. The process & efficiency of the system leading to selecting best Arms Length Standard is greatly influenced by the expertise of the organisation concerned & the local perspective.

Testing of Prices

Tax authorities generally examine Prices actually charged between related parties which are examined by Tax Watch authorities to

determine the appropriateness of adjustments. The authorities resort to comparison of those prices to comparable prices charged among unrelated parties. Such testing may require the taxpayers to conduct prescribed testing in advance or while filing tax returns. Such testing requires to assess the transfer pricing method in practice.

The Revenue Watch or collector authority conducts these tests to find inordinate amount of tax evasion in the disguise of tax avoidance by TP banner. The TP benefits of MNC’s Groups are always the thrust area for Tax & Revenue departments’ watch.

China Specific Tax Rules

China generally followed OECD Guidelines until March 2008 when it announced new guidelines. The State Administration of Taxation (SAT) issued these in January 2009 applicable to domestic and international transactions. These guidelines differ materially in approach from those in other


The Author is the Senior PartnerMasih Muhith Haque & Co.Chartered Accountants

About 60% of capital flight out of Africa is from improper transfer pricing as per report of 2011. Such capital flight from the developing world is estimated at ten times the size of aid it receives and twice the debt service it pays as per studies in 2011 & 2012.

The African Union report estimates that about 30% of Sub-Saharan Africa's GDP has been moved to tax havens as per report in 2007. Solutions include corporate “country-by-country reporting”

where corporations disclose activities in each country and thereby prohibit the use of tax havens where real economic activity occurs.

In 2014, the Leverhulme Center for the Study of Value, based at the University of Manchester, published a report authored by Sarah Bracking and Khadija Sharife, identifying over $3 billion in price fixing of South African rough diamond trade, through transfer pricing manipulation from

2005-2012. The report published in 2014 found significant evidence of profit shifting through volume and value manipulation.

Following the years after independence in 1971, Bangladesh turned into a case of survival. Western economists viewed the country as a text case of development. Many found its separation from Pakistan as imprudent, and many expected to see the country slide into the crowd of the failed states for years to come. But Bangladesh emerged from the ashes and disproved all the myths and dismal predictions. Now the country is known as a role model of sustained growth and inclusive development, justifying the dreams of the Father of the Nation Bangabandhu Sheikh Mujibur Rahman and the sacrifices of the millions. The nation also justifies the support of our wartime allies including India in particular – the neighbouring country whose resolute stance in 1971 in favour of Bangladesh’s freedom was the strongest strategic support for an embattled nation like us in the international arena.

The initial years of a war-ravaged Bangladesh was bumpy and stressful as expected. After 1975, the country entered a period of policy anomalies that contributed to enormous macroeconomic fluctuations until the early 1990s. By that time, both China and India had embarked on liberalization and we were not too late to catch the train. Privatisation and

Bangladesh: A ProspectiveEconomy with Sustained Growth

Atiur Rahman PhD

pro-market reforms in the early 1990s placed Bangladesh into a new trajectory of economic dynamism, which got a new boost since the mid -1990s. This new era of liberalization and gradual inception of market reforms fuelled the Bangladesh economy to accelerate and we followed a new path of higher growth momentum.

Attaining high economic growth without an inclusion strategy is not possible for an emerging economy like Bangladesh. Herein, lies the essence of financial inclusion that is instrumental to formulating monetary policy by Bangladesh Bank. The main objective of financial inclusion is to ensure access to finance for all segments of people in the society, and therefore to make growth sustainable by engaging the poor.

Bangladesh Bank believes that financial inclusion not only stimulates growth by expanding the activity base, but also contributes to growth stability through desired diversification of financial assets. Thus, the main task of Bangladesh Bank is to promote higher economic growth along with macro stability and moderate inflation. As the diagram shows, Bangladesh’s growth has been the second highest in the region over the last 20 years while its growth volatility is the lowest;



For some years now, Bangladesh Bank has engaged the business sector in inclusive and environmentally sustainable financing of output activities. This strategy has helped the Bangladesh economy maintain six plus percent average GDP growth for well over a decade amid financial crises and a prolonged slowdown of global

growth. Real GDP growth has averaged at 6.2 percent over the last five years. CPl inflation has followed a steadily downward trend since the end of 2011. Bangladesh’s inflation volatility is the lowest in the region, suggesting a strong platform of macro stability to attract foreign ventures.

ATTAINING

HIGH ECONOMIC

GROWTH WITHOUT

AN INCLUSION

STRATEGY IS NOT

POSSIBLE FOR AN

EMERGING ECONOMY

LIKE BANGLADESH.

HEREIN, LIES THE

ESSENCE OF

FINANCIAL

INCLUSION THAT IS

INSTRUMENTAL TO

FORMULATING

MONETARY POLICY

BY BANGLADESH

BANK. THE MAIN

OBJECTIVE OF

FINANCIAL

INCLUSION IS TO

ENSURE ACCESS TO

FINANCE FOR ALL

SEGMENTS OF

PEOPLE IN THE

SOCIETY, AND

THEREFORE TO MAKE

GROWTH

SUSTAINABLE BY

ENGAGING THE

POOR.

12%

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8%

6%

4%

2%

0%

Figure 2: Inflation and Its Components in Bangladesh: 2001-2014

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India Sri LankaAverage Rate of GDP Growth

Figure 1: Growth and Growth Volatillity in South Asia: 1995-2014

Growth Volatillty

Pakistan Bangladesh

2.61


such major reform, foreign equity investments in unlisted local companies can now be sold to local investors at market based prices rather than at net asset value.

Insufficient financial market development in Bangladesh significantly constrains the availability of adequate transmission channels. Absence of old age financial security nets in the form of pension and the retirement scheme for the elderly people is one such serious inadequacy, not only for monetary policy transmission but also for access to long term saving options that fund infrastructure and other long term investments. Apart from pension and provident fund schemes for those employed in the informal public and private sector organizations, long term old age pension and retirement savings schemes for the general adult population exist in developed and developing economies including the neighbouring India. Bangladesh Bank is closely working with the government to set up an institutional framework for such schemes in the country. The government is also paving the way so monetary policy becomes more effective than before. This step will help nurture financial markets developments and long term investment potentials in the real sector.

The lowest debt-GDP ratio in the region indicates opportunities for the Bangladesh government to incur productive debt, which can be used to build infrastructure and institutions that eventually accelerate growth. The government has already promised a remarkable number of new Special Economic Zones (SEZ), and is further considering a generous set of

Rising foreign exchange reserves and exchange rate stability are contributing to the improvement of the investment climate in the eyes of the foreign investors in particular.

Progress in bringing the annual average CPI inflation down from 7.35 percent at the beginning of FY 2015 to 6.5 percent by June 2015 is broadly satisfactory, with 6.76 percent inflation in February 2015. The monetary program seeks to limit broad money (M2) growth at 16.5 percent up to June 2015 using reserve money as the main policy tool. Private sector credit growth is targeted at 15.5 percent growth by June. The figure was 13.3 percent in January 2015. Broad money and domestic credit growth targets are in line with supporting higher output activities along with keeping inflation at a moderate level.

Lower fuel subsidy from declining international oil prices has kept fiscal deficit under control. It is still below 5 percent- a manageable figure for an emerging economy like Bangladesh. Exports rebounded with 2.43 percent growth in the first 8 month of FY 2015, while the import growth

increased by 16.43 percent during the same period. Remittances continued positive growth at 7.63 percent during July – February of FY 2015. Further measures are needed to attract and facilitate FDI, which is currently USD 1.5 billion. Foreign currency reserves are hovering over 23 billion dollars, covering imports of more than 6 months. The exchange rate also remained stable since mid-2013.

Deposit and lending interest rates of banks and financial institutions have been coming down, though very slowly, in line with declining inflation. The spread between the deposit and lending rates has come down to 5 percentage points or lower in the banking sector, reflecting a gradual improvement in banking governance.

Bangladesh Bank has also been focusing on capital market development. It played instrumental role in structuring the refinancing program supporting capital market activities. In the first half of FY 2015, Bangladesh Bank has accomplished a number of new investor friendly regulatory reforms facilitating external transactions of foreign and local businesses. Consequent to one

10

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IndiaSri Lanka

Figure 3: Inflation and Inflation Volatillity in South Asia: 1995-2014

Pakistan

9.458.57

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2.442.87

4.52

Average Rate of Inflation Inflation Volatillity

Bangladesh


incentives for investors in those SEZs. The incentives may include time bound full and partial waivers on the tax/VAT/stamp duty.

Current global economic and geopolitical developments have led Bangladesh to focus more on Asia and the East to acquire new trade relations and to augment investment opportunities. Bangladesh’s inclusion in the Regional Comprehensive Economic Partnership (RCEP) will be of multitude advantages, using Bangladesh as a cost efficient manufacturing base for items like automobile parts, electrical and electronic goods, apparels and various other consumer goods.

Inclusive and environmentally responsible financing is of paramount importance for economies like Bangladesh that are threatened by limited financial means and climatic erratic cycles. The Bangladesh case is a great example to learn how the financial sector can play a crucial role in triggering a shift of financial flows away from speculative price bubbles toward inclusive financing of the sustainable green options. Experience from Bangladesh suggests that policy interventions for such shift can be crafted in ways that uphold macroeconomic and financial stability. Since the late 2000s, Bangladesh’s approach of internalizing inclusive and green financing has started drawing external attention. These policies with refinancing schemes from the central bank are facilitating the economy toward a robust growth trajectory for the long run.

Bangladesh is reaping the advantages of regional cooperation. Being an active member of the SAARC, the country is

opening up investment opportunities for the neighbours such as India, Nepal, Myanmar, Bhutan, Sri Lanka, and Pakistan. India and Bangladesh not only share similar culture, history, demographic features, and the economic climate, but they also share the similar timing of policy

synchronisation. Both countries embarked on market reforms in the early 1990s and steered their policy direction towards further liberalization of trade and industry. Bangladesh’s bilateral trade with

India is rising rapidly as shown below;

India has already been providing electricity through the joint grid. Indian private sector investors are showing interest in investing in mega projects on coal based electricity, gas

exploration, and special economic zones. Also

India has been supporting in developing our rail way

sector where they have huge experience and technical

advantages. Given our deep bilateral relationship rooted in history, culture and, of course sacrifices of Indian people and soldiers who shed blood on our soil in 1971, we two nations can carry this historic friendship and mutual economic cooperation to a new height. This trend has been reinvigorated for the last half a decade.

Under the dynamic leadership of the Prime Minister Sheikh Hasina, a democratic commander empowered by secular spirits and long-term development vision, Bangladesh is rapidly transforming into a prospective hotspot for future investment in the areas of manufacturing, infrastructure, education, and technology. A country that houses 160 million people is sure to be robust market for modern consumption goods. The demographic dividend of Bangladesh, which treasures on the growing population of the young workers, heralds the message of

The Author is the GovernorBangladesh Bank

growing productivity and rising demand in the future. That is why most capital rich countries take much interest in Bangladesh nowadays. China, India and Japan, the three largest economies of Asia are increasing the investment portfolios in Bangladesh, making the country a hub of South Asian connectivity.

Since the late 2000s, in particular, the government has focused more on the quality and inclusiveness of growth rather than simply the numbers of growth per se. Expectedly our growth has displayed feature of greater sustainability than ever before. This very quality of growth is instrumental to drawing foreign investments into this land of

opportunities. All these prospects will lead Bangladesh to a new path of growth and prosperity in the decades to come.


8000

7000

6000

5000

4000

3000

2000

1000

0FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Exports

Imports

Figure 4: Bangladesh’s Exports to and Imports from India (in million US$) FY 2010-2015

Bangladesh is in restructuring and recovery mode after a difficult 2013-14. Heavy supply-side disruptions in the run-up to January elections and safety-related incidents in the apparel industry weighed on economic activity in FY14. Despite these factors, as per the data published by Bangladesh Bureau of Statistics (BBS), the GDP growth for FY14 (July 2013-June 2014) was 6.1 percent. The growth was primarily driven by the industry sector, notwithstanding a decline in industrial growth from 9.6 percent in FY13 to 8.4 per cent in FY14. Industrial growth decline reflected slower growth of manufacturing from 10.3 percent in FY13 to 8.7 percent in FY14. Construction sector registered a growth rate of 8.6 percent, the highest in the last five years despite prolonged disruption in activities in the first half due to work stoppages and blockades. Agriculture growth has improved to 3.4 percent from 2.5 percent in the previous year. The services sector growth increased to 5.8 percent in FY14 from 5.5 percent in FY13.The overall growth outlook for FY15 (July 2014-June 2015) is favorable and growth recovery has begun with the return of political stability. The FY15 budget has set an ambitious 7.3 percent growth target.

Review of Economy in 2014Inclusive Development Strategies

Show Remarkable ImpactRaihan M Chowdhury

Further improvement in growth is expected to be driven by an export growth recovery in the second half-year of FY15, increased consumer spending driven by higher wages and lower inflation, and higher infrastructure spending as the government seeks to boost development spending.

Major infrastructure projects are gaining momentum. The construction of Padma Bridge ultimately began at the end of December of 2014 after contracts for bridge construction and river navigability were awarded. Work on the four-lane of the Dhaka-Chittagong highway – a critical project to ease transport-related trade costs – has reportedly resumed. Construction of an offshore LNG terminal is underway. It is expected government contracts for construction of the Sonadia deep-sea port and an onshore LNG terminal will be finalized soon. Given severe deficiencies in Bangladesh’s current infrastructure, improvements could provide significant impetus to growth.

Ongoing restructuring in the apparel sector has weighed on export growth. Inspections and upgrades of factory safety standards have likely led to a temporary shift of some orders to other apparel-exporting nations. This, along with



the lagged impact of lower apparel orders in the run-up to the January 2014 elections, has led to a slowdown in export growth – which slowed to only 1.0% y/y in Q1-FY15. This impact is likely to continue for a few more months, with a rebound expected in H2-FY15. Indeed, the country has already seen a pick-up in export growth in the November data. Bangladesh’s apparel industry is fundamentally cost competitive, and several major international retailers remain positive on manufacturing in the country. Given slowing export growth and resilient imports, the trade deficit has widened since the start of FY15. Remittance growth has improved since the elections, but not as strongly as we had expected. Further government efforts to increase manpower exports and remittance inflows are needed to ensure a sustainable outlook for the current account surplus. We expect the surplus to narrow in FY15, which is likely to put depreciation pressure on the Bangladeshi taka (BDT) in 2015.

