State to State Arbitration Process and Foreign Investment Dispute Settlement

by Tahmidur Remura Wahid | Apr 17, 2023 | 2023, Law

State to State Arbitration Process

Arbitration has been defined as “a third-party dispute resolution mechanism that typically results in an award binding on the arbitration parties.” State-to-state arbitration is based on the parties’ mutual will and has been defined as “the resolution of differences between States by judges of their own choosing and on the basis of respect for law.”

It is similar to international court proceedings in that it requires the parties’ consent, though the time at which consent is provided and the scope of the consent can vary significantly.

An undertaking to arbitrate can result from an agreement to arbitrate before or after a dispute arises, and it is based on legal obligations that must be fulfilled in good faith. State-to-state arbitrations differ from general commercial arbitrations in that they may include political considerations as well as purely commercial issues.

Arbitration is similar to the court system in some ways. Similarly to the Court, an arbitrator is a judge who participates in the arbitration process. However, an arbitrator is a neutral third party chosen by both parties who is primarily responsible for resolving the dispute between the parties.

After hearing the claims and scrutinizing the supporting documents, the arbitrator renders a decision on the disputed matter. To avoid unintended consequences, the parties involved can file their claim on their own or hire an expert in this field.

The numerous benefits are the primary reasons for Arbitration’s growing popularity. Some of the key benefits of hiring an arbitrator in Bangladesh and choosing arbitration for dispute resolution are as follows:

Arbitrator Selection:

The parties involved in the dispute can choose an impartial person from the panel of arbitrators to serve as the arbitrator.
Convenient forum of hearing: The seat for arbitration can be chosen by the parties at their discretion.

Practical adaptability:

The parties or their lawyers can submit the necessary documents or evidence to support their claim in any pre-agreed-upon manner.
Confidentiality is one of the most important aspects of arbitration. Many parties are hesitant to settle a dispute in open court. Arbitration allows a small number of people to resolve a dispute, ensuring that the parties’ privacy is protected.

Quick: The arbitration process is much faster than the traditional court system.
Less expensive: The arbitration process is less expensive than traditional litigation.

In some ways, arbitration is like the court system. An arbitrator is a judge who takes part in the arbitration process, much like the court does. The primary responsibility for resolving the conflict between the parties, however, rests with an arbitrator, a neutral third party chosen by both parties.

The arbitrator makes a determination regarding the dispute after hearing the claims and reviewing the supporting documentation. The parties involved can file their claim on their own or hire a specialist in this field to avoid unintended consequences.

The main factors influencing arbitration’s rising popularity are its many advantages. The following are some of the main advantages of using arbitration to resolve disputes in Bangladesh:

Selection of the Arbitrator:

From the panel of arbitrators, the parties to the dispute may select an impartial individual to serve as the arbitrator.
Convenient place of hearing: The parties are free to choose the location of the arbitration.

Practical flexibility:

The parties or their attorneys may submit the required paperwork or proof of their case in any prearranged manner.

One of the most crucial aspects of arbitration is confidentiality. In open court, many parties are reluctant to reach a resolution. A dispute can be arbitrated by a small group of individuals, protecting the parties’ privacy.

Quick: Compared to the conventional court system, the arbitration process moves much more quickly.
Less expensive: Compared to traditional litigation, arbitration is more affordable.

The use of arbitration for resolving disputes involving foreign investments dates back to the time before investor-state arbitration under BITs gained popularity.

However, at the time, it may not have been the most popular method of dispute resolution because, given the size of the sums at stake, a court or judge would have preferred the parties to resolve the cases privately between themselves.

In the latter half of the eighteenth century, a number of ad hoc claims commissions and arbitral tribunals made decisions regarding the status of property owned by foreign nationals. Positive developments in this direction include a push for the idea of equal treatment for visitors and a commitment to refraining from meddling in the internal affairs of the host nation.

Even though the League of Nations made efforts, it wasn’t until the end of World War II that a significant international legal framework for the protection of investor rights was developed.

In documents like the OECD’s Draft Convention on the Protection of Foreign Property and the Havana Charter for an International Trade Organization, which failed to win international acceptance and did not go into effect after the Second World War, efforts were made to systematize the field of international economic law.

Through the 1959 Draft Convention on Investments Abroad, which sparked debate but never went into effect, efforts were also made outside of the government.

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards 158 and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 159 were both signed in the interim, and among other significant developments, the UN General Assembly adopted the Charter of Economic Rights and Duties of States in 1974.

Expansion of IIA

The expansion of IIAs globally has encouraged research into the IIAs’ provisions. Numerous researchers have claimed that IIAs, especially BITs, exhibit a uniform nature and that a BIT’s provisions are set in stone.

However, opposing viewpoints point out that IIAs are frequently bilateral and that negotiations are conducted clause-by-clause, with significant portions of the IIAs having undergone new negotiations. As a result, the treaties that the parties negotiate differ significantly.

Even the dispute resolution provisions, which are regarded by some as the IIA’s most significant provision overall (163), differ from treaty to treaty by relatively small but significant margins.

While some treaties permit direct access to international arbitration, others are more conservative and demand that disputes be first resolved in domestic courts before being brought before investor-state arbitration. Another significant difference is whether a given treaty permits arbitration under the ICSID Convention, one of the most popular methods for resolving investment disputes.

Several trade agreements and other agreements with provisions for investment protection have been signed in recent years. The signing of trade agreements with an investment chapter, like the North American Free Trade Agreement (NAFTA) or a sector-specific agreement like the Energy Charter Treaty (ECT), is a growing trend among nations.

An indication of a potential return to the old Freedom, Commerce, and Navigation (FCN) treaty framework, which contained treaties with a broad scope, is the general increase in complexity of IIAs in the latter part of the twenty-first century as a result of the shift from straightforward BITs to trade and investment agreements.

Another trend is the development of particular BIT models that have been mandated by various nations and international organizations like the OECD.

Minor parameters such as liberalization, minimum standards under international law, and an emphasis on the individual also differ between the two main BIT models, the American and European BITs.

168 BITs have also been modified to include specific provisions or explanations, such as explicit provisions governing the application of the MFN Clause in dispute resolution clauses, among other things, in the UK-Ethiopia BIT of 2009169 and the annexure on the definition of indirect expropriation.

State to State Arbitration Under IIAs as a Dispute Resolution Mechanism

Arbitration and adjudication are the two most popular legal methods of dispute resolution. State-to-state arbitration and investor-state arbitration are both possible forms of arbitration in IIAs; however, the study primarily focuses on state-to-state arbitration.

State to State Arbitration in IIAs: Its History

One of the earliest references to arbitration can be found in the 1794 Amity, Commerce, and Navigation Treaty, which is where the compromissory clauses establishing state-to-state arbitration as a method of dispute settlement in modern IIAs have their roots.

The FCN treaties were mainly signed by the USA and mostly concerned business-related issues. The first FCN treaty was signed between the USA and France in 1778, and their history dates back to the eighteenth century.

The process of signing these treaties continued, with examples including the USA-Brazil FCN treaty in 1828, the USA-Germany FCC treaty in 1923 and later after the Second World War, the USA-Italy FCN treaty in 1948, the USA-Ireland FCN treaty in 1950, and the USA-Belgium Friendship, Establishment, and Navigation (FEN) treaty in 1961, to name a few.

After the Second World War, the FCN treaties expanded to include investment protection. They served as a model for the 1959 Draft Convention on Foreign Investments, which later became the modern BITs.

FCN treaties can still be used for investment claims, as demonstrated by the ELSI case, which was brought before the ICJ based on a breach of an FCN treaty based on the compromissory clause in the treaty. More than 40 FCN treaties are still in force, making them important on their own. Even in the midst of the discussion on investment arbitration based on IIAs.

The lessons learned from FCN treaties can also be applied to future investment treaty negotiations because they shed light on how to include a variety of topics in a single treaty and perhaps even non-economic issues like human rights.

They served as the American alternative to European BIT programs until the 1960s, with a much wider area of coverage than BITs, including human rights, intellectual property rights, and navigation rights.

The FCN treaty program was finally abandoned by the USA in 1968 as Europe advanced due to the competitive advantages provided by the BITs. 186 state-to-state arbitration clauses, now known as the compromissory clause, came to be integrated into BITs as a legacy from the FCN treaty program.

Since the first BIT was signed between Germany and Pakistan, state-to-state arbitration has been included in IIAs through compromissory clauses; as of now, all German BITs do as well.

The 1959 Draft Convention on Investments Abroad, also known as the Hermann-Shawcross Convention, contained a similar compromissory clause. Long after the first BIT with investor-state arbitration was concluded in 1968, a compromissory clause with state-to-state arbitration served as the only method of third-party dispute resolution in some IIAs until 1984–192.

