Profit Repatriation of MNCs from Bangladesh

Profit Repatriation of MNCs from Bangladesh

Introduction:

When a foreign direct investment (FDI) is made in any foreign country, by an established local firm, the business objective is simple. It is to tap into the new economy's lucrative demand base and earn larger profits through strategies such as achieving economies of scale, etc. Such a huge investment in an unknown economy, with the added risk of entering a new plane with a business venture, cannot be undertaken if the profits repatriation is limited by certain legalities. If the parent company is getting peanuts from its subsidiaries, in return for all its efforts, it makes better business sense to halt the venture. The profit repatriation legalities vary from country to country, so depending on where we want to set up shop, we should first familiarize ourselves with the local profit repatriation laws. It is a simple concept, if we wish to have a greater degree of foreign direct investment in a economy, we need to liberalize it first, i.e. encourage a environment conducive with liberal profit repatriation laws and low trade barriers.

Profit Repatriation Definition:

The profit repatriation definition, according to the Webster's New World Finance and Investment Dictionary, states that profit repatriation is "to return foreign-earned profits or financial assets back to the company's home country." For example, when the Volkswagen Group earns huge profits anywhere in the world, it takes a share back home to Germany, after converting it into Euro and this 'taking profits back home' process is called profit repatriation. There are different legal and illegal ways of profit repatriations.

Ways of legal Profit Repatriation of MNCs:

There are many ways to repatriate profits without getting into any legal trouble. The idea is to circumvent the restrictions on profit repatriations through innovative but completely legal ways. Let's have a look at a few such legal profit repatriation methods.

• Transfer Pricing: When purchase and sale contracts are signed between the subsidiary and the parent company, at trade terms that favor the parent firm, it results in profit repatriation through transfer pricing. This kind of tilted transfer pricing, that favors high prices when the parent company sells something to its subsidiary, allows for effective transfer of profits from the subsidiary to the parent. Though this method is legal, it can cross the borders of legality if the transfer prices used are completely out of line with the market rates and are also blatantly overinflated. It is legal but only if the transfer prices are reasonable and justifiable.

• Royalty Payments: The best part about royalties is that they are not considered as profit transfers and hence, lay outside the purview of profit repatriation restrictions. A parent company can charge its subsidiary with royalties, for the usage of the parent's trademarks and copyrights. These royalties can serve as effective means for profit repatriation.
• Leading and Lagging Payments: Profit repatriation can be accomplished by leading or lagging payments between the parent company and the subsidiary, based on calculated expectations of currency exchange rate movements. If a subsidiary has to make a payment to the parent firm, in a currency that's expected to depreciate, the subsidiary can pay in advance (lead the payment) and pay more after the currency depreciates. By paying more after the depreciation of currency, you've legally passed over some of your profits to the parent firm. Similarly, one can lag payments if the payment currency is expected to appreciate, hereby again paying more and passing over profits to the parent firm.
• Financing Structure: Funding an international business with a loan from the parent company, can help the subsidiary to repatriate its profits. This is better than equity because interest payments are tax deductible on the subsidiary side while dividends are not. Even for the parent company, loan repayments are non-taxable in the hands of the parent company, unlike dividends which are taxed. Repatriation restrictions can only be evaded through this if the repatriation is controlled, i.e. the parent is not seen as charging an overly excessive interest rate, etc.
• Parallel Inter Company Loans: Two parallel and independent companies can give parallel loans to each other’s subsidiaries to counter the fact that the subsidiaries may not be allowed profit repatriation according to the previous point. With the amount, timing and interest payments matching on both the loans, both the companies can effectively help each other out with their profit repatriation. It pays to keep exchange rates out of this situation and that can happen if both subsidiaries are situated in the same country.
• Re-invoicing Centers: Re-invoicing centers that act as invoicing intermediaries between two parties can be set up in countries that have low capital controls. Non-repatriable cash flows can be converted into repatriable cash flows, when the payment to the parent company is routed through them.
• Counter or Barter Trade: This can be established with both parties (the parent and the subsidiary) buying and selling from each other. This is a barter system with no payments and so to repatriate profits, the subsidiary must sell the parent higher value goods than it receives from the parent. Profits are repatriated to the amount of the difference in value of the goods sent and received.