Point-to-Point Inflation Eases to Two-year Low

The overall inflation increased to 7.4 percent in FY14 relative to 6.8 percent in FY13, driven largely by increases in food inflation. For the first time in FY14, year-on-year inflation came down below 7 percent in June, but the average for the whole fiscal year has exceeded the 7 percent target. Food inflation rose in FY14 while non-food inflation declined. These were closely linked with the political turmoil experienced in the first half of FY14. The food supply chain was severely disrupted due to nation-wide and regional strikes (hartals) and blockades. The rising trend of food inflation towards the end of FY14 is largely explained by the higher retail price of rice. During the harvest season for boro rice, prices at the retail levels were significantly higher than the same period in the previous year. At the same time non-food inflation declined in the face of lower domestic demand.

BANGLADESH’S APPAREL INDUSTRY IS FUNDAMENTALLY COST COMPETITIVE, AND SEVERAL MAJOR INTERNATIONAL RETAILERS REMAIN POSITIVE ON MANUFACTURING IN THE COUNTRY. GIVEN SLOWING EXPORT GROWTH AND RESILIENT IMPORTS, THE TRADE DEFICIT HAS WIDENED SINCE THE START OF FY15. REMITTANCE GROWTH HAS IMPROVED SINCE THE ELECTIONS, BUT NOT AS STRONGLY AS WE HAD EXPECTED. FURTHER GOVERNMENT EFFORTS TO INCREASE MANPOWER EXPORTS AND REMITTANCE INFLOWS ARE NEEDED TO ENSURE A SUSTAINABLE OUTLOOK FOR THE CURRENT ACCOUNT SURPLUS.


Export Marked Rise as Garments Exports Show Resilience

Country’s trade deficit reduced to USD 6.81 billion in FY 14 from USD 7.01 billion during the previous fiscal year, due to higher export receipts. Although net other investment declined in FY14, significantly higher portfolio investment (net) and positive foreign direct investment contributed to financial account surplus of USD 2.79 billion during the period under review. Mainly current account together with financial account surpluses resulted in a surplus of USD 5.48 billion in overall balances during FY14 against a surplus of USD 5.13 billion during the previous fiscal year. Bangladesh's export earnings surpassed the USD 30 billion mark for the first time in history in FY14. Exports stood at USD 30.18 billion during the last

fiscal, rising by 11.65 per cent from the previous fiscal. Export Promotion Bureau statistics say, the 5 months from July to November of FY-15 recorded export earnings of USD 12.07 billion a growth of 0.92 percent over the same period in the previous fiscal, of which, the apparel sector contributed 81 percent. RMG exports displayed impressive growth in FY14 in the backdrop of increased global attention to safety compliance and prolonged political turbulence. Despite the Rana Plaza incident and nationwide general strikes in the first half of FY14 that disrupted the supply chain severely, RMG exports stood at an all-time high of USD 24.5 billion in FY14, with a growth rate of 13.8 percent compared to the previous year. There has been progress towards improving working conditions for factory workers including amendments to the labor and the Export Processing Zone (EPZ) laws,

capacity building of the government in assessing factory safety and agreement on common standards to assess structural building safety. With the current political stability, and steady growth in demand for RMG, the export target of USD 33.2 billion for FY 15 seems attainable. While the long term sustainable growth is pivoted on exploring new markets as well diversification of the export basket.

Import payments during FY14 increased by 19.39 percent and stood at USD 40.7 billion against USD 34.1 billion during the same period of the preceding year. Import payments during July-October, 2014 increased by 5.28 percent and stood at USD 13,805.70 million against USD 13,113.90 million of July-October, 2013. Fresh opening of import LCs during July-October, 2014 increased by 12.01 percent and


including the masses is the main mantra of inclusive banking, whose benefits have already began to manifest in the society. Overall employment has also picked up. While poverty has slid down, indicators like life expectancy and real wage have shown a positive trend. In addition to achieving self-sufficiency in food production, Bangladesh has been able to export rice for the first time in history. The relative shares of industry and service in the composition of GDP are on the rise - an essential feature of the economy to promote Bangladesh to the bracket of the middle-income countries.

There remain some aspects of economic discomfort that include non-performing loans, excess liquidity, and some irregularities at the branch level of banking. While most of them surfaced as the

stood at USD 13,977.57 million compared to the same period of the previous year. From the sectoral distribution in L/C opening during July-October 2014, it is revealed that L/C opening for the industrial raw materials is the highest which is 37.17 percent followed by the consumer goods being 12.36 percent.

Remittance Flows Show Impressive Growth

According to the report of Bangladesh Bank, in the 2013-14 FY, remittance has dropped 1.6 per cent from the previous Fiscal Year. In FY14 Bangladeshi people sent USD 14.22 billion in the country, which was USD 14.46 billion in FY13. Manpower export witnessed a slump due to unstable situation prevailing in different Middle-East counties including Iraq, Libya and Kuwait which contributed to the

stagnation. However, the current fiscal is portraying a different story as the flow of inward remittances grew by 11.42 per cent to USD 6.20 billion during the July-November period of the fiscal year 2014-15 against USD 5.56 billion in the corresponding period of the previous fiscal year.

Bangladesh Bank has adopted some pragmatic steps in compliance with the inclusive development strategies of the government. These included inclusive banking, SME loan, green banking, financial sector modernisation, e-commerce, mobile banking, agri-credit expansion, export promotion, and liberalization in foreign exchange transactions. As a result, the growth base has been expanded and it is much needed for sustainable development. Empowerment of the poor by


The Author is Business Editor ofThe Financial Express

staggered toll of political disturbances of 2013, Bangladesh Bank girded itself up to check the negative trend and undertook corrective measures. In the middle of 2014, we witnessed a one-time jump of default loans, which happened because of various reasons including new best practice of classification and provisioning rules as well as political instability. Bangladesh Bank has brought down the net

default loans to a moderate level. Total default loans are on the wane as a result of improved supervision and close monitoring from the central bank leading to higher level of loan recovery. The banks which were held responsible for default loans had to take the hit in their balance sheets in terms of higher levels of provisioning. Bangladesh Bank will not be lenient in this regard in the coming days as well. Banks must embrace the culture of

disbursing quality loans. Bangladesh Bank may extend some facilities to the credible borrowers now in trouble, but it will never hesitate to take stern measures against the bad borrowers.

Excess liquidity is dwindling - as reflected in the call money rate which rose from 6 percent in August to 8.3 percent in December 2014. The demand for funds is rising as businesses expand. The inflow and outflow of foreign currencies at the bank level are more frequent nowadays than before, suggesting a vibrant import demand for 2015. Bangladesh Bank is enhancing digital technology to improve supervision so banking irregularities do not repeat in the future. The transaction under dashboard is one of the examples of smart banking supervision and digitalization.


Vision 2021 is the ultimate roadmap where the nation should reach on the date of golden jubilee in the year of 2021. To be visionary is must to succeed for an individual, for an entity as well as for a nation. Having no specific vision of a nation is like an aircraft in the air without rudder having no specific aim of destination. At the end of 2014, the former president of India Dr. APJ Abdul Kalam visited Bangladesh on the occasion of 110th anniversary of Metropolitan Chamber of Commerce and Industry (MCCI) where, in his speech to the students of universities, he focused to be visionary to succeed in life.He advised the youth to take part in journey of nation building and quoted few lines of a poem of Jalaluddin Rumi for going ahead with ideas and dreams I am born with ideas and dreams……..I have wings, I will fly.” In his full speech it was a call for leadership with vision and mission to reach the visionary goal.The country should specify its vision and design its mission to reach there at. So, setting up vision 2021 as part of election manifesto of 2008 is not merely a political commitment, it should be a national dream going beyond the political debate. Because the vision 2021 contains the target of development of political and

VisionVision 2021:

Ten Challenges Ahead and a ContemporaryInitiative Towards MDGs and SDGs

Dipok Kumar Roy ACA

socio-economic culture which will ensure better politics, economics, society and standard of living for the people. Whoever or whatever party is on driving seat of the state, he or they must have an ultimate milestone over a period of time and work accordingly. The main goal of vision 2021 is to become a middle income country where poverty will be completely eradicated.

How is Middle Income Country (MIC) defined? World Bank categorizes the economy as low, middle and high income for the purpose of analysis. The middle income category is further subdivided into lower middle or upper middle income country. Nations with a per-capita gross national income in 2013 between $1,045 and $12,746 will fall under the category of Middle Income Countries (MICs) in 2015. At present, India, China, Brazil etc. under the category of middle income leading more than one third population as influential player in the global economy. Bangladesh aims to reach the row of MICs in the year of 2021 at its celebration of golden jubilee for 50 years of independence. As per record of World Bank for Bangladesh, GNI per capita as per atlas method (current US$)is 900 in 2013 which falls under lower income category. As per record of Bangladesh


Bureau of Statistics (BBS), Bangladesh’s per capita income stood $1,190 in 2014 and considering this achievement, Bangladesh falls under lower middle income group. Due to the method of calculation, this may differ to some extent with World Bank but it is apparent that Bangladesh is doing well and moving towards the MIC. By focusing on the set aspirations of vision in a planned way, the result could be better than we are achieving now.Today many national and foreign experts and institutions forecast Bangladesh as future leader or next eleven or emerging tiger for its consistent growth of GDP more than 6% over last 10 years and its tremendous strength and opportunities. So, vision 2021 is a demand of time. Then, what does the vision 2021 contain? Vision 2021 has 8 (eight) aspirations: (1) Democracy and effective parliament (2) Political framework, decentralization of power & people’s participation (3) Good governance through establishing rule of law and

avoiding political partisanship (4) Transformation of political culture (5) A society free from corruption (6) Empowerment and equal rights for women (7) Economic development & initiative (a) Meeting basic needs (b) Population and labour force (c ) Alleviation of poverty (d) Food & nutrition (e) Health care center (f) Education (g) Industry (h) Energy security (i) Infrastructural development (j) Housing (k) Environment (l) Water resources and (8) Bangladesh in the global arena ( a) Achievements of liberation (b) Culture (c) Foreign policy. If we overview the aspirations of vision 2021, we see three broad objectives of improvement: (1) A good political, social and economic environment through effective democracy, parliament, political framework, people’s participation and power, good governance, corruption free society, women empowerment and equal rights etc. and (2) Economic development and improving of standard of living of people(3) International relationship for

MDGS HAVE

BEEN DESIGNED TO

ENSURE A GOOD

ENVIRONMENTAL FLOOR

AND A GOOD SOCIAL

FOUNDATION FOR THE

PEOPLE ENSURING

POVERTY & HUNGER

ELIMINATION,

EDUCATION,

EMPLOYMENT, GENDER

RIGHTS, CHILD

MORTALITY, SEXUAL

AND REPRODUCTIVE

HEALTH, HIV/AIDS,

WATER AND

SANITATION, AND

GLOBAL PARTNERSHIP.

VISION 2021 IS ONE STEP

AHEAD OF MDGS. IT

WILL ENSURE

SUSTAINABILITY OF

MDGS AND BRING

FURTHER IMPROVEMENT

OF ENVIRONMENT

FLOOR AND SOCIAL

FOUNDATION WITH

ENHANCEMENT OF

LIVING STANDARD OF

PEOPLE.


sustainable social and economic network. So, the vision 2021 is an appreciable initiative for a brighter, smarter and stronger nation where the way of implementation and achievement may face a lot of challenges.

First Challenge will come in front about setting the appropriate goal and target of aspirations taking into account the basic needs, safety, security and right of people instead of being high ambitious or showing an unrealistic hopes to the nation. The goal is specific to be a middle income country with per capital income of $2,000 by 2021. This achievement will fall under the status of MIC as defined by World Bank. The question is- will the status of MIC remove poverty completely? Will we not see any beggar on the street or someone sitting on footpath with a plate of rotten and scrap foods? The answer, I hope known to all, is probably no. If the distribution of national income is not balanced, such MIC status cannot eradicate the poverty completely. The benefit of growth of national income has to be reached to the

general people instead of piling up in the hands of some classes of persons in the economy. The increase of per capita income will not trickle down the benefit for the people unless some social indicators like income balance, education for all, reduction of poverty, human right, women empowerment, good governance, access to technology for all etc. are improved reasonably and remarkably. The Government has formulated “Perspective Plan of Bangladesh 2010-2011: Making Vision 2021 A Reality”, a strategic plan of mission and goals, in line with aspirations of Vision 2021. The perspective plan articulates the roadmap for accelerated growth and lays down Broad approaches for eradication of poverty, inequality, and human deprivation. Some of key targets to be achieved by 2021in addition to raising of per capita income to about $ 2,000, are (i) GDP growth rate 10%, CPI inflation 5.2%, gross domestic investment 38% (against 24% in 2010) of GDP with gross national savings 39% (against 30% in 2010), total govt. revenue 20% (in 2010 it was 10%) (iii)

Unemployment rate will be reduced to 15% (against 30% in 2010) and rate of poverty reduction to 13.5% (against 31.5% in 2010)(iii) Industrial Contribution to GDP 37%, Service sector 48% and agriculture 15% (Against 28%, 53% and 19% respectively in 2010). (iv) Tax to GDP ratio to 14.6% in 2015 and 20% in 2021. In addition to the above economic indicators, the said plan has addressed to improve social indicators like development of human resources, education, health services, urban & rural developments, freedom of expression, equality of citizens irrespective of race, religion and creed, and equality of opportunities, human rights,distribution of national income, environment sustainability, women empowerment, employment and institutional foundation etc. Each aspiration has specific target to be achieved in two phases by 2015 and by 2021. How specific and appropriate are targets of aspirations set under vision 2021? We may refer the fabulous quote of Thomas Stearns Eliot, the famous


litterateur and Nobel laureate in 1948, on endeavoring the ambitions “If you aren't in over your head, how do you know how tall you are?” So, ambitions lead us to measure the existing capacity for attaining thereof. The capacity shows a matrix of Strength, Weakness, Opportunity and Threat (SWOT). The implementation strategy should be designed taking into consideration the SWOT matrix including all challenges. As our vision is known with its aspirations, all programs and activities of the government should be focused in accordance with aspirations of vision 2021. We should work to achieve this in a strategic planned way by sharpening the strengths, overcoming the weaknesses and availing the opportunities and deterring the threats. The routine works of the Government should be focused on vision 2021 with strategic Mission 2021 involving the general people with the action plan, project and programs and consisting follow up of the result.