However, the said compromissory clause has rarely drawn attention, a fact that can be attributed to the provision’s limited success and a common belief that it could only cover institutional issues of BIT interpretation or issues of racial discrimination.

State-to-state arbitration is a dispute resolution option in the WTO as well as most IIAs at the time of this study (occasionally as an option alongside other dispute resolution options like consultation, negotiation, or referral to international courts and tribunals). State-to-state arbitration (or litigation) is frequently the only means of binding dispute resolution in investment treaties, especially for nations with a large number of older treaties, like Germany or Switzerland.

In fact, state-to-state arbitration as a ‘binding’ form of dispute resolution is currently experiencing a resurgence with support from both states and investors, but as previously mentioned, very few investment treaties actually provide for recourse to ISDS. However, states parties to an IIA who have agreed to a compromissory clause with recourse to arbitration are required by law to conduct the arbitration in good faith as and when any disputes arise.

How the State to State Arbitration Process Works

The establishment of the state-to-state arbitral tribunal is a crucial step in the use of the compromissory clause under an IIA. The establishment of the SSAT marks the start of the second phase of the arbitration process, which consists of three phases: the execution of the agreement to arbitrate; the proceedings before the arbitrator; and the enforcement proceedings.

An arbitral tribunal established under international law is based on some instrument of international law, such as a treaty, which governs its operation. 61 The formation of the SSAT marks the start of the second phase.

The conclusion of an IIA with a compromissory clause mandating state-to-state arbitration already completes the first phase of an interstate arbitral process, and the third phase is largely outside the scope of this study. The second phase and main topic of this study, the operation of the arbitral tribunals, is covered in the following section.

Arbitrability as a Crucial Component of Arbitration

The word “arbitrability” is typically used to refer to the conditions or prerequisites that must be met in order for arbitration to proceed. The term refers to a number of matters, including inquiries regarding the existence of an arbitration agreement, its legality, and the scope of the dispute covered by the agreement.

The criteria for determining arbitrability are frequently used to highlight the challenges to arbitral jurisdiction that courts may take into account.

When it comes to international arbitration, it is up to the arbitral tribunal to decide whether a specific dispute can be arbitrated based on the law governing the contract and the arguments put forth by the parties.

Arbitration conducted in accordance with the Model Rules, which mandate that the ICJ determine whether a dispute can be arbitrated in the absence of a tribunal, is an exception to this rule. Due to increased recognition of the parties’ autonomy and the arbitral tribunal’s authority to make its own decisions, it is not anticipated that this provision will be used anytime soon.

Principles Relating to an Arbitral Tribunal’s Jurisdiction

The definition of jurisdiction is the “ability of a particular forum to hear a case.” The question of “who decides” whether an arbitral tribunal has jurisdiction in a particular case is debatable and is based on two doctrines: separability and competence-competence.

It is an assessment of whether the court or tribunal has the authority to decide on a case and render a decision that will be binding on the parties. Both of these tenets stem from the parties’ desire to advance arbitration as a method of resolving disputes.

The issue of whether an arbitral tribunal has jurisdiction over a dispute is typically resolved in three steps in cases of commercial international arbitration.

The first phase of the process may involve court proceedings with a request to refer the dispute to arbitration from one party; the second phase involves the arbitral tribunal determining its own jurisdiction; and the third phase involves a court’s determination of the tribunal’s jurisdiction in the event that the tribunal’s decision is challenged in a competent court.

When neither party chooses to use the first stage, the parties frequently go straight to the second phase.

The jurisdiction of the arbitral tribunal is typically decided in the second stage of state-to-state dispute arbitration under IIAs. As the jurisdiction of an arbitral tribunal is based on the arbitration agreement, this is based on the provisions of the IIAs.

In addition to determining its subject matter (rationae materiae) and temporal (rationae temporis) jurisdiction, the SSAT must also determine whether a dispute exists and whether the state has given its consent. The “intention of the parties” to arbitrate a specific dispute must also be established.

Arbitration Clause Separability:

The separability doctrine holds that the arbitration agreement can be regarded as an agreement separate from the main contract, preventing a situation where the obligation to arbitrate would not exist if the main contract were found to be invalid.

The principle is reflected in domestic laws and is known as the “who decides” question, holding, in essence, that when parties enter into a main contract and include an arbitration clause, the arbitration agreement is deemed to be part of that main contract.

In state-to-state arbitration, the arbitral tribunal itself has the authority to judge whether the treaty is valid, rather than a court. Although it is a rare occurrence, the award will be automatically void if a compromissory clause of a treaty is found to be invalid.

The arbitration clause for such a determination will be considered independent of the treaty, and an arbitral tribunal is given the authority to decide whether the treaty is valid. The arbitration clause itself will not be rendered invalid by a ruling that the treaty is void.

The contract’s arbitration provision may also be contested under the separability doctrine. It is important to do this in order to ensure that the arbitration clause on which the parties’ consent to the arbitration is based can be carefully examined before the entire dispute is referred to arbitrationtion is based can be carefully examined before the entire dispute is referred to arbitration.

In state-to-state arbitration, the arbitral tribunal is given the authority to consider any challenges to the validity of the clause, whereas in domestic arbitration, this function is typically carried out by a court.

Challenges to the Tribunal’s Jurisdiction

Any international tribunal’s authority to hear a case involving state parties is based on the delegation of authority by “the parties in dispute” and “only to the extent that the states have accepted it.”

The terms of the agreement between the parties to confer the jurisdiction thus limit the tribunal’s authority.

The parties carefully consider the actual scope and the authority that the jurisdictional clauses in the treaties give the tribunal.

In most cases, a challenge to a state-to-state arbitral tribunal’s jurisdiction “must be raised not later than in the statement of defense or, with respect to a counterclaim, in the reply to the counterclaim”

The arbitral tribunal may decide to address the jurisdictional issue as a preliminary question or, in some cases, directly in the final award. It can be argued that a jurisdictional challenge should typically be raised at the first hearing.99 In any case, a challenge to jurisdiction may cause the proceedings to be delayed100, and in those situations where its jurisdiction is contested, the SSAT may need to address the problem.

State Parties’ Mutual Consent to Arbitration

A key factor in determining jurisdiction is the states’ agreement to arbitrate, and no outside party can compel a state to participate in arbitration proceedings. Not only is consent required for establishment, but it is also necessary for the tribunal’s jurisdiction.

States are typically free to decide how to give their consent to arbitration, and no state may be forced to use arbitration or any other dispute resolution method without their consent. The treaty that the parties sign as a commitment to arbitrate or the treaty that creates the arbitrating institution is what governs state-to-state arbitrations the most.

A treaty, protocol, declaration, or other type of agreement wherein the parties agree to submit the disputes before the tribunal without requiring further consent from the other party in the future may be used to express the consent at an earlier stage before the dispute is submitted to the tribunal.

The most common way for states to give their consent for investor-state arbitration is through IIAs. The IIAs typically contain a “compromissory clause” that, as previously stated, “is a provision in a treaty which provides for the settlement by arbitration of all or part of the disputes which may arise regarding the interpretation or application of that treaty.”

This clause pertains to consent for state-to-state arbitration.109 As seen in the USA-Ecuador BIT, some treaties also include additional clauses that state the parties “prior consent to arbitration.”

Explicit consent is also common in many IIAs that Brazil has signed with nations in Latin America, usually through a separate clause that only applies to state-to-state arbitration.

However, there is no explicit advance consent for state-to-state arbitration in the form of a compromissory clause or an explicit consent clause in a few extremely uncommon treaties, such as the Brazil-Malawi ICFA or the new South African investment act.

Before beginning any arbitration proceedings in these situations, it might be necessary to obtain consent through a new agreement.

A state-to-state arbitration may also be started between the parties through an ad hoc agreement reached later on by the parties, which may be in the form of a compromis, even though compromissory clauses may be a common practice in treaties.

Procedures Must Support Arbitration as a Dispute Resolution Method Arbitration as a Dispute Resolution Method Needs to Be Supported by Procedural Provisions.

While compromissory clauses express the parties’ agreement to arbitrate, they frequently contain no information about the specifics of how the arbitration will be conducted, such as the applicable law or the rules of the arbitral tribunal. While some treaties contain in-depth information about the rules of procedure and method, relevant law, and the administrative aspects of the tribunal, others may call for the conclusion of a special agreement (compromis) to address these matters.

The state parties have a great deal of discretion over how the arbitration will be conducted, including choosing the rules and laws that will apply as well as determining the parameters of the award.191 Even then, a compromis or the treaty itself may not address these matters and result in perplexing circumstances, some of which are covered below.

Relevant Law for State to State Arbitration

State-to-state arbitration is typically governed by rules of public international law (lex arbitri193 and lex causae194), and in the absence of an express choice of law, tribunals have used international law as the applicable law.195 State Parties to the Agreement are free to choose the laws that will govern state-to-state arbitration and may do so in place of any applicable customary international law.