Bangladesh Profit Repatriation:

There are no such remarkable restrictions on the profit repatriation of MNCs operating in Bangladesh. The repatriation in industrial undertakings in Bangladesh generally may be made without restriction. However, foreign investors must obtain permission (from authorized banks) to remit dividends and capital gain back to the home country.  It is actually very good when it comes to profit repatriation from Bangladesh. Bangladesh allows free repatriation of profits once all the local and central (tax) liabilities are met. In fact, throughout history, there has never been an incident that Bangladesh has failed to provide foreign exchange for repatriation. Investment exit decisions are also fairly simple, and profits can be repatriated once all the tax debt and other obligations are satisfied. Problems only arise when people evade or circumvent the already simple rules, or do so out of ignorance. The profit repatriation laws differ from country to country, so if you wish to start a subsidiary in some other country, do familiarize yourself with them. Profit repatriation has both pros and cons. While some argue that profit repatriation entails taking away the money earned in one country and injecting it into another country's economy, thus boosting their local demand, others say that profit repatriation boosts FDI and thus the general growth of the host country (employment, income, etc.).Profit repatriation by foreign companies increased by 51.5 percent in 2007, reducing the net inflow of foreign direct investment (FDI), said the Centre for Policy Dialogue (CPD). The observation was published in a paper on “State of the Bangladesh Economy in Fiscal Year 2008 and Outlook for Fiscal Year 2009” which was released by the leading think tank Wednesday. The total inflow of FDI in 2006 and 2007 were $823.4 million and $950.4 million respectively. However, excluding the profit repatriation, the actual investment stood at $ 358 million and $ 245 million in the two years. The paper also found that oil, gas and power companies were on the top in repatriating their profits. In 2007 these companies repatriated a total of $507 million, which was 71.91 per cent of the total profit repatriation from the country. To cope with the situation, the CPD suggested that the government should encourage the large-scale foreign companies to reinvest their profit and offload a part of their shares in the capital market. These measures will make the local shareholders to get a part of the profits made by the foreign companies.

Repatriation of investment:

(1) In respect of foreign private investment, the transfer of capital and the returns from it and, in the event of liquidation of industrial undertaking having such investment, of the proceeds from such liquidation is guaranteed.

(2) The guarantee under sub-section (1) shall be subject to the right which, in circumstances of exceptional financial and economic difficulties, the Government may exercise in accordance with the applicable laws and regulations in such circumstances.

EXCHANGE CONTROL & REMITTANCE

Bangladesh Bank (BB) is the central Bank of the country and is responsible for issuing Bangladeshi currency and maintaining its value. BB administers the foreign exchange regulations. It has been continuing to liberalize foreign exchange regulations inconformity to the government\u2019s reform agenda in macroeconomic policies with a view to create an environment conducive to investment and productivity.

The major aspects of exchange control include:
a. Convertibility of Bangladesh Taka: The Taka is fully convertible for current account transactions. All current transactions including trade and investment as well as investment related transactions may be conducted by individuals-firms through authorized dealers (banks) without prior permission of BB.  
b. Opening of Bank Account by a Foreign Investor: A non-resident may open with any Authorized Dealer (AD) branch of a bank Foreign Currency (FC) accounts and Non-resident Foreign Currency Deposit (NFCD) acounts with foreign exchange brought in from outside. Balances of these accounts are freely transferable abroad. A foreign investor may also open and operate a Taka account freely with any bank while he is a resident. A non-resident can open a Non-Resident Investor\u2019s Taka Account (NITA) with any AD in Bangladesh with foreign exchange remitted from abroad through normal banking channel or by transfer of funds from the non-resident investor\u2019s foreign currency account for portfolio investment in Bangladesh.
c. Bringing in Cash from Abroad by a Foreign Investor
A foreigner can bring exchange in any form including cash without limit. But for amounts, in excess of $ 5000 a declaration on FMJ form is required to be made to the Customs Authorities at the time of entry.
d. Transfer of Capital and Capital Gains