The Second Challenge will be tailoring the implementation strategy & process. The perspective plan stipulates the development priorities. The development priorities include ensuring broad-based growth and reducing poverty; ensuring effective governance and sound institutions but creating a caring society; addressing globalization and regional cooperation; providing energy security for development and welfare; building a sound infrastructure and managing the urban challenge; mitigating the impacts of climate change; and promoting innovation in a knowledge-based society.The perspective plan, the summary strategic plan, also state that specific strategies will be developed over the two five year plans, i.e., the sixth and seventh five year plans. In accordance with the aforesaid priorities and targets of aspirations, sixth five year plan adopted the strategies with challenges focusing the target to be achieved within 2015 considering

midterm economic framework. After reviewing the achievement for the first phase by 2015, the 7th five year plan is to be designed with specific strategies and targets to fulfill the total targets of vision 2021. The perspective plan covers the areas to be focused to attain the targets and the 6th five year plan identifies the challenges for development initiatives and focused strategy with program/project activities, i.e. Mission to be taken or continued. For the effective implementation of the strategies, the implementation process is another pivotal force to reach the target. Unless the process is actively ensured, the achievements may be less than actually it could be with its resources and efforts. The Implementation process could be: (1) The nation should be integrated towards the journey of vision 2021 through awareness building of importance of vision 2021 and seeking co-operation for the attainment of the national vision (2) Vision 2021 implementation

it is more than 40%. An efficient tax system finances the necessary level of public spending in the most efficient and equitable way as the other sources of debt financing becomes frequently restricted and needs to maintain a balance with internal revenue especially with tax revenue. The programs and activities cannot be extensively started and run unless tax to GDP ratio increased significantly for which reforms of tax laws, enhancement capacity of tax administration, and ensuring rule of law are essential. The programs taken for agriculture revolution, Industrial expansion, Public spending efficiency, improvement of public administration, use of natural resources, energy sufficiency, making more than 55% youth people (out of total people) into human assets etc. will not be appropriately addressed and whole development activities will fall flat if the resources are not mobilized efficiently. As per development priorities, the


coordinating committee with specific roles and responsibilities (3) Review the status of SWOT and preparation of Action Plan or Mission 2021 for each aspiration by the Committee (4) Giving effect the action plan in budget, policy framework including sixth and seventh five year plan and projects/programs as routine jobs, (5) Review the result periodically by the Committee and adjust/modify the policy and focus the unaddressed or less-focused issues in budget, projects and programs as routine jobs and (6) Preparation of Annual Progress Report against each aspirations together with reasons of target achieved or not achieved (7) National Assembly informing the achievement and get feedback for further attainment.

The Third Challenge will be ensuring rule of law. Today’s corruption and lack of efficiency of both private and public sectors are output of lack of rule of law. The nation is sunk down in corruption. Corruption is so intensive that about 2-3% GDP growth is lost each year due to corruption as per World Bank estimate. TIB estimated that per capita income could be doubled if the Government could restrain corruption. Corruption leads to tax evasion and failure of the govt. projects making others illegally wealthy. Performance of both public and private sectors is less than the capacity due to abusing of power or non-compliance of law for depriving stakeholders and society and not bringing them under law for such non-compliance. Effective rule of law will bring political, environmental and moral purity which are essentials for a better Bangladesh. By ensuring rule of law, the practice of democracy,

political culture, accountability of government, employees & people, safe and sound planet, the efficiency of Implementation of govt. projects, enhancing tax to GDP ratio and finally growth of GDP will be remarkably developed. Rule of law will ensure good governance in the state and corporate sectors with satisfactory performance of national development. The state will be a compliant institution with higher growth of development that may create a brand image all over the world. The political commitment, the effective institution irrespective of govt. influence, modernization of laws and law enforcement agency etc. need to be ensured for effective rule of law in the state.

The Fourth Challenge will be resources mobilization. The most effective way to boost a country’s resource mobilization effort is to improve its tax system. The existing tax to GDP ratio is 10% whereas in the developed country

program activities are to be designed rationally due to having budget constraints for lower tax to GDP ratio.

The Fifth Challenge will be leadership with ethical standard. If the ethical leadership is not established, the resources will not be mobilized adequately to reach the target of achievements as set under aspirations. So, the implementation strategy should cover the way of governance with ethical standards. The professional enrichment and rule of law may be helpful to ensure ethical leadership.

The Sixth Challenge will be raising sense of nationalism and making the nation enthusiastic in performing the jobs from his/her own position for his/her well being as well as for the brand image of the nation. We do not care much about nationalism rather we are used to express our weakness

highlighting the strength of other countries. We leave our country for better standard of living but do not commit ourselves to build the nation. Due to lack of nationalism, the country is being brain-drained. The Govt. should take necessary steps to brand Bangladesh in such a way so that the youth can build their confidence and engage themselves to build a prosperous nation.

The Seventh Challenge is conducting research and development initiatives to tie up the capabilities with national productivity. The Country may have a budgetary allocation for such research and development initiatives for scientific, economic and social progress so that decisive actions can be taken by the nation based on research findings. The research and development initiatives may make the dominant economy with product and service specialization.

The Eighth Challenge is attracting Foreign Direct Investment (FDI).In attracting FDI, the national initiatives are not as sufficient and appropriate to draw interest and the confidence of foreign investors. The effective rule of law and resource mobilization, and the efficient leadership with ethical standard may act as catalyst to attract FDI. The other most crucial factors like sector priorities with policy framework, ensuring utility, political stability, healthy trade union practice etc. may be leading factor to attract FDI.

The Ninth Challenge will be adoption of technology. Both industry and agriculture are technology driven. Technology increases the productivity with reducing cost of production. Unless initiatives are taken by the government with subsidized costs, adoption may not be cost effective for technical incapacity. The policy and laws like income tax, VAT,


health, HIV/AIDS, water and sanitation, and global partnership. Vision 2021 is one step ahead of MDGs. It will ensure sustainability of MDGs and bring further improvement of environment floor and social foundation with enhancement of living standard of people. The target date of MDGs is knocking at the door in 2015 and The UN is now working on setting Sustainable Development Goals (SDGs) for 192 member states. These SDGs refer to an agreement of the United Nations Conference on Sustainable Development held in Rio de Janeiro in June 2012 (Rio+20), to develop a set of future international development goals. The Rio+20 outcome document is termed as ‘The Future We Want’and is also termed as for the goals to be integrated into ‘the UN’s post-2015 Development Agenda’. The UN General Assembly's Open Working Group on Sustainable Development Goals on 19 July 2014 forwarded to the Assembly its proposal for developing a set of Sustainable Development Goals (SDGs). The proposal contains 17 goals with 169 targets covering a broad range

customs duties etc. may be relaxed for using such technology in the operation of business undertaking. The Govt. should have a list of technology to be used for enhancing productivity with basic requirement priorities based on which the adoption policy will be formulated.

The Tenth Challenge will be best utilization of human resources. Human resources are assets and not a burden. 55% youth has glorious future if we can use their capacity and capability. Quality education and different training program can make our people a strong force of manpower for working inland and exporting abroad as skilled manpower. No initiatives will be effective and satisfactory result oriented unless human resources are used in the best way.

The achievement up to 2015 of vision 2021 will cover the targets of Millennium Development Goals (MDGs). The United Nations Millennium Development Goals are eight goals that all 191 UN Member States including

Bangladesh have agreed in September 2000 to try to achieve by the year 2015. The goals are:

(1)To eradicate extreme poverty and hunger (2)To achieve universal primary education (3) To promote gender equality and empower women (4) To reduce child mortality (5) To improve maternal health (6) To combat HIV/AIDS, malaria, and other diseases (7) To ensure environmental sustainability (8) To develop a global partnership for development.

The above eight goals have 21 targets and a series of measurable health indicators and economic indicators for each target as was in the case of aspirations of vision 2021. As per report of Bangladesh on MDGs in 2013 Bangladesh’s achievement on eight targets is remarkable. MDGs have been designed to ensure a good environmental floor and a good social foundation for the people ensuring poverty & hunger elimination, education, employment, gender rights, child mortality, sexual and reproductive


The Author is an Associate Memberof ICAB and Head of Finance ofVenture Investment PartnersBangladesh Ltd. (VIPB)

of sustainable development issues, including ending poverty and hunger, improving health and education, making cities more sustainable, combating climate change, and protecting oceans and forests. It was agreed that SDGs must be: (i) Action-oriented (ii) Concise (iii) Easy to communicate (iv) Limited in number (v) Aspirational (vi) Global in nature (vii) Universally applicable to all countries while taking into account different national realities, capacities and levels of development and respecting national policies and priorities. The outcome document further

specifies that the development of SDGs should: (viii) Be useful for pursuing focused and coherent action on sustainable development (ix) Contribute to the achievement of sustainable development (x) Serve as a driver for implementation and mainstreaming of sustainable development in the UN system as a whole (xi) Address and be focused on priority areas for the achievement of sustainable development.

MDGs have given an environmental floor and social foundation and SDGs will continue

those developments for a better life with some more aspirations. The achievement of aspirations of Vision 2021 of Bangladesh will be a solid basement of attaining SDGs set by UN.


Abstract

Globalization is definitely one of the most uttered words today. In most aspects of our life, the implication of globalization is very clear. For example, we can talk about the high popularity of dish TV channels, the surprising improvement of technology, the incremental knowledge and information sharing, the growing rate of immigration and emigration, the emergence of transnational cultures and so on. The impact of globalization on business is also very particular: before doing any business, we have to consider facts from global viewpoint instead of confining in any particular geographical boundary. Import, export, production technology, manpower sourcing, marketing and promotion, competition – hardly there is any facet of modern business which is not influenced by globalization. As an important part of business, financial reporting is not an exception to this. In order to enhance comparability and consistency, the accounting profession has developed IAS, IFRS and likewise regulations to be observed by businesses in the preparation of general purpose financial statements. These are named standards, as they are equally applicable to all businesses around the world. Surely the launching of these standards has added to the quality of

Some Adaptations to Financial Reportingin Response to Globalization

Thauhidul Alam

financial reporting. But it is also recognized that there remains huge room for perfection. Circumstance is continually changing, and businesses are exposed to new issues. Hence continuous modification of FR standards is essential in the interest of proper application.

Here I have pointed out some of the areas in which the FR standards should be upgraded, along with pertinent suggestions. The discussion is given under appropriate section headings.

Ratio Analysis to Address Increased Global Pressure for Quality

It is beyond saying that globalization asks each and every business, irrespective of its geographical coverage, to continually improve its product or service quality. Nowadays no business is truly domestic. Just two decades back, most of the businesses faced competition from only their domestic counterparts. The scenario has changed quite dramatically. Trade and commerce has been cross border and foreign enterprises are expanding in gradually larger scale over your physical place of business. By dint of improved means of information technology and aggressive advertising campaigns by foreign enterprises, consumers are now pretty conscious about the real price and



utility of a product. Foreign companies are commonly found offering better quality and features within the same price range. So the competition is extremer now than in ever ago and you must work with the quality of your offerings in order to survive and thrive. The day of washing a new customer’s eye and making one-shot profit has passed away.

The fundamental of financial analysis is ratio analysis. Various categories of ratios are common to demonstrate in notes to the financial statements, or at least in the annual reports. What to say is that all of the ratios focus on financial information, moving around assets, liabilities, equity, revenues, expenses and profits. Therefore, better the name is called “Financial ratio analysis” instead of merely “Ratio analysis”. As clear from the above discussion, many of the stakeholders (including customers, investors and owners) are by and large more interested in

non-financial (i.e. operational) information, particularly quality. So it is high time financial figures were combined with non-financial ones to develop a new category of ratios, for the purpose of showing the impact of quality on the bottom-line of the financial statements and thereby augmenting the usefulness of financial statements to their users.

Quality improvement attempts always sound to be expensive; moreover, the benefits are visible as well as valuable in the long run. So it is quite rational that the management hesitates about and delays in investing in quality. Provided this context, FR should come ahead to prove that the benefits of quality really worth the investment. The abovementioned ratios should be designed in a manner to exhibit relationship between quality, sales, costs, defects and wastage. I suggest some sample ratios below:

QUALITY IMPROVEMENT ATTEMPTS ALWAYS SOUND TO BE EXPENSIVE; MOREOVER, THE BENEFITS ARE VISIBLE AS WELL AS VALUABLE IN THE LONG RUN. SO IT IS QUITE RATIONAL THAT THE MANAGEMENT HESITATES ABOUT AND DELAYS IN INVESTING IN QUALITY. PROVIDED THIS CONTEXT, FR SHOULD COME AHEAD TO PROVE THAT THE BENEFITS OF QUALITY REALLY WORTH THE INVESTMENT.


much. One thing is clear that the above inconsistency or incomparability arises on account of differing laws and tax rules. So until and unless tax provisions of every country meet on a single point, the context of preparing financial statements will not be equivalent and the discrepancy can no way be eliminated. Now, living in this age of globalization, is it too absurd to say that some parallel tax laws to be developed among countries?

Exchange Rate Fluctuation Gain or Loss: How Much Worth Accounting for?

As one of the most visible consequences of globalization, businesses nowadays are more or less involved in foreign trade. Accordingly modern businesses are seriously exposed to the exchange rate fluctuation. Proper accounting treatments are directed in the FR standards in this regard. But, can there really be any fluctuation gain or loss which needs recording?

Fluctuation gain or loss arises on account of exchange rate up or down between the transaction date, reporting date and settlement date. Of course future is uncertain and we do not know for sure whether exchange rate will go up or down on the settlement date. But we also know that there are

Such ratios must be made an integral part of the notes to the financial statements. This will ensure that owners get to feel the merits of quality improvement attempts.

Comparability of Financials in the Context of Differing Legislations and Tax Provisions

As mentioned earlier, on account of globalization all businesses, irrespective of their scale of operation, are subject to cross-border competition. One of the major implications of this is that comparability becomes a major headache not only of the users of financial information but also of its preparers. In other words, businesses intend to show their operation same lucrative as compared to that of their domestic as well as foreign competitors. Going to do this, preparers of financial statements tend to compromise with FR standards.

All businesses are operating within the jurisdiction of some regional laws and regulations. Moreover, every government has in effect its own tax rules and provisions. Compliance with these local laws and tax rules is more important for businesses than with FR standards. Every company intends to keep its financial statement figures in a way

that its actual tax liabilities as well as disclosed profit lie around its planned figures. When you cannot do this in compliance with FR standards, you simply bypass them and arrange the financials in your own way.

But listed companies and MNCs are bound to follow the FR standards, since their financial statements are subject to greater public and legislative exposure than that of a non-listed domestic enterprise. Now when some businesses are abiding by the FR standards and others are not, how effectual is the comparison of inter-business financials?