Due to the principle of jurisdictional immunity, the generally accepted rule that the law of the seat applies to arbitration is not always true for a state-to-state arbitration, and the IIA may specify the applicable law even when mentioning a seat of jurisdiction. In accordance with their preferences, the parties may also choose to alter the applicable customary international law principles governing state-to-state disputes.

They may also, in exceptional circumstances, give the SSAT express authority to decide a dispute ex aequo et bono199, but a tribunal may not apply this principle without express permission.200
IIAs’ compromissory clauses make references to various sources of relevant law.

For instance, the Australia-Uruguay BIT, 2019, refers to the BIT, other international agreements between the parties, and generally acknowledged principles of international law as the applicable law, whereas the US Model BIT from 2012 refers to “applicable rules of international law.”

The compromissory clause commonly refers to international law in some way as the applicable law, but there may be other sources of law attached to it that the SSAT must also take into account.

These clauses that list “international law” as the applicable law generally imply that the dispute resolution process will be governed by international law and that it must be possible to resolve the dispute in accordance with international law.

In any case, the VCLT’s rules for treaty interpretation and application, which are regarded as embodying primary international law, must be included in and followed by these rules of international law.

Now that international law lacks a legislative body like that of nations, it derives its “legal norms” from a variety of sources, including treaties, judicial rulings, treatises, and academic articles.

As a result, there might be some misunderstanding as to the sources that a tribunal that has been requested to resolve a dispute based on “relevant rules of international law” under Art. 31 (3)(c) VCLT may consider. If further clarification is not provided by the IIA itself, such conflicts may be resolved by the tribunal through a procedural order following consultation with the parties.

As was the case in the IUSCT, where the parties agreed that the legal system of a third country, the Netherlands, governed certain aspects of the arbitration, the parties to a dispute may choose to change the law governing the arbitration and may “waive their sovereignty.” In exceptional circumstances, state-to-state arbitration may also be governed by local or domestic law of a state, but only to the extent that is agreed upon by the parties.

When it comes to the applicable law, agreements sometimes only choose to mention the rules that may govern the arbitration. For guidance on the appropriate law in these situations, the arbitration rules are assessed.

According to the PCA Optional Rules on Arbitration between Two States, for instance, disputes would be resolved in accordance with international law by applying:

(a) International conventions, whether general or specific, establishing rules expressly recognized by the contesting States;
(b) International custom, as proof of a general practice accepted as law; and
(c) The general principles of law recognized by civili

Additionally, PCA Optional Rules make clear that the tribunal must use the legal authorities listed in Art. 38 of the Statute of the ICJ when no special agreement has been made between the parties or when there is no rule that applies to the dispute. The Model Rules also include similar provisions regarding the applicable law to be applied in a dispute in the absence of guidance.214 If both parties agree, tribunals may also rule on a case ex aequo et bono.

However, choosing a set of rules does not guarantee that the applicable law guidance in those rules will be followed; alternatively, separate applicable law guidance may be specified.

Additionally, although choosing a particular forum or institution may indicate a preference for the applicable law, this is not an absolute rule, and the parties may agree to modify the applicable law.

As a result, the parties may in some circumstances decide to grant the tribunal broad discretion over the law, rules, and procedure.

The Iran-US Claims Tribunal (IUSCT), which serves as a state-to-state arbitration tribunal, is one example where no opinion was given regarding the legal framework for the state-to-state interpretative disputes.219 If a dispute relates to a claim for protection under a treaty, the parties to the treaty “may be deemed” to have made an implicit choice for the determination of the dispute under international law.

However, if the parties to an IIA are not recognized as states, as in the case of some Taiwanese BITs, where the parties have reserved the right to decide the terms and conditions later, or have not specified the applicable law, this implicit choice may not be applicable. Before the start of the proceedings, clarification from the parties may be necessary in this case regarding the applicable law.

Applying Rules

The arbitral tribunals must decide disputes in accordance with the applicable arbitration rules, and these rules also have an impact on how the arbitration proceedings are conducted. State-to-state arbitration rules are either (a) established by the tribunal, (b) outlined in the treaty or created through an agreement between the parties, or (c) referred to in pre-existing rules like the Model Rules, UNCITRAL Rules, or PCA Rules.

When a treaty names an institution—such as the SCC, the LCIA, or even an international tribunal like the IUSCT—the state-to-state arbitration proceedings may also be governed by the rules of that institution.

The state parties have the freedom to choose the rules of procedure, and they are free to specify an institutional location for arbitration at their discretion. The tribunal, meanwhile, is free to choose its own procedure and may even set alternative rules.

To fulfill its obligations under the 19581 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), Bangladesh enacted the Arbitration Act in 2001. For both domestic and international arbitration with a seat in Bangladesh, the Act established a single, unified regime.

The Act contains provisions for the enforcement of foreign arbitral awards as well as rules governing the oversight of international arbitration.

The Act is largely based on the UNCITRAL’s (United Nations Commission on International Trade Law) Model Law recommendation for commercial dispute resolution through arbitration and enforcement award, which has been adopted in 80 States and a total of 111 jurisdictions. Bangladesh is unquestionably included by this statute in the current global commercial arbitration trend.

Since the Act was passed in 2001, almost 22 years have elapsed. Bangladesh has yet to be successful in establishing itself as a desirable location for international arbitration. Despite the Act 2001 being based on the Model Law, there are many significant areas where it departs from the Model Law. In many instances, these departures from the Model Law have an impact on Bangladesh’s potential to serve as a preferred venue for international arbitration.

For instance, Bangladesh designated the High Court Division (HCD) of the Supreme Court of Bangladesh to oversee the operations of an arbitration tribunal with a seat in Bangladesh in accordance with the Model Law’s recommendation.

The ability to intervene in the efficient operation of the international arbitral tribunal was expanded by the HCD’s designation, among other things. The current Act broadens the scope of judicial intervention, contrary to the Model Law’s goal of minimizing judicial interference with the operations of the international tribunal.

In addition, Bangladesh’s legal system, which is based on common law and has a written constitution, gives it broad supervisory authority over the operations of any international arbitration with a Bangladeshi seat.

 Are you planning to do arbitration or  looking for alternative dispute resolution remedies in Bangladesh?

Tahmidur Rahman Remura Wahid TRW is a full-service law firm that has been dealing with arbitration consisting of a wide range of topics at both international and local level. We have barristers that have specialised in  international commercial arbitration from the United Kingdom and accredited civil-commercial mediators. 

If you require any assistance or consultation, please visit our office or contact us at +8801779127165 or +8801847220062 (WhatsApp) or by email- info@trfirm.com.

GLOBAL OFFICES:
DHAKA: House 410, ROAD 29, Mohakhali DOHS
DUBAI: Rolex Building, L-12 Sheikh Zayed Road
LONDON: 1156, St Giles Avenue, 330 High Holborn, London, WC1V 7QH

 Email Addresses:
info@trfirm.com
info@tahmidur.com
info@trwlaw.co.uk

24/7 Contact Numbers, Even During Holidays:
+8801708000660
+8801847220062
+8801708080817

Payments Trends in 2023

by Tahmidur Remura Wahid | Apr 6, 2023 | 2023, Law

Payments Trends and Cross-border transactions

Each transaction consists of two components: receipts and payments. This is the accounting golden rule. The same applies to international transactions. For example, a buyer makes payments to a seller, who then receives payment for the transaction. On the other hand, an importer transfers funds to a bank for international transfer to the supplier. Thus, a transaction occurs.

It is commonly believed that hundi circumvents legal transactions. In order to conceal money laundering, formal channels can also facilitate illicit transactions by over-invoicing imports and under-invoicing exports. It is possible to conduct international transactions without the assistance of banking channels.

These are accomplished through two channels: current transfers and financial or capital transfers.

Foreign Exchange Regulation Act of the country defines current account transactions as –

(i) receipts and payments due in connection with foreign trade, other current business including services, and normal short-term banking and credit facilities in the ordinary course of business;
(ii) receipts and payments due as interest on loans and as net income from investments; and
(iii) moderate amounts of amortisation of loans or for depreciation of direct investments.

Capital account transaction is a transaction for the creation, modification, transfer, or liquidation of a capital asset, including but not limited to securities issued in capital and money markets, negotiable instruments, non-securitised claims, units of mutual fund or collective investment securities, commercial credits and loans, financial credits, surety bonds, guarantees, deposit account operations, life insurance, personal capital movements, and real estate.

The taka is theoretically freely convertible for current account transactions. It means that regulator approval is not required for transactions on current accounts. However, insiders hold differing opinions; under general authority, banks are permitted to execute transactions within the indicative limit.