Foreign Investors are free to make investment in Bangladesh in industrial enterprises excepting a few reserved sectors. An industrial entity may be set up in collaboration with local investors or may even be wholly owned by the foreign investors. The repatriation of sale proceeds (including capital gains) of shares of companies listed in a Stock Exchange in Bangladesh may be made through an AD if such investment takes place through NITA operation. Remittance of sale proceeds of shares of companies not listed in a Stock Exchange requires prior BB permission, which is accorded to for amounts not exceeding the net asset value of the shares. Transfer of shares and securities from non-resident loc quires no prior BB approval.

e. Remittance of proceeds from liquidation of industrial under staking: Remittance of proceeds arising out of liquidation of industrial undertaking requires prior BB approvals.
 f. Remittance of royalty, technical know-how & technical assistance fees: Industrial enterprises may enter into agreements for payment of royalty, technical know-how/technical assistance fees abroad if the total fees and other expenses connected with technology transfer do not exceed (a) 6% of the previous year\u2019s sales of the enterprise as declared in their tax returns, or (b) 6% of the cost of imported machinery in case of new projects. These agreements need however be registered with the Board of Investment (BOI). Agreements not in conformity with these general guidelines require prior permission of BOI. ADs may remit royalties, technical know-how/ technical assistance fees payable as per agreements registered with/approval by BOI.
g. Transfer of profit and dividend accruing to a foreign investor

i) Profits: Branches of foreign firms/companies including foreign banks, insurance companies’ financial institutions are free to remit their post-tax profits to their head offices through ADs.

ii) Dividends: Remittance of dividend income to non-residents in respect of their investments in Bangladesh may be made through an AD.
 h. Repatriation of savings, retirement benefits and salary of foreigners employed in Bangladesh

Foreigners employed in Bangladesh with the approval of the Government may remit 50% of salary, actual savings and admissible retirement benefits through an AD. Net salary of foreign national’s payable for the period of leave admissible to them as per their service contract duly approved by the Government will be remittable.

 i.Investment Facilitating Measures:
Prior approval of BB is no longer required for:
a. Remittance of profits to the head office of foreign investors
b. Issuance of shares to non-residents against investment in industrial set up in Bangladesh
c. Remittance of dividends on such shares the non-resident investors
d. Portfolio investment by non-residents including foreign individuals / enterprises in shares and securities through stock exchanges of Bangladesh
e. Remittance of dividends on portfolio investment by non-residents securities through stock exchanges of Bangladesh
f. Remittance of sale proceeds including capital gains
g. Remittance of principal and interest installments on loan supplier\u2019s credit obtained by industrial units from foreign lenders with approval of BOI
h. Remittance in repayment of principal and payment of interest on such loans
i. Remittance of royalty, technical know-how and technical assistance fees in conformity to the BOI guidelines
j. Remittance of savings of expatriate personnel, out of salaries and benefits stated in BOI approved contract, at the time of their leaving Bangladesh.

Profit Repatriation as a FDI outflow:

    FDI brings much-needed foreign funds for current investment, but it also creates long-term obligations in the form of future repatriation of profit earned by the foreign investor. Another bothersome aspect is the round tripping of capital that finds original investment (including intra-company debt and interest) and domestic capital reinvested as ‘FDI’, because of discriminatory taxation policy that favors FDI over domestic investment. Table 6 shows the possible repatriation of foreign exchange in the form of dividend/profit, capital repatriation, private debt repayment and family maintenance during 1995 to 2005. Table 5 shows that between 1995 and 2002 the country enjoyed a higher rate of FDI inflow with a lower outflow of profit and loan repayment. But in the year 2003 and 2004, the net balance, i.e., inflow minus outflow is negative implying that foreign investors have taken out more money than they have pumped into the country through repatriation of profit/dividend, capital and repayment of loans with foreign banks and other sources. However, total inflow of FDI exceeded total outflow in 2005. If we compute the present value (PV) of the ‘gross inflow’ and also ‘net inflow’ in Table 5, discounting at 5 percent, which is close to the long term US bond yield, we get 4566.19 million US dollar as the PV of ‘gross FDI inflow’ over the period, 1995-2005 (11 years). On the other hand, PV of ‘net inflow’ is 1516.26 million US dollar, just one-third of the gross inflow.