The question is: why businesses sidestep the FR standards. The answer is twofold and very straightforward:

- They are not facing any punishment for contravening the standards;

- They are not able to keep the bottom-line figures as of their expectation if they comply with the standards.

As to the first point, punishments are suggested in pen and paper, just awaited for implementation. I have nothing to say anew in this respect.

What can FR do on the second issue? Simple answer: nothing

Proposed name of the ratio How should be calculated Remarks

Marginal cost of quality Monetary investment in quality ÷ Production units The lower, the better

Marginal sales from quality Sales ÷ Monetary investment in quality The higher, the better

Defection sales Sales price of scrapped units ÷ Sales price of good units

This ratio will definitely stay below 1; yet the higher, the

better.


The Author is an Asst. Manager -Internal Audit, Valiant(Apparel Division of Habib Group)

option contracts, forward contracts, future contracts and various other derivatives in order to hedge against this movement. Those are advance concepts of Financial Management; we just take the basics: you may fix up the exchange rate on a future date in order to prevent the downside risk of exchange rate fluctuation. If you can do that, you now surely know how much you have to pay to the foreign suppliers and how much you are going to receive from foreign buyers, in terms of your functional currency (often is the domestic currency). At the reporting date you will record receivables and payables in the fixed amount. Of course exchange rate on the settlement date may be higher or lower than the rate fixed by you, but it does not affect you any more since the contract is binding on you. In that case, what is the ground for showing fluctuation gain or loss in the accounts?

ForEx contracts are not trendy in Bangladesh. But there is nothing too formal as to doing above. Simply you have to fix the exchange rate with your bank. First you must guess about the exchange rate on the settlement

date. There are a number of futures exchanges around the world; such as: Chicago Mercantile Exchange, ICE, Eurex, CBOE and LIFFE. You can learn what the exchange rate is going to be on a future date from these sources. If you think appropriate, you can add your own assessments thereof. The bank you are dealing with also suggests you a particular exchange rate based on its assessment. Now, finally upon a successful negotiation, you mutually fix the exchange rate for your future ForEx agreements and shield yourself against the adverse fluctuation in exchange rate. If you compare with the spot rate on the settlement date, sometimes you will be gainer and sometimes be loser: but at the yearend you are likely to be balanced off. So you actually need not worry about it.

This technique can be used equally for both transaction and translation exposures. This is not too sophisticated to use. The upside is that by using this simple technique you can:

- definitely know the amount of cash inflow or outflow to incorporate in your budgeting;

- eliminate the unnecessary gain

or loss which may manipulate your profit figures;

- make your reporting more understandable to people from non-accounting background.

Concluding Remarks

The lesson of globalization refers to the old maxim: “Survival of the fittest”. Rivalry has been intensified in every respect; so you must more and more excel in your operation for paving the way to growth. Since financial reporting is the major tool for representing the health of your business in front of others, it also requires to be reviewed continuously for the sake of enhancing its understandability, reliability and comparability to general people. “Accounting is the language of business, so people not having the basics should not understand it.” – such traditional rough and tough notions are definitely outdated in this dynamic era. Now is the time for practicing a rational accounting, which non-accounting people would feel easier to get with.

Introduction

The Mughals ruled the Medieval India from 1526 to 1857 A.D. Mughal empire extended to about 3,200,000 km² (1,235,527 sq mi) at its peak. They had immense contributions to art, education, communication, defense etc., and one of the utmost contributions was in trade. Both local and foreign trades flourished extensively due to the encouraging support from the Mughal rulers.

Trading Infrastructure

The Mughals engaged themselves with various infrastructural developments in Indian subcontinent. The aspiration of governing a robust political empire by the Mughals gave birth to a series of urban centers in different regions/parts of the empire for their effectual control. Many trading towns grew during their rule in conjunction with the urban centres. The Mughals created an environment which was well equipped with peace and stability that triggered the prosperous growth of trades.

The political and economic unification of Indian subcontinent under the Mughal rule and establishment of law and order

Looking Back:Trades in Mughal India

Mohammed Hamidul Islam FCA, ACCA

over extensive areas created the favorable environment for trade and commerce. The improvement of transportation and communication by the Mughals also led to the monetization of economy.

It was easier for people to travel and carry commodities because of the development of roads and bridges. Land and river transport systems were developed in order to carry on inland trade in different provinces. Many new roads were constructed, and old roads were extended and enlarged. An important road from Sonargaon in Bengal to Lahore in the north western part of Indian subcontinent was constructed during the Mughal rule. The central axis of Shah Jahan’s empire was the road running from Lahore through Delhi to Agra-a continuous and beautiful avenue of trees for four hundred miles.

Trees were planted along the big roads to give shadow and fruits to the travelers, and also many sarais (inn) were built in the important trading areas to give shelter to both the traders and their beasts used to carry commodities.

Many ports were established for international trade during the Mughal rule. Some ports cities were used for export-import from very primeval period.



Local elite, European traders as well as the Mughals expanded foreign trades taking active initiatives for modernizing these ports.

The cost of river transport was cheaper than road transport. The products of the Punjab, Lahore and Sindh were transported through the river Indus to other trade centres throughout the Mughal empire. Most transportation of goods between Delhi and Agra were made through the river Jamuna. Bengal had well connections with big towns by different river routes and coastal areas which promoted the inter-regional trades in Mughal India.

Local Trade

Local market of Mughal India was based on agriculture. Apart from food-stuffs, the villagers also

supplied raw materials such as cottons, indigo for urban manufactures. The village baniyas and the banjaras (tribesmen) controlled such market and transported the food grains and other locally produced items to different madis(a market where a particular product or goods are sold).

The other important productions were various types of sugar products from the sugarcane, mustard oil, and coconut oil. Agricultural products such as tobacco, coffee, indigo and opium were cultivated in large areas. The dyeing industry burgeoned during this period in many folds. The coarser cotton cloths were well demanding to the people because of its attractive design. Locally produced wines also had a large market.

THE MUGHALS WERE SUCCESSFUL IN DEVELOPING AND ESTABLISHING A WELL-ORGANIZED TRADE NETWORKS FOR TRADING OF BOTH LUXURY AND ESSENTIAL COMMODITIES ALL OVER THE VAST AREA UNDER THEIR REIGN. THE MOVEMENT OF THESE COMMODITIES WAS MADE POSSIBLE BY A COMPLEX NETWORK AMONG RETAILERS, WHOLESALERS AT THE REGIONAL AND LOCAL LEVEL IN MUGHAL INDIA.


Bankruptcy was common in Mughal India because of risk to succeed in intense competition between traders or failures in trade. Reportedly if someone went bankrupt he simply lighted two candles in the morning as a sign that he became bankrupt.

The Mughals were successful in developing and establishing a well-organized trade networks for trading of both luxury and essential commodities all over the vast area under their reign. The movement

of these commodities was made possible by a complex network among retailers, wholesalers at the regional and local level in Mughal India.

Foreign Trades

India was involved with foreign trades from

primeval era. In Mughal India, there were many sea ports used for overseas trades. During the Mughal era Indian subcontinent had overseas trading relations with the Arab countries e.g.Persia, Egypt, China, and with various countries of South-East Asia. Horses from West Asia, silver from Japan and gold from East Indies were being imported. There had been increasing demands for European wine, toys and luxury items in India. Other imported items were copper, lead, tin, zinc, spices, coffee, tobacco, silk, velvet,

Mughal India was industrially prosperous but not so advanced in terms of technology. Tools almost remained the same as ancient times. There were the royal Karkhanas (factories) which had been set up on the Persian model. This system was accelerated during Akbar’s reign. They catered the needs of the royal family and the nobles. All kinds of experts and specialists such as embroiderers, goldsmiths, silk or brocade manufacturers, painters, tailors, muslin and turban makers worked there.

The Mughals as well as the nobles around them used to have luxury life style. They were the primary consumers of both local and foreign luxury goods like wine, carpet, handicrafts, fine textile and silk etc. There were therefore a good number of consumers who had the demand and also the affordability to buy products above the line of necessity.

Iron was produced in Golkonda, while Saltpetre was manufactured in different parts of the country, especially in Bihar. Gold and silver industry reached its excellence during the reigns of Akbar and Shahajahan. The craftsmen of Banaras, Delhi, Gujrat and Agra specialized themselves in the manufacture of gold ornaments and silver vessels. The articles such as jewellery used in temples,

particularly in the south were many and varied.

Quite a large number towns and cities grew out of business spirit. Srinagar, Lahore, Thatta, Karachi, Cambay, Ahmadabad, Surat(the richest and most prominent port city in the Mughal empire), Bombay, Poona, Goa, Calicut, Nagapattam, Kanchipuram, Madras, Masulipattam, Delhi, Agra, Lucknow, Murshidabad were prominent towns and cities. Most urban markets did not only cater

the needs of local consumers, wholesalers and retailers, but were also used as storing centres from which dealers from other centres could get their supplies. In fact, there was a complex network between the towns and rural communities.

Bengal exported sugars, rice and its most delicate and valuable muslin and silk to other parts especially to North India. Silk weaving was an important industry in Lahore, Agra and Gujrat.


glassware etc. Even slaves were imported from Ethiopia. Main exported items from Mughal India were cotton textiles, pepper, rice, wheat, sugar, coconut products, ginger, turmeric, raw silk etc.

At the end of 15th century, the Portuguese came in this part of Asia. They established domination by force in the overseas trade over the Moors (called to Arabs and Muslims) who dominated the overseas trade here before and they monopolized certain articles of trade such as spices, horses, armaments, species etc. Even they started to issue passes and used to collect custom revenues from the Asian traders at a Portuguese controlled port.

Subsequently, various European companies came to trade in Mughal India. Between the middle of the 16th and the middle of the 18th century, due to enhanced activities of such companies, the overseas trade of Mughal India expanded heavily. However, apart from Dutch and English East India companies, other European companies, the Australian, the German, Danish etc. played only limited role. The English and Dutch encouraged the Indian landlords for the establishment of coastal posts for trade. Moreover, because of the business ties among the Ottoman (Turkey), the Safavid(Persia-modern Iran), the Ming in China and the Mughals, the growth of trade increased significantly. These empires not only provided for law and order and conditions under which trade and commerce could grow, but also aided the process of urbanization and monetization of their economies.

At the very end of Akbar’s rule, the British, Dutch, and Portuguese also

started trade with the Mughal empire . Even though the trade started during the reign of Akbar the Great, his son Jahangir was the one to strengthen this economic activity in the Indian subcontinent. Even the ladies in the harem were also extremely rich by engaging themselves in business and commerce. Jahangir’s mother owned a large ship which traded on her behalf between Surat and Red Sea, and there were political crisis in 1614 when it was seized by the Portuguese. Nur Jahan carried on a similar business, specializing in indigo and cloth trades. Subsequently, Shah Jahan’s daughter-Jahanara continued the tradition and reportedly had made huge profits through trade.

In 1615, Sir Thomas Roe, the first British Royal ambassador to India, had been sent with letters of credence from King James I to try to secure a trading agreement for the East India Company from the Great Mughal. Although his four years stay in India and good relationship with Jahangir was not a big success, the British managed to increase the trade with textile with 22.7 million square meters over a period of just twenty years.

Through the trade, the European countries established strong ground in the Mughal empire, gradually gaining more power in this way and consequently, over the empire, until the British colonized the Indian subcontinent in the 19th century. The European language was primarily spread amongst coastal regions, in particular large trading centres and sometimes throughout big commercial towns which were engaged in inland trades.

The Great Mughals were very connoisseur of alcohol. Even two

of Jahangir’s brothers drank themselves to death, and he also had been suffering from alcohol related complications (reportedly died for alcohol).All the Mughal emperors appreciated it too, with the exception of Aurangzeb (who hated it). It became one of the most traded items in Mughal India. Alcohol was also considered a gift of goodwill, especially between sailors and merchants. Employees of the British East India Company imported wine for themselves and for gifts for the monarch. It was used not only for special occasions but also as a regular act of just admiring the emperor. Wine and alcohol in general was used for negotiations and, was therefore a very important part of the trading process.

Medium of Exchange

To the Mughals the coinage was a very important matter. Akbar started practice of issuing coins and established royal mint appointing the famous painter Abdus Samadas the head of it. The Mughal coinage was mainly based on the rupee and dam issued by Sher Shah Suri.The rupee was the most famous of all Mughal coins.

Muhar was the standard gold coin of about 170-175 gram and it was very popular. Jalali was a silver coin in square shape issued by Akbar. Nisar, Nur Afshan and Khairqasul were the smaller silver coins issued by Jahangir. Daun was the copper coin used by the common people in day to day transactions. The Daun made by the copper also known as falus, sikah falus, Nisfi, damra and damri. Coins especially issued by Akbar and Jahangir, were of high quality and even superior to contemporary European coins.


In the process, they also acted as private banks-they kept money in deposit from the nobles, and also lent it to traders. By these ways, hundis appeared as the money in circulation and financed commerce, both in local and foreign trades. Risks due to transmission of money were reduced greatly as the merchant could cash his hundi at the point of his destination after he had sold his goods. Virji Vohra set up agency

houses in different parts of Indian subcontinent including Burhanpur, Golconda, Agra and in the Malabar and also in West Asia the port-towns of the Persian Gulf, Red Sea and South East Asia. In some cases nobles used the hundis for payment of salaries to the soldiers deployed in distance places.

Interest rates in Mughal India varied significantly

from place to place and from time to time. The minimum interest rate reportedly was six percent, and the highest was thirty six percent. The rate was more or less four percent in England during that time.

Arguments for Development of Business Environment

Ovington, Jourdain, Fryer, Trvernier, Manucci and many others travelers mostly from Europe travelled to Mughal India in different times. They were very critical regarding Mughal administration, infrastructure, law

Trader Group and Social Status

Expanding commerce during the Mughal rule gave rise to new Indian commercial and political elites along the coasts of southern and eastern India. The Muslim ruling class preferred to settle in the towns and cities. The artistic life style of Mughal ruling clan encouraged handicrafts, art and architecture and trade in Indian subcontinent. The merchants and trader class was divided into big business magnates owning hundreds of ships, rich merchants and traders and petty shopkeepers.