To exceed the authorization, central bank approval is required. Despite the fact that ease of doing business is a topic that is frequently discussed, discord is caused by contradictory perspectives in business transactions.

Open are transactions under capital account for inward investments such as direct investments and portfolio investments. Other transactions require government authorization.

As Taka is not convertible for outward remittances on capital account transactions, the central bank monitors every transaction under current account. Every import payment is subject to documentary proof by the entry of corresponding goods; each export shipment must be accompanied by incoming payments.

Every outbound transfer must be reported to the central bank. All of these measures are intended to prevent capital transfers disguised as current payments. It is debatable whether the monitoring system produces effective results.

Ongoing international efforts are made to address obstacles and frictions in cross-border payments.

For the next phase of work under the G20 Roadmap for Enhancing Cross-Border Payments, the Financial Stability Board (FSB) published a report in February 2023 detailing actions to be taken on payment system interoperability, legal, regulatory, and supervisory frameworks, and cross-border data exchange.

Prior to the G20 Roadmap’s 2027 deadline, the FSB makes it clear that much work remains to be done to improve the cost, speed, accessibility, and transparency of cross-border payments.

What to expect in future about cross border transactions

The Taka is presumed to be fully convertible for capital account transactions. In this situation, it is questionable whether a monitoring framework is required. Such a monitoring mechanism is disregarded by the central banks of countries with a convertible capital account framework. They simply gather data to generate various macroeconomic reports.

If current account transactions were fully convertible in the true sense and capital account transactions were partially convertible, the demand for shadow transactions would have decreased. Consequently, a framework for monitoring cross-border transactions would have been superfluous.

For money to be transferred under the guise of current accounts through banking channels or shadow channels, foreign currency inflows are required. Balance of payments displays incoming and outgoing funds. Exports account for more than fifty percent of total inflows, followed by wage remittances.

Exporters are required to submit regulatory declarations regarding their exports of goods, for which payments must be repatriated within four months of shipment date. In the absence of repatriation, exporters may face regulatory actions and be denied policy supports such as cash incentives, bond facilities, low-interest loans, etc. The use of autopilot for the repatriation of export profits is effective.

In addition to the export of physical goods, international service delivery according to mode 1 of the GATS is considered an export of services.

Consultancy, law, engineering, accounting, and information technology are a few examples. The central bank permits service exporters to retain a significant portion of their foreign currency inflows to cover expenses, as the service industry is deemed a promising sector.

Despite this, the sector has yet to demonstrate a significant position in international transactions.
There are complaints that service exporters do not properly repatriate earnings. According to industry insiders, the underlying reason is that service exporters require outward remittances for which required tax payments impose an additional cost burden.

Sendings from Bangladeshi expatriates are the second largest source of foreign income. It is not required that non-residents send their earnings abroad. Non-residents may use the income in their home country. We are all aware that the majority of residents in megacities like Dhaka come from rural and urban areas.

There are white collar, blue collar, and red collar jobs, among others. People who fall under the white category typically save money and invest in capital goods, such as real estate. They occasionally send money to their village of origin. Frequently, others send money. But income generated in megacities is not required to return to its earners’ origins.

The same is true for non-residents, who send modest amounts of money home. Only blue collar workers consistently send money home.

The demand for international transactions conducted through shady channels generates alternative foreign exchange markets. The foreign exchange rate for incoming remittances is higher than that for export receipts. A higher rate for wage receipts indicates that the remittances are exchanged for transfer in another manner.

Now comes the question of which fund is sent overseas by adjusting wage remittances. Unquestionably, restrictions on outward remittances and relevant formalities result in shadow markets.

Not generally permissible for which specific approval is required are payments of this nature. It is true that where there is a demand, a market will form. If demand is eliminated, the market will cease to exist.

If we see other countries alongside Bangladesh, in Europe, changes will be compelled by regulators, such as instant euro payments in the EU. In light of the slow market adoption of technology to process instant euro payments, the Commission proposes to implement the so-called Instant Payments Regulation.

This would require payment service providers that offer euro credit transfers to offer instant euro payments at the same or a lower fee than that applicable to euro credit transfers that are not instant.

In accordance with the G20 Roadmap’s priorities, global regulators and market participants will work to advance payment system interoperability, including interlinking arrangements for payment systems that reduce reliance on intermediaries by allowing banks and other payment service providers to transact directly.

Additionally, domestic advancements will allow the focus to shift abroad. For instance, in the United States, the Federal Reserve anticipates launching the FedNow Service, a new instant payment service that would allow consumers and businesses to settle payments almost instantly through deposit accounts with banks that maintain a master account at a Federal Reserve Bank.

The Federal Reserve has stated that, at launch, the FedNow Service will only support domestic payments between US depository institutions; however, if access is expanded to non-US financial institutions in the future, the service could be used to facilitate cross-border payments.

Central bank digital currencies

More than 114 countries, representing over 95% of global GDP, are examining the potential benefits of central bank digital currencies (CBDCs) – a digital representation of fiat currency issued by a central bank. A few nations, including the Bahamas and Jamaica, have already implemented CBDCs, whereas the majority are still in pilot or research stages.

Despite the fact that some CBDCs are based on blockchain or distributed ledger technology (DLT), many jurisdictions are investigating a variety of alternative technologies.

What are the implications of these developments for Bangladesh? A digital taka (e-taka) could make the payment system more efficient and affordable. Currently, it takes 30 minutes and a surcharge of 100 taka to transfer 1 lac taka via the real-time gross settlement service between 10 a.m. and 3 p.m.

In Europe, payment processing takes only 10 seconds and costs €0.002 per transaction (equivalent to 20 paisa in Bangladesh). An e-taka will also save hundreds of billions of taka in printing costs. For instance, it costs eight taka to print a one thousand taka note and nearly two taka to mint a five taka coin.

The most significant advantage of e-taka, however, is that it will enable the government to track its expenditures for development and other operational services.

Therefore, it will be extremely difficult, if not impossible, for public officials who take advantage of stealing and accumulate physical money because it takes the government time to identify them (often they are identified right after their retirement) to steal public e-money.

Similarly to how the introduction of the electronic government procurement (E-GP) system has increased the quality and competitiveness of public project bidding, the mandatory use of e-taka in public works will make the system more transparent and combat corruption.

Concept of Digital Taka

A digital taka can provide unanticipated benefits in our personal lives.

For instance, parents will be able to track where their children spent their money, thereby reducing misuse. In addition, digital currency can be programmed to exclude certain transactions. A diabetic patient, for instance, may not be able to purchase unhealthy food with digital taka or digital currency. We can also track the expenditure of our zakat and sadaqah contributions.

All these advantages come at the expense of our highly valued privacy in Bangladesh. As a result, it is believed that the CBDC will be most successful in China, where Chinese citizens are most accustomed to being monitored by their government.

In conclusion, CBDCs can theoretically be extremely potent in the sense that they can displace credit cards and banks. However, this will defeat the purpose of the system.

Despite the fact that the new competition from CBDCs is likely to make banking services cheaper, faster, and more equitable. Whether digital currency is administered by private banks or a central bank, the greater concentration of digital currency will make the system more susceptible to cyberattacks.

China invented paper currency in the seventh century and monopolized the issuance of currency in the eleventh century. It is therefore not surprising that the People’s Bank of China is the first major central bank to introduce an e-currency.

In the coming years, the Fed, the ECB, and other central banks will likely issue their own CBDCs. CBDCs could serve as an effective countermeasure to cryptocurrencies and have the potential to become the predominant medium of exchange.

Numerous CBDC projects emphasize domestic retail. However, international standard-setting organizations such as the Bank for International Settlements (BIS) are promoting the use of CBDCs to facilitate international payments. Solving the interoperability problem between initiatives is crucial.

What to expect form Central bank digital currencies in 2023

Changes will be compelled by regulators, such as instant euro payments in the EU. In light of the slow market adoption of technology to process instant euro payments, the Commission proposes to implement the so-called Instant Payments Regulation.

This would require payment service providers that offer euro credit transfers to offer instant euro payments at the same or a lower fee than that applicable to euro credit transfers that are not instant.

In accordance with the G20 Roadmap’s priorities, global regulators and market participants will work to advance payment system interoperability, including interlinking arrangements for payment systems that reduce reliance on intermediaries by allowing banks and other payment service providers to transact directly.

Additionally, domestic advancements will allow the focus to shift abroad. For instance, in the United States, the Federal Reserve anticipates launching the FedNow Service, a new instant payment service that would allow consumers and businesses to settle payments almost instantly through deposit accounts with banks that maintain a master account at a Federal Reserve Bank.

The Federal Reserve has stated that, at launch, the FedNow Service will only support domestic payments between US depository institutions; however, if access is expanded to non-US financial institutions in the future, the service could be used to facilitate cross-border payments.

