Bangladesh Tax Treaty
Bangladesh International Tax Compliance Rules
Bangladesh – US Tax Treaty Quick Summary. Bangladesh is the most densely populated country in the world, with the world’s eighth-largest population (over 165 million). Bangladesh is situated in the northeastern corner of the Indian subcontinent, sharing a 4,100 km border with India and a 247 km border with Burma.
Its legal system is based on the English common law system, and many of its basic laws, such as the penal code, civil and criminal procedural codes, contract law, and company law, are heavily influenced by English common law. Bangladesh has a unicameral, 350-seat House of the Nation or Jatiya Sangsad.
Bangladesh is a member of the World Trade Organization (WTO).
- CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE PEOPLE’S REPUBLIC OF BANGLADESH FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
- Technical Explanation of the Convention between the United States and Bangladesh signed at Dhaka on September 26, 2004
Currency. Bangladesh Taka (BDT)
Common Legal Entities. Public and private limited liability company, partnership, and branches.
Tax Authority. National Board of Revenue
Tax Treaties. Bangladesh is party to more than 30 tax treaties.
Corporate Income Tax Rate. 25% – 25%
Individual Tax Rate. Up to 30%
Corporate Capital Gains Tax Rate. 15%
Individual Capital Gains Tax Rate. 15%
Residence. Residence is based upon presence for more than 182 days or a multi-year calculation with a four-year look-back period.
Dividends. 20% (resident company) / 10% (resident individual) / 20% (nonresident company) / 30% (nonresident individual)
Interest. 0% (resident company) / 0% (resident individual) / 20% (nonresident company) / 20% (nonresident individual)
Royalties. 10%/12% (resident company) / 10%/12% (resident individual) / 20% (nonresident company) / 20% (nonresident individual)
Transfer Pricing. Based upon OECD-type provision.
CFC Rules. No.
Hybrid Treatment. No.
Inheritance/estate tax. No.
Set forth below are selected explanations, analysis, and insights with respect to the Convention and Protocol between the United States and Bangladesh (the “Convention”).
Income Tax Treaty between the United States and Bangladesh
The Convention applies to residents of the United States or Bangladesh except where the terms of the Convention provide otherwise. Under the Fiscal Domicile Article, a person is generally treated as a resident of a Contracting State if that person is, under the laws of that State, liable to tax therein by reason of his domicile or other similar criteria. If, however, a person is considered a resident of both Contracting States, a single state of residence is assigned under that Article.
The Convention contains the traditional saving clause found in all U.S. treaties. The Contracting States reserve their rights, except as specifically provided, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary.
An individual who is a U.S. resident under the Code but who is deemed to be a resident of Bangladesh under the tie- breaker rules of Article 4 (Fiscal Domicile) would be subject to U.S. tax only to the extent permitted by the Convention. However, the person would be treated as a U.S. resident for U.S. tax purposes other than determining the individual’s U.S. tax liability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares in that corporation held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart F income recognized by the corporation. See, Treas. Reg. section 301.7701(b)-7(a)(3).
Under the Convention, each Contracting State also reserves its right to tax former citizens and long-term residents whose loss of citizenship or long-term residence had as one of its principal purposes the avoidance of tax. The Convention defines “long-term resident”, consistent with U.S. law, as an individual (other than a U.S. citizen) who is a lawful permanent resident of the United States in at least 8 of the prior 15 taxable years. An individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country.
In the United States, such a former citizen or long-term resident is taxable in accordance with the provisions of section 877 of the Code. Section 877 provides for special tax treatment of former U.S. citizens and long-term residents who gave up their citizenship or long-term resident status to avoid U.S. tax. Prior to its amendment by the American Jobs Creation Act of 2004 (AJCA), section 877 applied to individuals that relinquished U.S. citizenship or terminated long-term residency with a principal purpose (i.e., subjective intent) of tax avoidance. An individual was generally presumed to have a tax avoidance purpose if their net worth or average annual net income tax liability exceeded specified thresholds. AJCA replaced the subjective determination of tax avoidance as a principal purpose for relinquishment of citizenship or termination of residency with objective rules. Former citizens or long-term residents are now subject to U.S. tax for the 10-year period following loss of such status, unless they fall below certain net income and net worth thresholds or satisfy certain limited exceptions for dual citizens and minors who have had no substantial contact with the U.S.
Thus, section 877 now treats individuals who expatriate and meet the objective tests as having expatriated for tax avoidance purposes. Accordingly, the objective tests in section 877 represent the administrative means by which the United States determines whether a taxpayer has a tax avoidance purpose for purposes of the reservation of taxing rights contained in the Convention.
Fiscal Domicile (Residence)
The Convention sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. As a general matter only residents of the Contracting States may claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. The fact that a person is determined to be a resident of a Contracting State under Article 4 does not necessarily entitle that person to the benefits of the Convention. In addition to being a resident, a person also must qualify for benefits under the Limitation on Benefits provisions in order to receive benefits conferred on residents of a Contracting State.
The determination of residence for treaty purposes looks first to a person’s liability to tax as a resident under the respective taxation laws of the Contracting States. As a general matter, a person who, under those laws, is a resident of one Contracting State and not of the other need look no further. That person is a resident for purposes of the Convention of the State in which he is resident under internal law. If, however, a person is resident in both Contracting States under their respective taxation laws, the Convention provides tie-breaker rules pursuant to which a person is assigned, where possible, a single State of residence for purposes of the Convention.
This Convention defines the term “permanent establishment,” a term that is significant for several articles of the Convention. The existence of a permanent establishment in a Contracting State is necessary under the Business Profits Article for the taxation by that State of the business profits of a resident of the other Contracting State.
The basic definition of the term “permanent establishment,” as used in the Convention, refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on. As indicated in the OECD Commentary to Article 5, a general principle to be observed in determining whether a permanent establishment exists is that the place of business must be “fixed” in the sense that a particular building or physical location is used by the enterprise for the conduct of its business, and that it must be foreseeable that the enterprise’s use of this building or other physical location will be more than temporary.
The general rule is that business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on business in that other Contracting State through a permanent establishment situated there. When that condition is met, the State in which the permanent establishment is situated may tax the enterprise, but only on a net basis and only on the income that is attributable to the permanent establishment.
The Convention incorporates the arm’s-length principle reflected in the U.S. domestic transfer pricing provisions, particularly Code section 482. It provides that when related enterprises engage in a transaction on terms that are not arm’s-length, the Contracting States may make appropriate adjustments to the taxable income and tax liability of such related enterprises to reflect what the income and tax of these enterprises with respect to the transaction would have been had there been an arm’s-length relationship between them.
The Convention permits the United States to impose its branch profits tax and its branch level interest tax on a Bangladesh corporation. Bangladesh may impose a branch profits tax on a U.S. corporation.
Limitation on Benefits
The Convention follows the general form used in other recent U.S. income tax treaties. It provides for the general rule that residents of a Contracting State are entitled to benefits otherwise accorded to residents only if the resident satisfies one or more of the specified attributes of a resident . A person that satisfies one or more of the attributes will be entitled to all the benefits of the Convention. With respect to a person not entitled to benefits under the general rule, benefits nonetheless may be granted to that person with regard to certain types of income or if the competent authority of the State from which benefits are claimed determines that it is appropriate to provide benefits in that case.
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