The elite traders came from Hindus, Muslim, and Persian communities. The most prominent among them were a noted capitalist of Surat was Virji Vohra(1590-1670s) who was reputed to be the richest merchant in the world in his time and he could deploy as much as eight million rupees in trade. Besides, Haji Said Beg, Haji Qasim and Rustam Manakalso from Surat, Shantidas Jawhari from Gujarat, Mir Jumla from Golconda, Malay Chetti and Kasi Viranna from Coromandel, Chinna Chetti from South India and Jagat Seth of Bengal specially engaged themselves in export of trade, transporting Indian goods abroad. They had their ships and other transport arrangements, and also had lots of power and influences on the royalty. Some of these merchants were wealthy enough to advance loans to princes, and independent enough to deny that even to the emperor.

Institutional Involvement

Most Indian trading firms were family owned, sometimes partnerships were seen but there were no joint stock of companies. Of course there was no formal institutions like bank, insurance etc. like the modern time. However, hundi was used as a medium for the transmission of money from one part of the country to another. The hundi was

a letter of credit payable after a period of time at a discount. The hundis often included insurance which charged at different rates on the basis of the value of goods, destination, means of transport (land, river or sea) etc. The sarrafs or shroffs were money exchangers, whose main business was to test the purity of coins and to exchange one coin to another. They also exchanged bullion for currencies and vice versa.

The sarrafsor shroffs were specialized in dealing with hundis.

The Author is a PartnerA. Qasem & Co.Chartered Accountants


and order situations and communal issues. They mentioned the following major hamstrung in trade in Mughal India:

• The Mughals and their related nobles used luxury goods, for all its lavishness, was trivial to the economy, which was sustained primarily by local production and local trade. Moreover, even there was caste organizations of artisans and merchants, there was no common trade organizations in Mughal India.

• Local trades sometimes faced difficulties greatly because of imposing heavy taxes at many places by different authorities. Besides, sometimes the roads were unsafe for the merchants and traders because of robbers and other outlaws, on the roads and even in the towns.

• Sometimes the emperor himself created monopolies. In 1633, Shah Jahan made indigo a royal monopoly, requiring sale throughout the empire. In 1655 he also set up a monopoly in saltpetre, in 1640-41 he and his Vizier Asaf Khan seized the entire textile industry in Ahamadabad for exporting cloth to the Middle East. Salt was a royal monopoly under the Mughals. Other nobles also tried to monopolize certain goods in different times.

• Corruption was widespread in Mughal India. Custom officers deployed at the sea ports used to take bribes for illegal transactions of goods. Many high ranking officials were corrupted; it was evident from Aurangzeb’s criticism of his

high ranking officials during the later part of his rule.

However, it was evident from many factors and also confirmed by the modern historians that the Great Mughals were very supportive in trade and commerce, such as:

• Due to easier access of foreign traders, foreign trade increased significantly because of the arrival of European traders from the beginning of 17th century onwards.

• Local business was well organized because town markets were regulated by the government officials, who checked prices, weights, measure and quality regularly and strictly.

• There was no major communal conflict in Mughal India. The major effort of the Mughal state was that trade was kept free and the sea routes were open to the merchants.

• Custom duty was low in Mughal India. It was between two and five per cent. However, it was argued that the effective custom rate was higher because of corruption of custom officers.

• In case of any disputes in trades, the Mughals negotiated with the traders and in many cases they controlled the trade of many commodities for smooth supply of goods.

Conclusion

After Aurangzeb’s death in 1707, the Mughal rule continued for

another fifty two years without any significant influences by them in trade and commerce. During that time their control over their empire was tremendously destabilized due to family violence over the succession and emergence of several states in Mughal land with complete autonomy and impunity. That instability created a path for East India Company in the process of extending their rule to the subcontinent. However, from Babur to Aurangzeb, the six great emperors, considered them not as intruders, but locals and they in many ways kept their influences in the trades of Mughal India.

References1. Biswas,Anirban.2007. Money and

Markets from Pre-colonial to Colonial India. Aakar Books, Delhi, India

2. Chandra, Satish.1999. Medieval India-from Sultanat to the Mughals. Har-Anand Publications Pvt. Ltd., India

3. Chatterjee, Prasun. 2005. The Lives of Alcohol in Pre-colonial India: The Medieval History Journal.

4. Eraly, Abraham. 2007. The Mughal World-Life in India’s Last Golden Age. Penguin Books

5. Gascoigne, Bamber. 2002. A brief history of the Great Moghuls. Constable & Robinson, London

6. http://en.wikipedia.org/wiki/ Mughal_Empire.

7. Lally, Jagjeet. 2009.The Pattern of Trade in Seventeenth-Century Mughal India: Towards an Economic Explanation (Research Paper 120/09)

Business Enterprises are expected to compete internationally for markets and resources with competitive product / service and quality. Competitiveness in respect of price, quality and service is precondition to survive in the globalized market. An economy’s ‘competitiveness’ and its ability to achieve high and growing productivity and economic prosperity are likely to be driven primarily by domestic factors. ‘Competitive’ is a relative concept. When applied to a business, it would mean that the firm in question is able to produce its output at the same or lower cost than other firms in the same line of business, or that it has some other advantage over them such as the quality of its product.

The Foreign and local investments closely related to competitiveness of the particular industry, sector and the country as a whole. The enterprise and the environment in which it operates remain the key to the issue of competitiveness. At a country level, the notion of competitiveness becomes less clear. Countries and enterprises compete in a different manner. Different countries do compete with each other in order to attract investments and as a response to global processes they lay specific

Tax Competition for FDIM S Siddiqui

emphasis to retain economic activities within their business environment.

In this respect the accumulation of foreign direct investment (FDI) is one of the most effective ways for economies to become integrated and competitive on the global markets. The level of FDI depends on the location effect of a country’s business environment.

The income and other tax are not a principal factor determining FDI flows. A low burden of tax of host country cannot compensate for a generally weak or unattractive FDI environment. In practice, the range of empirical estimates of the responsiveness of FDI to corporate tax rates is quite wide and this makes clear cut conclusions difficult. The FDI increased due to international competitiveness, improvements in the business environment of many countries in the world including emerging countries. Companies’ search for better locations of lower cost, new markets, competitively high skills - in order to maximize the returns of their investment strategies i.e. efficiency, strategic asset seeking, market and/or resource seeking (UNCTAD, 2006).

The World Economic Forum, in its Global Competitiveness Report defines



‘competitiveness’ as ‘The set of institutions, policies and factors that determine the level of productivity of a country’. The Global Competitiveness Report weighs together data pertinent to 12 ‘pillars of competitiveness’: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

The impact of tax on ‘competitiveness’ is to consider how tax policy and administration impact on the various ‘pillars’ and hence productivity, etc. In practice, most taxes including not just the corporate income tax can have an impact on competitiveness. Tax policy and administration can

contribute to a competitive economy in a number of ways. Bangladesh and other LDCs are hungry for FDI for accelerated growth of economy. FDI must offer location advantages measured with low trade, labour or energy costs, low tax burden. The indicators are responsible that make local production more profitable.

The actual tax burden on FDI relates to tax-planning, administrative discretion in deciding tax liabilities, other taxes. Globalization integrates the economies of neighboring and of trading states and success of states relied on common tax, tariff and trade regime.

The main attraction is its incorporation of main statutory tax parameters influencing capital costs and establishing the statutory tax burden on investment returns.

THE INCOME AND OTHER TAX ARE NOT A PRINCIPAL FACTOR DETERMINING FDI FLOWS. A LOW BURDEN OF TAX OF HOST COUNTRY CANNOT COMPENSATE FOR A GENERALLY WEAK OR UNATTRACTIVE FDI ENVIRONMENT. IN PRACTICE, THE RANGE OF EMPIRICAL ESTIMATES OF THE RESPONSIVENESS OF FDI TO CORPORATE TAX RATES IS QUITE WIDE AND THIS MAKES CLEAR CUT CONCLUSIONS DIFFICULT.


rules that allow accelerated depreciation and loss carry forwards for tax purposes, and reduced tariffs on imported equipment, components, and raw materials, or increased tariffs to protect the domestic market for import substituting investment projects. China offers foreign-invested firms a tax refund of 40 per cent on profits that are reinvested to increase the capital of the firm or launch another firm. The profits must be reinvested for at least five years. If the reinvested amounts are withdrawn within five years, the firm has to pay the taxes. India, similarly, offers a tax exemption on profits of firms engaged in tourism or travel, provided their earnings are received in convertible foreign currency.

A related challenge for tax policy from globalisation is the greater ease with which businesses especially multinational enterprises (MNEs) can evade tax moving (‘stripping’) earnings from higher tax country to lower tax country through e.g. internal group leverage such as financing subsidiaries in high tax countries primarily with debt. They have option of profit shifting through transfer mis-pricing, i.e. by setting prices for intra-group transactions and the local investors cannot take such opportunity. The tax base of a MNE’s home country and that of host countries can be at risk. Especially if the home country is a relatively high tax country, its taxable profits may be reduced dramatically through aggressive tax planning techniques, particularly in the area of intangibles.

Business decisions are not only influenced by tax policy parameters (e.g. tax bases and rates) but also by

Investors use to give much attention to corporate income tax, the potential importance of other taxes must also be recognised. Taxes such as energy taxes and payroll taxes are important, and according to some officials, are becoming much more important. Government is responsible for taxation issues and offers, through the operation of various public enterprises a wide range of support for goods and services.

Again, tax administration that is not open to corruption and that implements tax law consistently and impartially make the tax regime predictable and reduce the extent to which it might discourage investment. Inefficiency in tax administration reduces the amount of an economy’s resources that have to be devoted to revenue collection. Raising tax revenues with an efficient administration are

broadly accepted as fair is more likely to achieve high levels of voluntary compliance. Low compliance costs and burdens on business reduce the time that taxpayers have to spend on tax compliance – time and effort that could otherwise be spent on creating income and wealth.

Tax policies have had significant implications for tax policy, as cross-border investors will generally be looking to maximise their post-tax not their pre-tax returns. Countries may feel that they are increasingly in a position of competing as a location for FDI and, as a result, under pressure to reduce taxes on the return on investment, particularly their corporate income tax rate.

There may be tax incentives would include, reduced tax rates on profits, tax holidays, accounting


The Author is a Legal Economist

the way in which a tax system is administered. MNEs consider whether the tax administration has a good understanding of business models and provide good “service” to business. Do they provide certainty and predictability in the application of the rules and are the rules applied in a consistent and coherent manner. Investors also assess the cost to business of complying with the letter and spirit of the law and is there a level playing field in terms of tax compliance for local and overseas investors and also future plan and forecast of tax policy incentives.

Tax policy making that is evidence-based and transparent, with publication of the revenue forgone from tax expenditures and periodic reviews of their cost-effectiveness, estimates of the revenue effects of tax measures proposed in the budget, etc. There are numerous examples of where poor infrastructure and other weak investment conditions have deterred FDI. Tax is but one element and cannot compensate

for weak non-tax conditions. Again, higher corporate tax rates are matched by well-developed infrastructure, public services and other host country attributes attractive to business, tax competition from low-tax countries not offering these advantages is not regarded by a number of policy-makers as seriously undermining the tax base.

According to the OECD, corporate and income tax reforms are crucial to maintaining inward investment in an era of capital mobility and globalisation. Government must lower taxes to attract capital investment, ensure job creation and attract human capital. This assumption has underpinned the tax reforms of the United States since the 1980s and the European Union since the 1990s. It is a policy discourse that is particularly strong in liberal market economies such as Ireland, the UK, US, New Zealand and Eastern and Central Europe. Many countries has given increased attention to “tax competition” for inbound FDI,

linked to the increasing mobility of capital and pressures to offer a competitive tax system. Countries such as Ireland, the Netherlands and the UK have used tax competition as a strategy to increase foreign direct investment (FDI), which has become a lynchpin of their economic development models.

Bangladesh corporate tax and other taxes are high in comparison to competitor countries and the complexities of tax assessment. The tax administration is not updated of technology and advanced manpower and suffering from colonial mentality. The local enterprises have option to evade taxes in collusion with tax officials and auditors. The tax law has anomalies resulting cascading effects (tax on tax) on sincere tax payers and opportunity of evading taxes. The level playing field does not exist. These are responsible for unhealthy competition among the local investors as well as overseas investors.

Capital is highly mobile internationally and an economy of country like Bangladesh is small in relation to international capital markets. Any taxation of capital income could mean investors would choose to invest in another country, where taxes were lower. In a word, with high levels of capital mobility, Bangladesh cannot ignore the potential effects on investment of how their tax rates compare with other countries.

Abstract

The core objective of this study is to examine practice and standard of corporate governance for financial reporting in comparison with the UNCTAD Guidance on Good Practices in Corporate Governance Disclosure in Bangladesh using banking industry listed in Dhaka Stock Exchange as a case-study. Bangladeshi Banks are guided by corporate governance requirements issued by Bangladesh Securities & Exchange Commission (BSEC) through their notification no. SEC/CMRRCD/2006-158/134/Admin/44 dated 07 August 2012 and Bangladesh Bank’s guidelines BRPD circular no. 16 dated 24.07.2003. The banks must comply with the Companies Act 1994, the Securities and Exchange Rules 1987, the Bank Companies Act, 1991 and the rules and regulations issued by Bangladesh Bank.

With the rapid globalization of businesses, the corporate governance disclosure requirement in financial reporting is gaining more and more significance day by day. To compare with a global standard on corporate governance the authors compared UNCTAD guidelines with the

Scope of Improvement for CorporateGovernance Disclosure in FinancialReporting with UNCTAD Guidelines:

A Case Study on Banks in Bangladesh1Leena Afroz Mostofa Chowdhury | 2Sharmeen Akter

existing practices in banking industries and tried to figure out the disclosure areas that can be improved. UNCTAD Guidance for Good Practices on Corporate Governance (2006) draws upon recommendations for disclosure relevant to corporate governance contained in such widely recognized documents as the revised OECD Principles, the International Corporate Governance Network (ICGN), past ISAR, the Commonwealth Association for Corporate Governance Guidelines (CACG Guidelines), the EU Transparency Directive, the King II Report for South Africa, the Cadbury Report, the Combined Code of the UK, the Sarbanes-Oxley Act, and many others. The UNCTAD benchmark contains 51 disclosure items spanning five broad categories of disclosure.

The recent Global Financial Crisis, Bangladesh Stock Market Crisis and the bitter experience of distress and failure of banks, suggest that Bangladesh needs to reassess its corporate governance regulations. The high growth of GDP and ever flourishing Bangladesh economy has caught the attention of foreign investors too. The analysis clearly shows a slight divergence between the code of corporate governance and its compliance. For Bangladesh to reap the benefits of



effective corporate governance and build a sustainable public and foreign confidence in the banking industry there is need to strengthen the enforcement mechanism of the regulatory institutions.