Stable-coins:

Stablecoins, in contrast to CBDCs, are privately issued DLT-based cryptoassets that include a mechanism to minimize price fluctuations and “stabilize” their value.

Their objective is to create an alternative form of low-risk digital unit that businesses and consumers can use directly. The most prevalent potential stabilisation method is the collateralised stablecoin model, which achieves stability by linking the currency to a reserve of stable real assets, such as fiat currencies or commodities.

Alternate options include crypto-collateralized stablecoins (where a reserve is comprised of other cryptocurrencies) and uncollateralized stablecoins (which do not have any reserve but instead use central bank-like monetary policy to maintain a fixed price by controlling supply with algorithms which respond to market conditions).

Since the failure of Libra/Diem, global regulators have been closely monitoring stablecoin market developments, and the collapse of USD Terra last year has heightened their concerns.

This has prompted several jurisdictions, including the United Kingdom, to prioritize the creation of a regulatory framework for stablecoins over other cryptoassets in their draft Financial Services and Markets Bill.

In addition to the regulatory framework for cryptoassets and security tokens that will be implemented in 2020, Japan is currently implementing a framework for the issuance and distribution of stablecoins.

In contrast, the EU’s new Markets in Crypto-Assets Regulation (MiCA) will introduce a comprehensive new regulatory framework for the issuance and sale of all cryptoassets, as well as significant additional requirements for the sale of stablecoins.

In the United States, a number of bills to regulate stablecoin issuers have been proposed, each imposing variations of bank-like requirements (such as FDIC insurance, chartering framework, and liquidity requirements), but none have reached the floor of the US Congress for a vote.

What follows?

The EU’s MiCA will be formally adopted in 2023, with some of its provisions becoming applicable in 2024. It is also anticipated that the Financial Services and Markets Bill will be passed in 2023. With the introduction of these regimes, stablecoins can be utilized in more conventional consumer and wholesale settings.

Additionally, there will be additional legislative and regulatory changes in additional jurisdictions.

In the United States, we anticipate the introduction of new legislation and the continuation of debate on the appropriate regulatory framework for stablecoin issuers, including how to address uncollateralized or algorithmically-stabilized stablecoins such as USD Terra and the extent to which stablecoin issuers may be regulated like banks.

Operational resilience

Increasing digitalization of customer experiences, increased automation of internal processes, and increased use of third-party service providers all make businesses more susceptible to technological disruptions and hence Operational resilience is extremely important for companies in 2023.

Due to the financial, reputational, and societal consequences of high-profile IT failures, operational resilience (or ensuring the continuity of essential business services) remains a top priority for boards, regulators, and customers.

Bangladesh’s achievements over the course of this 50-year partnership with World Bank have vastly surpassed the initial World Bank assessments conducted in the early 1970s.

Since this initial emergency credit, the World Bank has committed approximately $39 billion in funding from the International Development Association (IDA) in the form of grants, interest-free loans, and concessional credits to assist the country in developing its indigenous strategies to address its most pressing development challenges.

With approximately $15 billion in ongoing programs, Bangladesh has the largest IDA program in the world at the present time. The World Bank is also the largest development partner for Bangladesh.

Bangladesh has made remarkable progress in numerous areas, but three strategic development decisions it has made over the years have yielded the greatest returns: investing in people, empowering women, and preparing for disasters and adapting to climate change.

Bangladesh quickly realized that investing in people is equally as important as investing in infrastructure. In 1972, the life expectancy was less than 50 years, whereas a newborn today is expected to live over 70 years. The fertility rate has decreased from 6,1 births in 1971 to merely 2,1 births in 2018. The vast majority of children attend school.

The strategy for reducing poverty in Bangladesh centered on the empowerment of women.

In 1991, Bangladesh had one of the lowest levels of female education attainment. Bangladesh was one of the first developing nations to achieve gender parity in secondary school enrollment, thanks to a pioneering school stipend program for poor rural girls, which was replicated in Mexico, Cambodia, and other nations.

In 1970, only 17 percent of lower secondary school enrollment was made up of females; this number has since increased to more than half. Hundreds of thousands of rural women were employed by its thriving ready-made garment industry. The female labor force participation rate rose from 21 percent in 1990 to 35 percent in 2021, an increase of 73 percent.

Bangladesh has met the challenges of being severely impacted by natural disasters and climate change by becoming a leader in climate adaptation and disaster preparedness.

Since independence, a network of embankments, cyclone shelters that function as primary schools during normal weather, early warning systems, and forestation have reduced cyclone-related fatalities by a factor of one hundred.

The numbers tell the tale: More than 300,000 people were killed by Cyclone Bhola in 1970, while Cyclone Sidr in 2007 claimed 3,363 lives and Cyclone Mora in 2017 claimed only 18 lives.

In response to a request from the G20, the FSB published a consultation in October 2023 titled Achieving Greater Convergence in Cyber Incident Reporting.

The FSB’s proposals include recommendations to address the obstacles to achieving greater international convergence in cyber incident reporting, work on establishing common terminologies related to cyber incidents, and a proposal to develop a standard format for exchanging incident reports.

The purpose of the EU’s new Digital Operational Resilience Act (DORA) is to establish uniform requirements for the security of network and information systems of companies operating in the financial sector, including cryptoasset service providers, as well as any critical third parties that provide them with information communication technologies services.

Following its exit from the EU, the United Kingdom has introduced the Financial Services and Markets Bill, which includes provisions to regulate cloud service providers and other critical third parties that provide services to UK-regulated firms and financial market infrastructures.

Under the proposed legislation, HM Treasury would have the authority to designate certain service providers as “critical,” and UK regulators would be granted new direct oversight authority over designated service providers, who would be subject to new minimum resilience standards.

In the absence of a general election, the Bill should be passed and signed into law by the end of the current session of Congress (expected to be in May 2023). While the United Kingdom’s proposals and DORA’s requirements share the same objectives, there are a number of differences between them, including with respect to the “critical” designation criteria and the enforcement regime.

What to expect in Operational resilience in 2023 around the globe?

Efforts to harmonize global standards at the national level will continue. The FSB is scheduled to release a revised report to the G20 in April 2023. This report will include expectations for financial authorities’ oversight of financial institutions’ reliance on critical service providers, such as “Big Tech” and fintech firms.

Once in effect, the requirements of DORA and the new UK regime for contracting with payment service providers will impose a significant legal burden on businesses that provide payments technology.

The implementation of a new incident reporting mechanism by DORA, including a requirement that “major” incidents be reported to competent authorities within strict timeframes, will necessitate substantial process investments.

In the United States, we anticipate the banking agencies to finalize their 2021-proposed guidance on “third-party risk management,” which will establish supervisory expectations for risks posed by third-party relationships as well as higher standards for providers of “critical services.”

The guidance requires, among other things, that covered institutions conduct due diligence, provide ongoing oversight of a third party’s information security programme and information systems, and assess the third party’s ability to continue providing services during a disruption event.

Additional global regulators will launch comprehensive regulatory regimes to ensure that financial institutions have appropriate internal governance and control frameworks surrounding the use of ICT, including the use of third-party technology providers.

We are also likely to see a rise in regulatory enforcement actions related to operational disruptions; TSB Bank plc was recently fined £48.65 million by UK financial regulators for operational risk management and governance failures related to its IT upgrade program.

Similarly, the same technology disruption events are likely to result in civil claims and litigation, whether for contract breach, negligence, or data breach.

Multiple jurisdictions have implemented open banking regimes, permitting third-party payment service providers (TPPs) to initiate payments or access account information on behalf of their customers. Regulators anticipate that firms will fulfill their regulatory obligations while competing on the basis of quality and value.

Some jurisdictions have taken this concept a step further, applying it to other types of accounts and financial products as part of a broader “open finance” initiative.

Open Finance

Multiple jurisdictions have implemented open banking regimes, permitting third-party payment service providers (TPPs) to initiate payments or access account information on behalf of their customers.

Regulators anticipate that firms will fulfill their regulatory obligations while competing on the basis of quality and value.
Some jurisdictions have taken this concept a step further, applying it to other types of accounts and financial products as part of a broader “open finance” initiative.

Developing comprehensive legislative frameworks for such initiatives is time-consuming, but essential for ensuring that TPPs are regulated to provide clarity around I security, consent, data use, privacy, and ethics, and to build customer trust.

In the context of Open Banking, the recast EU Payment Services Directive’s rules on TPP access, strong customer authentication, and secure communication standards may provide a blueprint for expansion in the European Union.

The Consumer Financial Protection Bureau (CFPB) in the United States is in the process of developing a proposal for an Open Banking rule that would give consumers more control over their financial data by allowing them to access and share it with other providers.