FDI related outward remittances, 1995-2005(calendar year) (In Million USD)

Year	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005
Dividend/Profit Repatriation	19	18	26	40	83	149	175	195	355	338	418
Inv. liquidation/	0.3	-	0.6	0.1	2.9	0.5	0.5	2.6	2.2	10.5	3.3
Cap. Repatriation
Private Debt amortization	20	34	84	53	168	227	188	243	229	372	208
Family Maintenance	0.99	0.74	1.41	1.56	1.92	2.43	1.84	2.82	4.19	4.72	2.58
Total Outward flow (a)	40.29	52.74	112.01	94.66	255.82	378.93	365.34	443.4	590.4	725.2	631.9
Gross FDI inflow including	106.3	267.6	610.3	668.5	455.1	703.6	568.5	573.3	466.2	545.4	927.3
private outside loan (b)
Net Inflow/	66.01	214.9	498.29	573.84	199.28	324.67	203.16	129.9	-124	-180	295.4
Outflow (b) – (a)

Source: Statistics Department, Bangladesh Bank

Note: Here ‘gross FDI inflow’ differs from ‘total FDI inflow’ in Table 1, due to inclusion of private outside loan with the total inflow.

While welcoming FDI, it would simultaneously be prudent and farsighted to develop a set of priorities in guiding FDI decisions. The general principle one can easily agree on, is to promote long-term sustainable economic growth through labor-intensive economic activities, which is the primary goal of any investment. Issues of advanced technology and its diffusion, strengthening of the country’s comparative advantage and hence export growth, help develop the domestic capital market are among the elements at the next level of focus. However, within these broad guidelines, it is observed that foreign investors are often keen to bring outside private loans. As a result, they have to remit more outside the country for repayment, which creates pressure on the foreign exchange reserves. Foreign companies are often reluctant to arrange funds domestically or float shares in the domestic capital market. These practices do not alleviate the capital market of its weaknesses. One reason is perhaps the concern that if the stock prices of these foreign companies remain low in Dhaka that may ultimately hamper their business in other locations. Of course, listing in the stock exchanges is not mandatory for foreign companies as yet. Moreover, due to some restrictions on sanctioning funds (e.g., single borrower exposure limit) by domestic banks and financial institutions, foreign companies have not been looking for domestic finance in most cases. In this connection, the syndication of domestic credit being negotiated by the Saudi owners of Rupali Bank is a positive move. Recently, Bangladesh Bank has put directives to foreign owned/controlled firms/companies seeking domestic currency term loans regarding the composition of their investment (FE Circular no.07, dated 14 August, 2006). The directive stipulates that debt may not exceed 50 percent of total investment.2In spite of negative flows generated in some years; overall FDI helps output growth, particularly in service and industrial sectors of the economy. However, one should weigh up both the positive and negative implications of individual FDI proposals before any decision. It would appear that the specific policy directives might be revisited so as to reduce dependence on foreign bank borrowing, and instead encourage foreign and domestic investors alike to raise more capital from the domestic equity market. If some industry segments, e.g., cellular phone companies find the local market too limited, funds may be raised by floating shares simultaneously in both domestic and regional markets (e.g., Dubai, Hong Kong, Malaysia, Singapore, etc.).

The FDI can undoubtedly play an important role in the economic development of Bangladesh in terms of capital formation, output growth, technological progress, exports and employment. The relatively small share of FDI in GDP, however, indicates that the potentials are far from being realized in the Bangladesh experience thus far. Nevertheless, concerns remain about the possible negative effects of FDI, including the question of market power, technological dependence, capital flight and profit outflow. The limited evidence gathered above tends to support some of these apprehensions. On a positive note, service sector growth appears well correlated with FDI flow to this sector. Further, this has a linkage effect to the rest of the economy. Source: Bangladesh Bank Publications and Data.