Keywords: Corporate Governance, Bangladesh Bank, Securities & Exchange Commission (SEC), UNCTAD.

Introduction

Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the US, which was introduced to reestablish public confidence in financial reporting after the notorious scam of bankrupted high-profile corporations like Enron and WorldCom. It is the system of rules, practices and processes by which a company is directed and controlled. Since corporate governance also provides the framework for attaining a

company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. To put forward the issue of corporate governance several guidelines were developed, such as the Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004) and the Sarbanes-Oxley Act of 2002 (US, 2002) among many. In this regard the United Nations Conference on Trade and Development (UNCTAD) has also developed a guideline on Good Practices in Corporate Governance Disclosures (2006). This guidance is a technical aid for regulators and companies, particularly in developing countries and transition economies. The purpose of the guidance is to help those

THE RECENT

GLOBAL FINANCIAL

CRISIS, BANGLADESH

STOCK MARKET CRISIS

AND THE BITTER

EXPERIENCE OF

DISTRESS AND FAILURE

OF BANKS, SUGGEST

THAT BANGLADESH

NEEDS TO REASSESS ITS

CORPORATE

GOVERNANCE

REGULATIONS. THE HIGH

GROWTH OF GDP AND

EVER FLOURISHING

BANGLADESH ECONOMY

HAS CAUGHT THE

ATTENTION OF FOREIGN

INVESTORS TOO.


principles around which businesses are expected to function to ensure good governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an endeavor by the federal administration in the United States to establish several of the principles endorsed in the Cadbury and OECD reports.

UNCTAD Guidance for Good Practices on Corporate Governance (2006) draws upon recommendations for disclosure relevant to corporate governance contained in such widely recognized documents as the revised OECD Principles of Corporate Governance (OECD Principles), the International Corporate Governance Network (ICGN) Corporate Governance Principles, past ISAR conclusions on this matter, the Commonwealth Association for Corporate Governance Guidelines (CACG Guidelines), the pronouncements of the European Association of Securities Dealers (EASD), the EU Transparency Directive, the King II Report on Corporate Governance for South Africa, the Report of the Cadbury Committee on the Financial Aspects of Corporate Governance (Cadbury Report), the Combined Code of the UK, the United States Sarbanes-Oxley Act, and many others. This guidance is a voluntary technical aid for, among others, regulators and companies in developing countries and transition economies. What and how organizations disclose will depend considerably on local laws and customs. In addition, particular industries may have some industry-specific disclosure requirements. In order to facilitate the general usefulness of this document, the focus is placed on widely applicable disclosure issues that should be relevant to most enterprises.

responsible for preparing company reports to produce disclosures on corporate governance that address the major concerns of investors and other stakeholders. Compliance of this guideline is not mandatory requirement in Bangladesh. However UNCTAD suggests that the implication of this guideline will bring more transparency for financial reporting in the developing countries. This paper discusses the extent to which disclosures maintained by listed companies of the banking sectors of Bangladesh comply with the guidelines set by UNCTAD and how disclosures can be improved in this sector.

Literature Review

Corporate governance is about “how investors get the managers to give them back their money” (Shleifer & Vishny, “A Survey of Corporate Governance,” Journal of Finance 52(2) 1997: 738).

Mayer (1999) contends that corporate governance means the sum of the processes, structures and information used for directing and overseeing the management of an organization. The Organization for Economic Corporation and Development (OECD) (1999) also defined corporate governance as a system on the basis of which companies are directed and managed. In another prospective, Arun and Turner (2002) contend that there exists a narrow approach to corporate governance, which views the subject as the mechanism through which shareholders are assured that managers will act in their interests.

As the Delaware Supreme Court has stated, “the most fundamental principles of corporate governance are a function of the allocation of

power within a corporation between its stockholders and its board of directors.” (J. Robert Brown, Jr. and Lisa L. Casey, Corporate Governance: Cases and Materials, 2012)

In broad terms, corporate governance refers to the way in which a corporation is directed, administered, and controlled. Corporate governance also concerns the relationships among the various internal and external stakeholders involved as well as the governance processes designed to help a corporation achieve its goals. Of prime importance are those mechanisms and controls that are designed to reduce or eliminate the principal-agent problem. (H. Kent Baker and Ronald Anderson, Corporate Governance: A Synthesis of Theory, Research, and Practice , 2010)

Shann Turnbull concluded that corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil law.

Modern-day views of corporate governance lean towards mentioning principles elevated in three code of conduct released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and Organization for Economic Co-operation and Development (OECD) reports current general


The significance for corporate governance in the banking sector can be derived in the paper “Corporate governance in the wake of Financial Crisis” (2010) by UNCTAD Secretariat. According to the paper, by late 2008 the global financial crisis that began with the collapse of the US mortgage market in 2007 had spread globally to institutions overexposed to the risks inherent in investment products that had packaged mortgage-backed securities. There were some high-profile bank failures early in 2008, notably the nationalization of Northern Rock in the UK in February 2008 and the distress sale of Bear n Stearns to JP Morgan in the United States in March 2008. However, the severity of the crisis only really became apparent in September 2008, when the United States government took over Freddie Mac, Fannie Mae and AIG, and Lehman Brothers filed for bankruptcy protection. This was followed by a series of government bailouts or government engineered emergency acquisitions of a

number of large financial institutions (Washington Mutual, Wachovia, Citigroup, Merrill Lynch and others). Around this time the global reach of the crisis was also becoming apparent as a number of European financial institutions (Bradford & Bingley, Dexia, Fortis, Hypo Real Estate, UBS, RBS and HBOS) were either bailed out or nationalized and the entire banking system of Iceland collapsed. The view expressed by Grant Kirkpatrick of the Organization for Economic Co-operation and Development (OECD) that “the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements” is therefore shared by a number of key policy makers and is reflected in both national and multilateral financial regulatory reform efforts.

Globally many scholars have researched on the UNCTAD guidelines application in private companies:

Oliveira C.M. (2013), reports

the case study of Corporate Governance in Brazil, where he employed UNCTAD Corporate Governance guidelines as benchmark. The findings show, 20 items among 52 items were disclosed by 90% or more of the firms, while 12 were disclosed by all firms. (2013 Review of the Implementation Status of Corporate Governance Disclosures: Brazil).

Hamid et. al, (2012), determines the intensity of Corporate Governance disclosures by top 250 listed public companies in Malaysia. The result revealed that there is no specific pattern on Corporate Governance reporting among the top 250 companies in Malaysia.

Beredego et al.(2013) examined the significance of International Corporate Governance disclosures on financial reporting in Nigeria. The report discovered that international corporate governance disclosures significantly affect companies’ total assets and profitability and that Nigerian banks report more than half of the UNCTAD requirements, but indiscriminately. (Practice and Standard of Corporate Governance in the Nigerian Banking Industry)

Shehata et al. (2013), examined 29 listed companies in Egypt to determine the compliance status with UNCTAD disclosures. (2013 Review of the Implementation Status of Corporate Governance Disclosures: Egypt)

Corporate Governance is relatively new to the corporate culture of Bangladesh. In fact Bangladesh


regulations issued by Bangladesh Bank.

This study on corporate governance on compliance of the bank companies of Bangladesh is based on a sample of 18 top ranked private sector banking companies that are listed by the DSE as of 31st December, 2013. The benchmark used in this study consists of 51 indicators recommended by UNCTAD. The study covers:

A. Analysis of the nature of corporate governance being complied by the banks of Bangladesh;

B. Determination of the quality of the compliance by the banking companies listed in the Dhaka Stock Exchange (DSE);

C. Whether the banks make disclosures in accordance with UNCTAD recommendations;

D. Whether the banks make disclosures as required in

lagged behind its neighbors and global counterparts in this issue. (Gillibrand, 2004) One reason for this is that most companies are family oriented. Poor bankruptcy law, no push from international investor community, limited or no disclosure regarding related party transactions, weak regulatory system, general meeting scenario and lack of shareholder’s participation are some of the individual constituents that were identified by Mumtaz Uddin Ahmed and Abu Yusuf as major hitches towards implementing proper corporate governance in their research study “Corporate Governance: Bangladesh Perspective” (Mumtaz and Yusuf, 2005).

A very few attempts are made to determine the compliance status of Bangladeshi companies with UNCTAD/ISAR corporate governance disclosures. But some authors have determined the compliance with SEC corporate governance guidelines. Golam Muhiuddin, Nayeem Abdullah &

Sabrina Hossain (2008), made an attempt to investigate the gap between current practices of corporate governance in listed companies and SEC guidelines. Rezwana Karim (2010) examined the annual report of listed companies for finding the compliance with corporate governance disclosure set by SEC.

Research Methodology

Background of the Study

For corporate governance compliance Bangladeshi banks must satisfy conditions of Corporate Governance issued by Bangladesh Securities & Exchange Commission (BSEC) vide their notification no. SEC/CMRRCD/2006-158/134/Admin/44 dated 07 August 2012 and Bangladesh Bank’s guidelines BRPD circular no. 16 dated 24.07.2003. The banks must comply with the Companies Act 1994, the Securities and Exchange Rules 1987, the Bank Companies Act, 1991 and the rules and


Bangladesh and how the disclosures required by UNCTAD can be adopted to improve financial reporting in Bangladesh.

There has been no research paper published in Bangladesh on the above, although similar study has been undertaken in several developing countries like Brazil, Egypt and Nigeria as discussed in the literature review section.

Limitations of the Study

The study is on the listed 18 bank companies of Dhaka Stock Exchange. The report may not give a current picture of the situation, as the analysis is based on 2012 bank company reports only. The Islamic Banks are ignored from the analysis, as they are governed by other laws altogether. Islamic Banking is a significant area in the banking industry making the highest profit among private sector banks.

Sample

To conduct the study 18 well-performing banks have been selected as sample. The most important aspect of this study is the use of secondary data from company annual report. UNCTAD Corporate Governance guidelines, SEC guidelines, books of renowned authors and articles published in reputed journals. For the implementation section findings from interviews with top management engaged in finance division of several banks were used.

Extent of Corporate Governance Appliance

The level of disclosure of each bank in the sample was evaluated

against 51 UNCTAD indicators of corporate governance divided into 5 broad groups:

A. Financial transparency

B. Ownership structure and exercise of control rights

C. Board and management structure and process

D. Auditing

E. Corporate responsibility and compliance

To conduct the research, 5-point Likert scale has been used. They are:5 for Strongly Agree4 for Partially Agree3 for Neutral2 for Partially Disagree1 for Strongly Disagree.

After using the Likert scale for scoring, the arithmetic means for all the indicators have been calculated. Indicators, scoring below 4 has been viewed as the areas, where corporate governance disclosures can be improved for financial reporting.

Study Findings

The main findings for the research have been shown in the table in the annexure.

Financial Transparency

It was analyzed that in Bangladesh banking sector the disclosures regarding the following areas were not maintained properly:

The impact of alternate accounting decision

Decision making process for approving related-party transactions and

Rules and procedures governing extraordinary transactions.

According to UNCTAD regulation financial transparency is indicated through fulfillment of 8 criteria given below:

The companies, examined during the FY 2012, had no alternate accounting decision. That’s why they did not disclose any information. The disclosure of decision making process for

Table 1: Financial Transparency

FINANCIAL TRANSPARENCY

Fina

ncia

l and

oper

atin

g re

sults

Crit

ical

acc

ount

ing

estim

ates

Impa

ct o

f alte

rnat

eac

coun

ting

deci

sion

Com

pany

obj

ectiv

es

Dec

ision

mak

ing p

roce

ssfo

r app

rovi

ng re

late

d-pa

rty

tran

sact

ions

Rule

s an

d pr

oced

ures

gove

rnin

g ex

trao

rdin

ary

tran

sact

ons

Boar

d’s

resp

onsi

bilit

ies

rega

rdin

g fin

anci

alco

mm

unic

atio

ns

Nat

ure,

type

and

elem

ents

of r

elat

ed-

part

y tr

ansa

ctio

ns

5

4

3

2

1


approving related-party transactions was not maintained by four banks, while others addressed the disclosure. No banks in their annual report discussed about rules of extraordinary transactions.

Owner’s Structure and Exercise of Control Rights:

The problem areas were disclosures regarding:

Control rights,

Decision making process for approving related-party transactions,

Anti-takeover measures and

Process for holding AGM.

The process for holding AGM is prescribed in the Company Act 1994 that regulates all banking companies. Therefore, it may have been ignored for financial reporting in most of the banks. However related party transaction has been listed by most of the banks. But the process for approval was not mentioned.

Table 2 displays the results of 9 indicators of Owner’s Structure and Exercise of control rights:

Board and Management Process

The scope for improvement lies here in the disclosures regarding:

Duration of directors' contracts Existence of succession plan for

senior executives and board members

Independence of the board of directors

Professional development and training activities for board members

Availability of advisory facility for board members or board committees

Performance evaluation process for board members

Compensation policy for senior executives departing the company because of merger or acquisition.

The duration of directors’ contract was not disclosed clearly. However most banks mentioned who were retiring from the board and were eligible for reelection. This disclosure is deemed important for the interested parties as they may want to know if a powerful and dynamic director would be on the board for long time. Except for Jamuna Bank Limited that vaguely discussed about succession plan, no bank in their publicly available data mentioned about the existence of any succession plan for senior executives and board members. This information should be disclosed to help investors assess about future management process of the bank. The criteria and definition for independent director are not straight-forward in SEC ordinance. Although there is a mandatory requirement of SEC for at least 1/5th of total number of directors, most banks are reluctant to comply with this disclosure. However, they have mentioned in the checklist of Compliance with the conditions imposed by the Bangladesh Securities and Exchange Commission’s Notification No. SEC/ CMRRCD/2006-158/Admin/44 dated 7th August 2012 issued under section 2CC of the Securities and Exchange Ordinance, 1969 that they are fully complied.

Board and Management Process

The scope for improvement lies here in the disclosures regarding:

Table 2: Owner’s Structure and Exercise of control rights

OWNERSHIP STRUCTURE AND EXERCISE OF CONTROL RIGHTS

Ow

ners

hip

stru

ctur

e

5

4

3

2

1

Cha

nges

in s

hare

holin

gs

Con

trol

str

uctu

re

Con

trol

righ

ts

Anti-

Take

over

mea

sure

s

Proc

ess

for h

oldi

ngan

nual

gen

eral

met

ings

Avai

labi

lity

and

acce

ssib

ility

of m

eetin

g ag

enda

Con

trol

and

cor

resp

ondi

ngeq

uity

sta

ke

Rule

s an

d pr

oced

ures

gove

rnin

g th

e ac

quis

ition

of c

orpo

rate

con

trol

in c

apita

l mar

kets


Duration of directors' contracts

Existence of succession plan for senior executives and board members


Professional development and training activities for board members

Availability of advisory facility for board members or board committees


Compensation policy for senior executives departing the

company because of merger or acquisition.