The concept of Open Application Programming Interface (API) for use in the banking industry i.e open finance has emerged as one of the most significant developments over the past few years. Open banking entails making the APIs accessible to third parties (financial technology companies), who can use the shared consumer data to create innovative products and services, as well as to generate offers and discounts based on consumer spending habits.

The API will allow the company’s software to access information from another company’s software. When we order an Uber, the Google Maps API allows us to track our car’s journey to the pickup location.

Without these APIs, if you want to share the information in your bank account with another organization, you must give them your login credentials. These new APIs will allow you to safely and securely share your bank account information without disclosing your password.

The objective of Open Banking regulations is to transfer account information ownership from banks to customers. It enables individuals to securely share transaction information with other banks and third parties.

The fundamental aspect of open banking is that customers are not required to share their data with third parties. When you sign up for a service, each provider will ask for your permission to access your information.

The system will then send a request to your bank, which will then process the request and share your information. You may also revoke your consent at any time. The rules only apply to online-accessible accounts, and you must connect your online banking to the third party for it to obtain your data.

It is ultimately your decision whether or not to share your information. Under Open Banking, however, your financial information will be more secure than ever before. All banks, apps, businesses, and other third parties operating within the Open Banking framework are evaluated according to the highest privacy and security standards.

Here are a few real-world examples of how the customer could benefit:

• Customers can obtain better deals on credit cards, loans, and mortgages by comparing them across multiple financial institutions and third parties based on their individual circumstances.
• Gain a comprehensive perspective of accounts in a single location.
• Monitor multiple bank accounts and credit cards for fraud with ease.
• Utilize a unified platform to efficiently and safely manage your finances across multiple services and providers, from banking to online shopping.
• Open banking is not limited to developed nations; many markets around the world have sought to adopt similar principles with the ultimate goal of enhancing customer financial outcomes.

The rule is intended to promote competition by making it simpler for consumers to “walk away” from their current providers and transfer their financial data to other providers via application programming interfaces (APIs).

Future of Open Finance in 2023

There will be a renewed emphasis on open finance and the development of more innovative use cases. With web 3.0 and metaverse applications raising a new set of legal and regulatory questions, consumers will receive payment services through channels that are novel.

Following a consultation in 2023 , the publication of a new framework for Open Finance in the EU is scheduled for the second quarter of 2023.

In Bangladesh’s banking industry and open finance, there are numerous supply difficulties. The cost of providing financial services is disproportionately high to the price of the product. Open Banking is the only remedy for this issue.

Despite digitization and open source, industries such as retail, transportation, food and beverage, education, etc. are experiencing significant disruptions. However, the trend will have a much greater impact on the financial services industry, whose business models are on the verge of digital transformation.

Multiple parties are involved in Open Finance, and it is unclear who should be responsible for data protection and security and who owns customer data. It will be difficult to determine who owns all of this information, as it will continue to flow from screen to screen. In the future, accelerating data ownership and customer privacy will be crucial.

The evolving landscape of banking presents both challenges and opportunities. Our banks should collaborate with other service providers to enrich and streamline the customer experience.

As the Open Banking community continues to expand throughout 2023, new obstacles and opportunities will emerge. Banks must continue to prioritize data privacy, cyber security, and customer protection throughout the implementation phase. However, the benefits Open APIs offer to customers and banks will drive their growth and adoption.

The CFPB is expected to issue a proposed Open Banking rule later this year in the United States. Significant issues remain unresolved, including the rule’s applicability to non-banks as well as privacy and data security concerns.

Smaller banks have urged the CFPB to phase in a ban on “screen scraping,” in which a third party uses a customer’s login credentials to access their account information, because they lack the technological resources to build a library of APIs.

Hire a Competent law firm for your cross border transactions in Bangladesh:

Tahmidur Rahman Remura Wahid TRW Associates is comprised of competent Barristers and Advocates with expertise in multiple legal fields, allowing them to provide the required services to a high degree and allowing clients to acquire all necessary and supplementary legal services under one roof.

The Barristers, Advocates, and attorneys at Tahmidur Rahman Remura Wahid TRW in Mohakhali New DOHS, Dhaka, Bangladesh have extensive experience assisting clients with all sort of licensing matters. For questions or legal counsel, please contact us at:

GLOBAL OFFICES:
DHAKA: House 410, ROAD 29, Mohakhali DOHS
DUBAI: Rolex Building, L-12 Sheikh Zayed Road
LONDON: 1156, St Giles Avenue, 330 High Holborn, London, WC1V 7QH

 Email Addresses:
info@trfirm.com
info@tahmidur.com
info@trwlaw.co.uk

 24/7 Contact Numbers, Even During Holidays:
+8801708000660
+8801847220062
+8801708080817

Corporate Income Tax in Bangladesh in 2023

by Tahmidur Remura Wahid | Apr 3, 2023 | 2023, Law

Corporate Income Tax in Bangladesh

Corporate income tax is an important source of revenue for a government. Bangladesh’s national parliament proposed and approved a national budget, and the National Board of Revenue (NBR) of Bangladesh publishes the Finance Act every year in order to update tax rules and regulations and accelerate tax revenue.

While one can understand that the essence of many updates in tax laws has been the Government’s excessive tax collection target, certain recent tax law updates appear extremely aggressive for honest taxpayers. In July 2019, the Finance Act 2019 was published, and it added a new section 30B “Treatment of disallowances” to the Income Tax Ordinance.

Section 30B is unquestionably one of Bangladesh’s most aggressive and unfair tax collection measures. Before we get into section 30B, let’s go over section 30 “Deduction not admissible in certain circumstances” briefly and simplify the likely consequences. This section discusses specific business expense limits, compliances, and rules.

Some of the points in this section are logical, while others are highly debatable. The following are some examples of contentious compliances:

• Perquisites (house rent, conveyance etc) (house rent, conveyance etc.) given to an employee in excess of Tk 550,000 per year
• A royalty or fee for technical services that exceeds 8% of the disclosed net profit
• Overseas travel costs that exceed 1.25% of the disclosed turnover

Without a doubt, all of the expenses listed above are legal and reasonable for any business anywhere in the world.

All of these expenses are taxable income for an entity, and tax is payable at a regular rate if they exceed the limit set in Section 30 of the IT Ordinance 1984. Until the Finance Act of 2018, all entities treated those inadmissible expenses as part of their taxable income.

Income from business or profession

According to Finance Act 2019, new Section 30B of the IT Ordinance 1984 states that any amount of disallowances made under Section 30 shall be treated separately as “Income from business or profession” and tax shall be payable thereon at a regular rate.

It applies regardless of whether a business is assessed under Section 82C or whether a loss or profit is computed under the regular “Income from business or profession” section. As a result, even a losing business will be required to pay additional tax.

In a country like Bangladesh, where a minimum tax is already in place and all entities, including loss-making ones, are required to pay income tax based on turnover/gross receipts, the additional tax under Section 30B appears to be a penalty rather than a direct tax.

Corporate Tax refund in Bangladesh:

So, in this simple example, a loss-making company is entitled to a tax refund in Bangladesh.

In 2011, X had to pay a minimum tax of Tk 60 in 2018, but with the addition of Section 30B, his tax liability has increased to Tk 260.

The treatment of disallowances under Income Tax Ordinance 1984 Section 30B has a significant impact on tax liability. Disallowances occur when an expense exceeds the specified limit or for any violation of the law.

Section 30 of the ITO 1984 also addresses expense heads that differ by industry. Previously, any disallowance was calculated using u/s.

Section 37 of the IT Ordinance 1984 required that 30 be added to regular business income and taxed after deducting any losses. Following the passage of the Finnace Act 2019, all disallowances under Section 30 are treated separately as business income and taxed directly. The amount payable cannot be compared to the minimum tax liability or adjusted in any way.

Loss:

This will result in an additional cash outflow as a tax charge on top of the regular minimum tax for that year. This treatment results in a significant tax penalty for a business entity.

Business requirements vary by industry, and a standard expense limit is illogical. Furthermore, charging tax directly to an expense violates tax principles. In general, this move is not business-friendly because it worsens the situation for loss-making companies.

Direct income tax should be charged on income rather than expenses, according to basic tax principles. However, the newly added provision acts as a penalty measure, which should not be used to collect revenue.

What is the policy regarding foreign investor income tax in Bangladesh?

The Income Tax Ordinance, 1984 (as amended annually by the Finance Act) and a number of Statutory Regulatory Orders govern the income tax regime (SROs).

Over the past several decades, the government has gradually reduced the general Corporate Income Tax (CIT) rate (currently, 30% for unlisted companies and 25% for listed companies, excluding certain industries).

Capital gains are subject to a separate 15% tax rate.

CIT regime is considered standard based on usual determination of taxable income and deductible expenses, but differs from other countries in the application of:

i) differentiated tax rates (whether limited liability company or sole proprietorship business, publicly-listed or not, and depending on sector); and

ii) advance/ presumptive payments. Certain forms of income in Bangladesh are presumed to be taxable.

For instance, export proceeds must be withheld at source based on FOB value. Withholding practices also apply to proceeds from services, import payments, royalties/technical license fees, dividends, and loan interest. These taxes are advanced payments and are therefore credited to the final tax liability.

There is also a turnover tax (0.6% of gross receipts excluding certain industries) that can be imposed on all companies, regardless of taxable income and potential loss, constituting a minimum obligation.

Companies in Bangladesh are required to register with the National Board of Revenue (NBR) and obtain a Taxpayer Identification Number (TIN) for income tax reporting/filing purposes.

Disallowed expenses are taxed separately under the heading “income from business or profession” at the regular tax rate. Amortization and depreciation are permitted, and pre-commencement expenses, such as feasibility studies, modeling, prototype creation, and experimental production, may be amortized at a rate of 20% using the straight line method.

Lessors of assets under a finance lease may not claim depreciation.

When the employer fails to provide mandatory information regarding that employee’s tax return filing, salary expenses for that employee are not deductible when calculating the employer’s income.

Bangladesh Corporate Taxation Rate:

For publicly traded companies, the standard rate is 22.5%. Publicly traded companies that raise more than 10% of their paid-up capital through an initial public offering are taxed at a 20% rate.

Banks, insurance companies, and financial institutions (except merchant banks) pay 40% tax, with a lower rate of 37.5% available if the company is publicly traded or received specific government approval in 2013.

Listed mobile phone companies pay 40% tax; non-listed mobile phone companies and cigarette and other tobacco manufacturing companies pay 45% tax. All other businesses (including private limited companies and foreign subsidiaries) are taxed at a rate of 27.5%.

All income, receipts, and individual transactions worth more than BDT 500,000, as well as all types of expenses and investments worth more than BDT 3.6 million, must be transferred by bank transfer; otherwise, the applicable corporate income tax rate on a taxpayer’s total income is increased by 2.5 percentage points.

If a person employs or allows a non-Bangladeshi individual to work in its business or profession at any time during the fiscal year without prior approval from the appropriate governmental authority, the employer will be charged additional tax at a rate of 50% of the total annual income tax payable or BDT 500,000, whichever is greater.

Bangladesh Surtax:

There is no surcharge.

Alternative minimum tax:

In terms of alternative minimum tax, a minimum tax of 0.6% is levied on gross receipts from all sources for any company or firm with gross receipts of more than BDT 5 million, regardless of profit or loss, where the minimum tax exceeds the corporate tax liability.

The applicable rates for manufacturers of cigarettes and other tobacco products and mobile phone operators are 1% and 2%, respectively.

For the first three income years following the start of commercial production, the rate of taxation is 0.1% on gross receipts for an industrial undertaking engaged in the manufacture of goods, and for a startup in its growth years (see “Incentives,” below).

A prescribed method is used to calculate the minimum tax applicable to taxpayers who have income from any source that is exempt or subject to tax at a reduced rate.

Dividend taxation:

Dividends paid by resident corporations are generally taxed as income at a rate of 20%. Dividend income is exempt from multi-tier taxation for both resident and nonresident shareholders.

If a stock dividend (interim or otherwise) declared or distributed in an income year exceeds the amount of any cash dividend, listed companies must pay an additional 10% tax.

Listed companies are also subject to an additional 10% tax on the total amount transferred to retained earnings, reserves, or surplus if the amount transferred exceeds 70% of net income after tax.

Capital gains:

Capital gains are taxed at a 15% rate, with some exceptions.

Losses:

Business losses can be carried forward for up to six years. Loss carryback is not permitted.

Foreign tax breaks:

A resident entity may deduct foreign-source income tax from its Bangladesh tax liability. The credit is equal to the lesser of the foreign income tax paid or the Bangladesh tax payable on the foreign-source income.

Exemption from participation:

There is no exemption from participation.
Holding company regime: There is no such thing as a holding company regime.

Incentives:

Certain income, such as income from an infrastructure facility or industrial undertaking established in Bangladesh, the business of information technology-enabled services (ITES), and exports of handicrafts and industries established in an export promotion zone, are eligible for incentives if certain conditions are met. Industrial enterprises located in specific regions can benefit from area-based tax breaks.

A 10-year 100% corporate income tax holiday is available to newly established manufacturing companies in the following sectors, subject to certain conditions:

• Products relating to information and communication technology;
• Automobile manufacturing (three- and four-wheelers); • Agricultural and dairy products;
• Lighting and home appliances; • General and specialized hospitals; and
• Education and training in a professional or vocational field.
  
  The 100% corporate income tax exemption for income derived from information technology services and ITES provided by companies engaged in cloud services, e-learning platforms, e-book publications, mobile application development services, and other similar activities has been extended until 30 June 2024.

A company that works toward the deployment or commercialization of new products and employs processes or services that are driven by innovation, development, and technology, or intellectual property, may be classified as a “startup” and be eligible for a preferential tax regime.

To qualify, the startup’s annual turnover cannot exceed BDT 1 billion in any given fiscal year, and it cannot be a subsidiary of another company holding 50% or more of its shares, or the result of an amalgamation or demerger. Startups benefit from a variety of tax breaks, including the following:

• No expense disallowance;
• Losses can be carried forward for up to nine years;
• No compliance obligations other than filing an income tax return, assuming the company meets the tax registration requirements; and
• A minimum tax of 0.1% on gross receipts.
  
  Companies formed prior to 1 July 2017, as well as companies formed between 1 July 2017 and 30 June 2023 that fail to obtain tax registration by 30 June 2023, are ineligible for the startup regime. To be eligible, newly incorporated companies must register for tax by 30 June of the year following their incorporation.

The transfer of shares in a nonresident company is considered the transfer of an asset located in Bangladesh to the extent that the value of the transferred shares is directly or indirectly attributable to the value of assets in Bangladesh.

What is Bangladesh’s policy regarding personal income tax?

Bangladesh applies a progressive tax rate to personal income (for residents with a physical presence in the country:

i) for 182 or more days in a single fiscal year or
ii) for 90 or more days in a single fiscal year or
iii) for 365 or more days in the four preceding fiscal years), which ranges from 0% to 25%. (surcharge is payable by wealthy individuals).

Each fiscal year, the Finance Act will establish the personal income tax rate. Following are the current personal income tax rates:

First BDT 300,000 = Nil Following BDT 100,000 = 5% Next 300,000 BDT equals 10%.

The following BDT 400,000 equals 15% Following BDT 500,000 = 20% On balance = 25% Individuals who make eligible investments may be eligible for investment tax credits.

Treaties to avoid double taxation are also available to foreign nationals.

The budget for FY 2021-2023 proposes to maintain the existing rate for individual taxpayers. However, a special provision for the third gender community is introduced, as well as a proposal to set the tax-exempt ceiling for this community at 350,000.

What types of taxes and tariffs apply to imported capital equipment and raw materials?

Customs Duty (CD) specifies tariff rates of 2% to 5% for basic raw materials and capital goods, 10% for intermediate goods, and a maximum rate of 25% for final goods (mostly on domestically produced items) in general.

Regulatory Duty (RD), Supplementary Duty (SD), Value Added Tax (VAT), Advance Income Tax (AIT), and Advance Trade VAT (ATV) may be imposed in addition to CD, depending on the nature of the goods being imported into Bangladesh.

Hire the best law firm in Bangladesh to take care of your corporate taxation needs:

Tahmidur Rahman Remura Wahid TRW Associates is a full-service law firm in Dhaka that provides all types of legal and financial services, including Corporate Income Tax, Income Tax Ordinance, Tax refund, company registration, obtaining the proper licenses, drafting contracts and notices, and providing annual compliances and litigation services.

Tahmidur Rahman Remura Wahid TRW Associates is comprised of competent Barristers and Advocates with expertise in multiple legal fields, allowing them to provide the required services to a high degree and allowing clients to acquire all necessary and supplementary legal services under one roof.

The Barristers, Advocates, and attorneys at Tahmidur Rahman Remura Wahid TRW in Mohakhali New DOHS, Dhaka, Bangladesh have extensive experience assisting clients with trade licensing matters. For questions or legal counsel, please contact us at:

GLOBAL OFFICES:
DHAKA: House 410, ROAD 29, Mohakhali DOHS
DUBAI: Rolex Building, L-12 Sheikh Zayed Road
LONDON: 1156, St Giles Avenue, 330 High Holborn, London, WC1V 7QH

 Email Addresses:
info@trfirm.com
info@tahmidur.com
info@trwlaw.co.uk

 24/7 Contact Numbers, Even During Holidays:
+8801708000660
+8801847220062
+8801708080817

Trade license fee and e-trade license cost in Bangladesh

by Tahmidur Remura Wahid | Apr 2, 2023 | 2023, Law

TRADE LICENSE FEE, PROCESS AND COST IN BANGLADESH TRADE LICENSE PROCESS AND COST IN BANGLADESH

In Bangladesh, receiving a trade license is the initial step of beginning a business.