The duration of directors’ contract was not disclosed clearly. However most banks mentioned who were retiring from the board and were eligible for reelection. This disclosure is deemed important for the interested parties as they may want to know if a powerful and dynamic director would be on the board for long time. Except for Jamuna Bank Limited that vaguely discussed about succession plan, no bank in their publicly available data mentioned about the existence of any succession plan for senior executives and board members. This information should be

disclosed to help investors assess about future management process of the bank. The criteria and definition for independent director are not straight-forward in SEC ordinance. Although there is a mandatory requirement of SEC for at least 1/5th of total number of directors, most banks are reluctant to comply with this disclosure. However, they have mentioned in the checklist of Compliance with the conditions imposed by the Bangladesh Securities and Exchange Commission’s Notification No. SEC/ CMRRCD/2006-158/Admin/44 dated 7th August 2012 issued under section 2CC of the Securities and Exchange Ordinance, 1969 that they are fully complied.

Table 3: Board and Management Process

BOARD AND MANANGEMENT STRUCTURE AND PROCESS

Che

cks

and

bala

nces

mec

hani

srns

5

4

3

2

1

Com

posi

tion

and

func

tion

of g

over

nanc

e st

ruct

ures

Com

posi

tion

of th

ebo

ard

of d

irect

ors

Role

and

func

tions

of

the

boar

d of

dire

ctor

s

Gov

erna

nce

stru

ctur

e su

ch a

sco

mm

itees

and

oth

er m

echa

nism

...

Qua

lifica

tions

and

bio

gr a

phic

alin

form

atio

n bo

ard

mem

bers

Type

s an

d nu

mbe

rof

out

side

boa

rd a

nd...

Dur

atio

n of

dire

ctor

s co

ntra

cts

Risk

man

agem

ent o

bjec

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,sy

stem

and

act

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Ecis

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suc

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for s

enio

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Inde

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Exis

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Avai

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and

com

posi

tion

of d

irect

ors

rem

uner

atio

n

Perfo

rman

ce a

nd u

atio

npr

oces

s of

r boa

rd m

embe

rs

Com

pens

atio

n po

licy

for s

enio

rex

ecut

ives

dep

artin

g th

e fir

m...


independent directors have improved and several banks have appointed independent directors, while other indicators mentioned in this report remained the same.

Auditing

For auditing aspect most companies were found highly compliant with UNCTAD guidelines. Lack of disclosures was found in two areas:

Rotation of external auditors

Board confidence in the independence and integrity of external auditors

Requirement for rotation of auditors has been stipulated in the Company Act 1994. It is mentioned there that an audit firm must not work for a bank for more than three years in a row. However, only 2 banks namely UCB and AB Bank mentioned about their external auditor’s years of association with them.

Corporate Responsibility and Compliance

There is room for disclosure improvement in four of the seven indicators:

A Code of Ethics for the Board and waivers to the ethics code

A Code of Ethics for company employees

Policy on "whistle blower" protection

Existence of employee elected director(s) on the Board

For the ethics disclosure 10 out of 18 companies disclosed about ethical requirements for their employees. But as for ethical code for the Board members, only Prime Bank Limited has a code of ethics for their board members and directors.

Discussion and Managerial Implications

The authors went through annual reports of FY 2013. It was noted that the disclosures related to

Table 4: Auditing

AUDITING

Inte

rnal

con

trol

sys

tem

s

5

4

3

2

1

Proc

ess

for i

nter

actio

nw

ith in

tern

al a

udito

rs

Scop

e of

wor

k and

resp

ondi

bilit

ies

for i

nter

nal a

udito

rs

Proc

ess

for i

nter

actio

nw

ith e

xter

nal a

udito

rs

Proc

ess

fora

ppoi

ntm

ent

of e

xter

nal a

udito

rs

Dur

atio

n of

cur

rent

exte

rnal

aud

itors

Rota

tion

of e

xter

nal

audi

tors

Boar

d co

nfide

nce

in th

ein

depe

nden

ce a

nd in

tegr

ityof

ext

erna

l aud

itors

Exte

rnal

aud

itors

’in

volo

vem

ent i

n no

n-au

dit

wor

k and

fees

pai

d to

aud

itors

Table 5: Corporate Responsibilities and Compliance

CORPORATE RESPONSIBILITY AND COMPLIANCE

Polic

y an

d pe

rform

ance

in c

onne

ctio

n w

ith e

nviro

nmen

tal

and

soci

al re

spon

sibi

lity

Impa

ct o

f env

ironm

enta

lan

d so

cial

resp

onsi

bilit

y po

licie

s on

sus

tain

able

dev

elop

men

t

A C

ode

of E

thic

s fo

rat

he b

oard

and

wai

vers

to th

e et

hics

cod

e

A C

ode

of E

thic

s fo

r com

pany

em

ploy

ees

Polic

y on

“Whi

stle

blo

wer

”pr

otec

tion

Mec

han

ism

s pr

otec

ting

the

right

s of

othe

r sta

keho

lder

s

Exis

tenc

e of

em

ploy

eeel

ecte

d di

rect

or (s

)on

the

boar

d

Average

5

4

3

2

1

0


Evaluation Criteria General Discussion/ Justification for disclosure on the subjected criteriaFinancial TransparencyImpact of alternate accounting decision

Users of the financial statements will be willing to know how it will impact the result of the business and/or financial position of the organization if standard practice (accounting decision as guided by the International Accounting Standard or International Financial Reporting Standard) is applied.

Unless the impact of applying alternate decision is not disclosed properly, it will also not be comparable with the result/financial position of the previous year/years of the same organization and with the result/financial position of other peer group organizations.

Decision making process for approving related-party transactions

In line with the disclosure of the related-party transaction the decision making process for approving the same is to be disclosed. It is a fair expectation from the part of common stakeholders that, the related-party should/will not enjoy any preferred facility or concession from the view point of approval process, rate or cost charged, action taken for any non-compliance etc. Such disclosure will also reduce the risk of unusual interference by the related-party in the business decision.

Rules and procedures governing extraordinary transactions

In the absence of any such rules or procedure for extraordinary transaction there will be some risk of error or inconsistency.

Ownership Structure and exercise of Control RightsControl rights The investor/potential investors need to know whether there is any control

rights of any other party in the business in any manner other than shareholding or voting rights.

This disclosure is not that much practical in Bangladesh. However the company may choose to disclose that there is no existence of such control in the company.

Rules and procedures governing the acquisition of corporate control in capital markets

Since acquisition of corporate control in the capital market ideally represents significant/material business decision, proper rules and procedures is important to protect the interest of the company and the stakeholders also need to know whether such rules and procedures are in place in the case of material business decision.

Anti-takeover measures Hostile takeover is not a common phenomenon in Bangladesh. Therefore, this area is ignored completely. However, with the development of private sector business this issue may have impact on share holders’ confidence, as thecompanies will be matured and aggressive.

Process for holding annual general meetings

Ideally, process for holding annual general meeting is guided by the statute and regulatory guidelines of the country. The company needs to disclose that all applicable guidelines for holding AGM have been followed.

Board and management structure and processDuration of directors' contracts

Directors’ contracts must comply with the regulatory guidelines and it should be disclosed so that the user knows the actual period of service and remaining period of his/her service. Sometimes a single person can make big difference and as such having and/or not-having someone as the director may influence/impact the decision of the investor/stakeholders.

Existence of succession plan for senior executives and board members

Every organization should give due importance to the succession plan of the senior executives and board members and the information on the matter is important for the investor. Any sudden vacancies will, definitely, have negative impact on the performance of the business.


Independent directors can see the decision from an unbiased point of view and they ensure check & balance among the board. Such culture/practice enhances good governance in the organization and is also important for the investors' trust and confidence.


Evaluation Criteria General Discussion/ Justification for disclosure on the subjected criteriaProfessional development and training activities for board members

This will help the board to cope with the changes of the local and global business scenario, changes in the economy and the world as a whole. It’s an investor’s concern whether the board is properly updated to lead the business.

Availability of advisorship facility for board members or board committees

The board or board committee may hire expert to take crucial/technical business decision. The company should disclose whether there is any scope of having such advisor and whether there is any such advisor presently on the Board.


Some board members may be reluctant to attending in the board meeting regularly. It’s the moral duty of each of the member to contribute to the business decision and strategic guidelines. So an agreed performance evaluation process for board members will make them more responsible and accountable. Knowing the information of having such evaluation process will enhance the confidence of the investor.

Compensation policy for senior executives departing the company as a result of a merger or acquisition

Senior executives play pivotal role in an organization. They should be given an environment where they will feel secured in all terms. Only then it will be possible for them to deploy all-out effort in the development of the business. Disclosure of such information will give an impression to the investor about the concern of the organization to its manpower.

AuditingRotation of external auditors In Bangladesh the appointment, rotation and changes of the external auditor is

guided by the regulatory guidelines. It should be useful information for the investor that the organization follows proper process for rotation of external auditor.

Board confidence in the independence and integrity of external auditors

The Board should review the external auditors' report and evaluate the level of independence and integrity in their role. Evaluation on the criteria and giving proper disclosure on the issue will help the Board to set further course of action for improvement.

Corporate responsibility and complianceCode of Ethics for the board and waivers to the ethics code

The Board gives strategic direction to the business. But that should be guided by a set of code of ethical standard. An agreed code of ethics will reduce the risk of undue influence and also will enhance good governance in the organization.

Code of Ethics for the company employees

The employees must have a set of code of ethics. All employees will be bound to follow it. In any case employees must not play any role detrimental to the interest of the business, society and the country as a whole. Disclosure of such information may be useful to the user of the financial statements.

Policy on "whistle blower" protection

Bangladesh acceded to the UNCAC (United Nations Convention against Corruption) in February 2007 and is pledge-bound to reform certain laws and frame some more laws to curb corruption and promote good governance.In Article 33 of the UNCAC, the UN encourages signatory countries to incorporate into their domestic legal systems measures to protect whistleblowers and witnesses from any unjustified treatment. Bangladesh Parliament has passed "The Public Interest-Related Information Disclosure (Protection) Act, 2010" but the country has hardly used it to fight against corruption. The banking companies should develop its policy on whistle blower protection and disclose it to its investors.

Existence of employee elected director(s) on the board

It is not an established practice as per present law in Bangladesh.

The Authors are1Lecturer, University of Asia Pacific2Lecturer, Southeast University


Conclusion and Recommendations

Improvement in corporate governance disclosures for financial reporting has become a burning issue partly due to the stepping up of disclosure requirements issued by SEC and Bangladesh Bank in the public and private sector over the last three years and investment interest shown by high profile global investors like JP Morgan, Morgan Stanley, and Black Rock among many others. High degree of professionalism, transparency, and accountability are very essential for building strong public confidence in the banking industry. The recent systemic distress in the stock markets and unpleasant consequences on all shareholders, therefore, call for certain imperatives of good corporate governance for financial reporting. More importantly, for Bangladesh to reap the benefits of effective corporate governance and build a sustainable public confidence in the banking industry there is need to strengthen the enforcement mechanism of the regulatory institutions. The role of SEC and Bangladesh Bank in this regard cannot be over-emphasized. There must be consequences for any actions regarding lack of disclosure and fabricated disclosures. Regulators may still want to consider additional policy options for non-compliance that might include, for example, small fines for failure to report required items, or publishing on the stock exchange websites a list of

non-compliant companies, or alternatively, a list ranking the best company reports. The disclosure requirements of UNCTAD can be used as global benchmark for CG. The disclosure requirements can be assessed and updated keeping in mind global information needs to attract foreign investors and more transparency in financial reporting.

References

1. Mahiuddin, K. M. Golam, Nayeem, Mohammad Abdullah & Hossain, Sabrina (2008), “Corporate Governance Compliance: A study of the listed companies based on CSE-30 Index”, Journal of Cost and Management Accountant Bangladesh, September- October 2008.

2. Cadbury, Adrian, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London, December, 1992

3. Shleifer, Andrei, and Robert W. Vishny (1997). "A Survey of Corporate Governance," Journal of Finance, 52(2), pp, 737–783.

4. Hart, Oliver (1989). "An Economist's Perspective on the Theory of the Firm," Columbia Law Review, 89(7), pp. 1757–1774

5. Sarbanes-Oxley Act of 2002, US Congress, Title I, 101(c)(1), Title VIII, and Title IX, 406

6. "OECD Principles of Corporate Governance, 2004". OECD. Retrieved 2013-05-18.

7. Olayiwola, Wumi K. (2010), “Practice and Standard of Corporate Governance in the Nigerian Banking Industry”, International Journal of Economics and Finance.

8. Oliveira, Marcelle Colares, (2013), “2013 Review of the Implementation Status of Corporate Governance Disclosures: Brazil”, Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting 30th Session, 6-8 November 2013, Palais des Nations, Geneva.

9. Shehata, Nermeen F. (2013), “2013 Review of the Implementation Status of Corporate Governance Disclosures: Egypt”, Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting 30th Session, 6-8 November 2013, Palais des Nations, Geneva.

10. Brown, Robert, Jr. and Casey, Lisa L., Corporate Governance: Cases and Materials, 2012

11. Baker, H. Kent and Anderson, Ronald, “Corporate Governance: A Synthesis of Theory, Research, and Practice” , 2010

12. UNCTAD Guidance for Good Practices on Corporate Governance (2006), United Nations Publication, New York and Geneva 2006.

13. Turnbull, Shann, (1997), “Corporate Governance: Its scope, concerns & theories”, Corporate Governance: An International Review, Blackwood, Oxford, vol. 5, no. 4, pp. 180-205.

14. UNCTAD Secretariat, “Corporate Governance in the Wake of the Financial Crisis-Selected international views”, (2010), United Nations Publication, New York and Geneva 2010.

Introduction

Globalization creates unified businesses with enormous Cross-border transaction whilst corporate tax systems remain nationally based. Governments insist that globalization provides MNEs with more opportunities to manipulate transfer prices and reduces taxes than in the past thus the need for tighter regulation. So there is an increased desire amongst tax authorities faced with tight situations to protect and enhance their revenue base encouraging tighter regulations of MNEs.

That is why, Transfer Pricing becomes a red-hot issue nowadays in Bangladesh due to revenue leakage in the international transactions. The main motto of implementation of Transfer Pricing regulations is to ensure fair share of tax revenue to respective jurisdictions and to protect shifting of profits outside of Bangladesh by manipulating prices.

The rationale for transfer pricing regulations derives from the fact that multinational enterprises are integrated businesses. The primary objective of most MNEs remains profit maximization which can be achieved through internal advantages, assets specifically and cost advantages.

Critical Analysis of Transfer PricingRegulations in Bangladesh

The provisions of transfer pricing have been introduced to ensure that income arising from an international transaction between associated enterprises shall be computed having regard to the Arm’s length price. Any cost or expense allocated, reimbursed or apportioned between two or more connected/associated enterprises under a mutual contract/agreement or arrangement shall also be at an Arm’s length price.

Legal Basis for the Transfer Pricing Guidelines

a. The Arm’s-length Standard and Transfer Price Approaches

The following methods have been prescribed by Section 107C of Income Tax Ordinance, 1984 for the determination of the arm’s-length price:

i. Comparable uncontrolled price (CUP) method.

ii. Resale price method (RPM).

iii. Cost plus method (CPM).

iv. Profit split method (PSM).

v. Transactional net margin method (TNMM).

vi. Such other methods as may be prescribed.



National Board of revenue (NBR) has noted that the ‘other method’ for determination of the arm’s length price in relation to an international transaction shall be any method which takes into account the price which would have been charged or paid or has been charged or paid, for the same or similar uncontrolled transaction considering all the relevant facts and circumstances with or between non-associated enterprises under similar circumstances.

There are no methods noted as of greater or slighter significance. The most appropriate method for a particular transaction would need to be determined having regard to the nature of the transaction, the availability of reliable information, functions performed, assets employed, risks assumed or such other factors assumed relevant.

There are clear practical difficulties in implementing the arm's length principles. For items other than

goods, there are rarely undistinguishable items. Terms and conditions of sale may vary from transaction to transaction. Market and other conditions vary geographically or over time. Some systems give a first choice to certain transactional methods over other methods for testing prices.

In addition, transfer pricing provisions will not apply if the arm’s-length method would result in a downward revision in the income chargeable to tax in Bangladesh that means downward revision/adjustment is not allowed in Transfer Pricing regulation in Bangladesh.

b. What Relationship Denotes Associated Enterprises.

The definition of associated enterprises is broad and two enterprises are said to be associated if one enterprise participates in the management or control or capital directly or

THE MAIN

MOTTO OF

IMPLEMENTATION OF

TRANSFER PRICING

REGULATIONS IS TO

ENSURE FAIR SHARE

OF TAX REVENUE TO

RESPECTIVE

JURISDICTIONS AND

TO PROTECT SHIFTING

OF PROFITS OUTSIDE

OF BANGLADESH BY

MANIPULATING

PRICES.


and appropriate documentation are kept and maintained as per Bangladesh TP regulation. Adequate documentation is characterized by the sufficiency of the details indicating the taxpayers’ compliance with the arm’s length principle as well as the timely manner in which such details are prepared and submitted to tax authorities.

It also provides guidance to assist taxpayers in identifying documentation that would be most helpful in showing that their controlled transactions satisfy the arm’s length principle and hence in resolving transfer pricing issues and facilitating tax examinations.

e. Picking the Suitable Transfer Pricing Method

Therefore, there are no methods in itself right or wrong for any given set of facts and circumstances. Rather, the selection of the most appropriate pricing method to be used to determine the arm’s length character of a controlled transaction is based on determination of the method which, under the facts and

indirectly, or through one or more intermediaries of the other enterprise or the same person and/or persons participates in the management or control or capital directly or indirectly, or through one or more intermediaries of both enterprises.

Besides the above relationship certain other significant conditions are mentioned in TP regulations upon meeting which two enterprises are deemed to be associated enterprises.

However, there are practical challenges of identification of an associated enterprise in transfer pricing study. Full disclosures on the group structure, connection tree or ownership profile needs to be reviewed carefully by an auditor who are engaged for audit of TP documentation.

c. International Transactions Covered in Bangladesh TP Regulation

Those transactions entered by the person with associated enterprises, either or both of whom are non-resident, in the nature of

purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses, assets, financial position or economic value of such enterprises.

Direct or indirect cross-border transactions are included and domestic transactions between associated enterprises are excluded in Bangladesh TP regulation.

d. Documentation Obligations

Per section 107E and rule 73 it is mandatory for every person who has entered International transactions required to keep and maintain such documents and information, if in aggregate book value of international transactions exceeds BDT 30 million in the income year.

It will make easier for tax authorities to review a taxpayer’s transfer pricing analysis, justification and thereby contribute to avoiding a dispute or to a timely resolution of any transfer pricing disputes that may arise if necessary


circumstances of the transaction under review, provides the most reliable measure or best estimate of an arm’s length result.

In determining the reliability of a method, the two most important factors to be taken into account are:

1. The degree of comparability between the controlled and uncontrolled transactions; and

2. The coverage and reliability of the available data.

f. Which is the “Best” Method?

The most appropriate method for determining the arm’s length price of an international transaction shall be the method that provides the most reliable measure of an arm’s length price in relation to the international transaction under the facts and circumstances.

g. Rationale for Comparability Analysis

The arm’s length principle is based on a comparison of the prices or margins embraced or obtained by related parties with those adopted or obtained by independent parties engaged in similar transactions.

This concept of comparability analysis is used in the selection of the most appropriate transfer pricing method, as well as in applying the selected method to arrive at an arm’s length price. It thus plays a central role in the overall application of the arm’s length principle.

The main challenges of the comparability analysis is to find out reliable and accurate comparable data relating to the uncontrolled international transaction in the same industry in Bangladesh.

However, our TP regulation allows us to use out of country databases. Using of out of country data, it raises questions to the users on reliability, accuracy and consistency of the databases and data used.

Moreover, there are limitations on publicly available financial data which are mostly scattered in Bangladesh. But Comparability analysis in transfer pricing study requires databases in a specific forms and manner.

h. Choice of Tested Party for the Comparability Analysis

In order to select the most appropriate method for determining the arm’s length price or operating results, it is first necessary to select the “tested party”. The tested party is the participant in a related party transaction whose prices


j. Statement of International Transactions (TP Return)

Every person who has entered into even a single international transaction shall furnish a statement of international transactions along with the return of income. National Board of Revenue prescribed a specific format rule 75A for submission of such return.

The statement has two parts, one part mostly deals with revenue and expenses items related to profit and loss accounts and another part deals with balance sheet items that means capital nature which has increased and decreased in an income year.

k. Chartered Accountant’s Report

It is mandatory for every person to obtain report from a Chartered

charged or paid or whose profit margins will be tested using the most appropriate method. The tested party is ordinarily the party whose prices or profits can be verified using the most reliable data and requiring the fewest and most reliable adjustments and for which reliable data regarding uncontrolled comparables can be located.

The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available.

i. Challenges in Comparability Analysis (Functional Analysis)

To suit the functional analysis in comparability analysis is the main challenge ever faced by the assessee in practice. Functional

analysis is the cornerstone of any transfer pricing exercise. Its purpose is to obtain an understanding of the operations of an enterprise with its associated enterprises and of the respective roles of the parties to the controlled transaction under scrutiny.

Functional analysis is utmost and foremost important for the comparability analysis which typically includes documentation of functions performed, assets employed and risks assumed (also called FAR analysis) with respect to the international controlled transactions of an enterprise. Functional analysis seeks to identify and compare the economically significant activities and the responsibilities undertaken by the independent and the associated enterprises.

The Author is a Member of the ICAB


Accountant in respect of International Transactions, if aggregate book value of international transactions exceeds BDT 30 million between associated enterprises.

Chartered Accountant’s report denotes absolute assurance required to be issued by a Chartered Accountant in respect of correctness of Statement of International Transactions entered into by the assessee which seems challenging for the auditor who are going to issue such report.

l. Burden of Proof

The burden of proof in tax litigation refers to the necessity of

favorably proving the truth of facts alleged by a litigant on a superiority of evidence. However, it is important to be able to identify the party with the burden of proof when a tax audit is conducted or when the transfer pricing assessment is made; when a transfer pricing assessment is disputed it may ultimately end up in court.

The burden of proof to establish the arm’s length nature of international transactions is generally with the taxpayer. Once the taxpayer discharges this burden, the burden shifts to the tax authorities to establish that the arm’s length price has not been determined in accordance with the

provisions of the TP law or that the information or data used in the computation is not reliable, accurate or correct.

As Transfer pricing regulations is new to Bangladesh and the practice has not been started yet, being a developing country like Bangladesh, there will be some challenges initially to implement full-fledged Transfer Pricing concepts.

The effective management of public finances – known as public financial management (PFM) – is fundamental to the development and growth of individual economies. As populations increase, as resources become scarcer or as economies grow more complex, the importance of PFM rises.

One reason PFM is so essential is that the tax-paying citizens of any country expect their public finances to be well-managed. They expect them to be allocated effectively, used to deliver quality services, and to provide a secure and stable environment in which society may exist and prosper. They also expect finances to be collected and expended fairly and according to the law, with surpluses, deficits and debt levels understood and in control.

Additionally, the private and public sectors are highly inter-dependent and must have confidence in each other if they are to work together to grow cities and nations. This kind of confidence requires government accountability and transparency in both decision-making and reporting.

Why Public SectorFinancial Management?

When such expectations are not met – when confidence is lost – it can have significant consequences. Foreign investment may become difficult to attain, the cost of public debt may rise and donor funds may be harder to attract. This type of fallout can, in turn, reduce employment and economic growth, affecting the standard of living for many citizens. In the worst case, it can eventually lead to significant unemployment or poverty, accompanied by social unrest.

Governments are responsible to their citizens and taxpayers for implementing effective systems of public financial management and for utilising those systems to safeguard, and ultimately enhance, a country’s economic sovereignty.

The Eight Key Elements of PFM Success

We have found that eight key elements are necessary to create a comprehensive and coherent system of PFM. Please note that these eight key elements do not purport to establish best practice or to be a detailed checklist specifying exactly which elements should be in place. They simply


The Climatefor Reform

Fiscal and

Policy Framework

Reporting

Governance -The Legal

andInstitutionalFramework

Governance - The Values System

Scrutinyand

Assurance

Capacityand

Capability

PerformanceManagement

Eight Key Elements

of PFM Success


aim to stimulate a dialogue that, in turn, may establish the most appropriate choices for different circumstances.

Depending on the stage of PFM development in any given jurisdiction, the focus may be on some elements rather than others. Additionally, certain elements may be considered as a prerequisite to other elements and certain elements may be regarded as more

significant than others in achieving success. The more important elements will vary from jurisdiction to jurisdiction, reflecting each jurisdiction’s unique history, circumstances and culture. Accordingly, in the introductory stages each element must be deemed important. We also note that in jurisdictions with limited PFM systems, a more comprehensive process of reform will be necessary than in others.

THE PRIVATE AND PUBLIC SECTORS ARE HIGHLY INTER-DEPENDENT AND MUST HAVE CONFIDENCE IN EACH OTHER IF THEY ARE TO WORK TOGETHER TO GROW CITIES AND NATIONS. THIS KIND OF CONFIDENCE REQUIRES GOVERNMENT ACCOUNTABILITY AND TRANSPARENCY IN BOTH DECISION- MAKING AND REPORTING.


Reproduced from February 2014 Bulletin of the Confederation of Asian and Pacific Accountants (CAPA)

Description of the Eight Key Elements

The Climate for ReformGovernance -The Legal and Institutional Framework

Governance - The Values System Capacity and Capability

Fiscal and Policy Framework Performance Management

Reporting Scrutiny and Assurance

The first element of PFM success is necessarily the widespread recognition and acknowledgement that change is required, along with a commitment from key stakeholders to effect the necessary reforms.

The second essential element of PFM success is that of a well-defined legal and regulatory framework: one that facilitates the implementation of efficient and effective public-service arrangements. Appropriate institutions must be in place, as well as a set of recognised codes, standards and practices.

The public entrusts taxpayer funds to the government and expects them to be used appropriately. Yet the appropriate attitudes and behaviours are not always culturally embedded. The third key to PFM success is therefore an open, honest and responsible approach to the way services are planned, executed and reported, which signifies a strong intent to work in the public interest.

The fourth key to PFM success is ensuring that the appropriate resources are available to support the application of each aspect of PFM, particularly in terms of people and systems. “Without the necessary systems and skilled personnel to implement them, no PFM reform process can be successful”.

“The main output of PFM systems is the budget, through which public policies are financed.”2 A credible budget is essential, reflecting the expected financial impact of the government’s policies and its use of resources. As a result, the fifth element of PFM success is that of a clearly defined and comprehensive fiscal and policy framework.

The sixth key element is the successful implementation of the budget, both in macro terms and at the organisational level. The budget must be well managed, monitored and reported to achieve the anticipated outcomes, with three things – value for money, the efficient and effective delivery of services, and financial compliance – acting as overriding performance principles.

Empirical evidence is emerging that highlights the positive relationship between the degree of fiscal transparency and measures of fiscal sustainability. Not surprisingly, then, appropriate, transparent reporting against planned outcomes is the seventh key element of PFM success, helping governments be accountable for their fiscal actions.

Reported information must be reliable, whether for purposes of transparency, accountability or decision making. It must also be capable of withstanding scrutiny from different levels and forms of review. As a result, the eighth key element of PFM success is that of subjecting information to effective scrutiny and assurance, thus generating confidence in its veracity. Confidence is further enhanced by subjecting this information to external, independent audit.


The Institute of Chartered Accountants of Bangladesh (ICAB) is the premier accounting body of Bangladesh. The professional qualification it offers is highly prized. Membership of ICAB is recognition of high standards and exceptional skills. Under a twinning project, the syllabus of ICAB has been revised and is equivalent to that of the Institute of Chartered Accountants in England and Wales (ICAEW), the premier global accounting body.

ICAB publishes a quarterly Journal, The Bangladesh Accountant, to keep its members up to date on technical issues and global developments in the profession. It is regularly read by all the members of ICAB both in Bangladesh and across the world. Circulation includes many major companies and financial institutions, governmental and semi-governmental organisations, NGOs and international accounting and professional bodies.

The journal is also read by other professionals related to the accounting profession, those in businesses and other organisations, students of Chartered Accountancy and all those who wish to keep abreast of developments in the accounting profession.

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