Doing business in Bangladesh requires a formal authorization from Dhaka City Corporation or Municipality’s important office (Union Parishad, pouroshava, upozilla or zillaparishad) to work.

This authorization is given as Trade License. This writing talks about the trade license process and cost in Dhaka Bangladesh.

INTIAL STEPS:

To get a Trade License in Bangladesh the lawful premise of this prerequisite is being presented in Bangladesh under the City Corporation Taxation Rules 1983 and Municipal Taxation Rules 1986. It is issued when a business visionary is connected through the license form/structure. Working business without an exchange permit is unlawful in Bangladesh.

A business visionary must use the proper application format and submit an application to the relevant authority’s office in order to obtain a valid exchange permit. For example, Dhaka City Corporation is divided into north and south sections.

The candidate will be required to pick the right structure contingent upon the territory where the business is found.

One should begin by obtaining legal authorisation and a business license from the City Corporation or City Council of the relevant business zone. The expense of getting a business permit is BDT 2000.

PROCEDURE:

The procedure is supervised by the City Corporation or city committee in the location where the business is located. A permit is issued solely for the sake of the licensee and such permit is not transferable.

The licensee will not use the permit for anything other than the reason and nature of calling, trade, or calling for which it was issued. A renewed Trade License is given by the concerned staff of the zonal tax collection office.

An expense for exchange permit must be kept at any Bank as demonstrated on the Trade License form/structure.

The list of required archives for obtaining a trade license is as follows:

• Dhaka City Corporation Application Form (North Form) or (South Form)
• National identification card of the entrepreneur Recent receipt or proof of ownership
• Recent photograph of the entrepreneur in passport format Work permit from the Board of Investment Statement of bank solvency and TIN certificate.

ADDITIONAL DOCUMENTS REQUIRED FOR TRADE LICENSE:

• In the case of a standard Trade License, an attested copy of the rent receipt or rental agreement, as well as a copy of the Holding Tax payment receipt, are required.
• In the case of a Trade license for industries – Everything mentioned in serial number 1 plus the following:
• No objection notice on the adjacent Location Map
• Fire certificate copy
• Statement on non-judicial stamp of tk 150/to comply with DCC rules and regulations.
• In the case of a Clinic or Private Hospital, the Director General of Health must grant permission.
• In the case of a Limited Company: Articles of Association Certificate of Organization
• In the event that Printing Press and Residential Hotel Permission is Required from DC
• In the case of Recruitment Agencies, a license from the Manpower Man-power Export Bureau is required.
• In the event of Arms and Ammunition – Arms License Copy.
• In the case of drugs and narcotics, please provide a copy of your drug/narcotics license.
• In the case of Travailing Agency – Civil aviation authority approval.

PROCESSING TIME LIMIT:

Projection of Processing The license is typically issued within three to four business days; however, this may vary depending on the nature and type of business.

RESERVED ADMINISTRATION PAYMENT:

The fee for submission is BDT 10.00.

The license fee ranges from BDT 100.00 to BDT 40,000.00 depending on the nature and type of business.
License fees for Limited Companies are based on paid-up capital.

RECERTIFICATION OF BUSINESS (COMMERCIAL COMPANIES):

Licenses for conducting business must be renewed annually. The required documents are the License Book, which is issued upon issuance of a Trade License, the Challan Book, proof of rent and ownership, and the TIN Certificate.

The candidate is required to store the planned charges at the designated bank as part of the renewal strategy. If the various requirements are met, the relevant zonal office of the City Corporation or Municipality will complete the restoration process after receiving the charge receipt.

Obtaining a business license is the first step in starting a business. Working in Bangladesh necessitates a formal authorization from an important office of the Dhaka City Corporation or Municipality (Union Parishad, pouroshava, upozilla, or zillaparishad). This permission is granted as a Trade License. This text describes the procedure and cost for obtaining a commercial license in Dhaka, Bangladesh.

LEGAL STEPS:

Bangladesh’s City Corporation Taxation Rules 1983 and Municipal Taxation Rules 1986 stipulate the legal basis for this requirement in order to obtain a Trade License. It is issued when a business visionary is linked via the license structure/form. Working business without an exchange permit is unlawful in Bangladesh.

The business visionary must use the proper application format and submit an application to the relevant authority’s office in order to obtain a valid exchange permit. For example, Dhaka City Corporation is divided into north and south sections.

The candidate will be required to pick the right structure contingent upon the territory where the business is found. Begin by obtaining legal authorization and a business license from the City Corporation or City Council of the relevant business zone. The cost of obtaining a business license is BDT 2,000.

PROCEDURE:

The procedure is supervised by the City Corporation or city committee in the location where the business is located. A permit is issued solely for the licensee’s benefit and cannot be transferred.

The licensee will not use the permit for anything other than the reason and nature of calling, trade, or calling for which it was issued.

The concerned personnel of the zonal tax collection office issues a renewed Business License. A cost for exchange permit must be maintained at any bank, as indicated on the Trade License application/structure.

The list of required archives for obtaining a trade license is as follows:

Dhaka City Corporation Application Form (North Form) or (South Form)
National identification card of the entrepreneur Recent receipt or proof of ownership
Recent photograph of the entrepreneur in passport format Work permit from the Board of Investment Statement of bank solvency and TIN certificate.

ADDITIONAL DOCUMENTS REQUIRED FOR TRADE LICENSE:

In the case of a standard Trade License, an attested copy of the rent receipt or rental agreement, as well as a copy of the Holding Tax payment receipt, are required.

In the case of a Trade license for industries – Everything mentioned beforehand and the following:

• No objection notice on the adjacent Location Map
• Fire certificate copy
• Statement on non-judicial stamp of tk 150/to comply with DCC rules and regulations.
• In the case of a Clinic or Private Hospital, the Director General of Health must grant permission.
• In the case of a Limited Company: Articles of Association Certificate of Organization
• In the event that Printing Press and Residential Hotel Permission is Required from DC
• In the case of Recruitment Agencies, a license from the Manpower Man-power Export Bureau is required.
• In the event of Arms and Ammunition – Arms License Copy.
• In the case of drugs and narcotics, please provide a copy of your drug/narcotics license.
• In the case of Travailing Agency – Civil aviation authority approval.

PROCESSING TIME LIMIT:

Projection of Processing The license is typically issued within three to four business days; however, this may vary depending on the nature and type of business.

RESERVED ADMINISTRATION PAYMENT:

The fee for submission is BDT 10.00.
The license fee ranges from BDT 100.00 to BDT 40,000.00 depending on the nature and type of business.
License fees for Limited Companies are based on paid-up capital.

RECERTIFICATION OF BUSINESS (COMMERCIAL COMPANIES):

Licenses for conducting business must be renewed annually. The required documents are the License Book, which is issued upon issuance of a Trade License, the Challan Book, proof of rent and ownership, and the TIN Certificate.

The candidate is required to store the planned charges at the designated bank as part of the renewal strategy. If the various requirements are met, the relevant zonal office of the City Corporation or Municipality will complete the restoration process after receiving the charge receipt.

ট্রেড লাইসেন্স ইস্যু ও নবায়ন পদ্ধতি

ট্রেড লাইসেন্স ইস্যু:

ট্রেড লাইসেন্স নবায়ন:

Tahmidur Rahman Remura Wahid TRW Associates is a full-service law firm in Dhaka that provides all types of legal and financial services, including organization registration, obtaining the proper licenses, drafting contracts and notices, and providing annual compliances and litigation services.

Tahmidur Rahman Remura Wahid TRW Associates is comprised of competent Barristers and Advocates with expertise in multiple legal fields, allowing them to provide the required services to a high degree and allowing clients to acquire all necessary and supplementary legal services under one roof.

The Barristers, Advocates, and attorneys at Tahmidur Rahman Remura Wahid TRW in Mohakhali New DOHS, Dhaka, Bangladesh have extensive experience assisting clients with trade licensing matters. For questions or legal counsel, please contact us at:

GLOBAL OFFICES:
DHAKA: House 410, ROAD 29, Mohakhali DOHS
DUBAI: Rolex Building, L-12 Sheikh Zayed Road
LONDON: 1156, St Giles Avenue, 330 High Holborn, London, WC1V 7QH

 Email Addresses:
info@trfirm.com
info@tahmidur.com
info@trwlaw.co.uk

 24/7 Contact Numbers, Even During Holidays:
+8801708000660
+8801847220062
+8801708080817