The document summarizes lessons learned from IFC's Tax ADR initiative in Bangladesh which established mediation for tax disputes for the first time in a developing country. Some key lessons included: 1) behavioral change among NBR officials and businesses is important for effective ADR in addition to technical trainings, 2) a clear sustainability plan is needed including budget allocation, 3) better coordination within NBR departments is necessary, and 4) success measures like number of cases referred can vary between departments so incentives may need to differ. While initial successes were achieved, continued momentum and NBR ownership will be important for sustainability.

1. SMARTLESSONS — APRIL 2014 1
Background
Bangladesh has a burdensome commercial
court litigation process that most businesses
find frustrating, costly, and a key impediment
to business operations. As of 2012, the
number of tax cases was 16,000, with an
estimated value of $1.9 billion pending
at the High Court, Supreme Court, and
Tribunals of Income Tax, VAT, and Customs.
The backlog of tax cases has resulted in huge
loss of revenue to the government.
IFC’s assistance with Tax ADR in Bangladesh
started back in 2011 with technical support
for the introduction of ADR provisions
in relevant revenue-administering acts—
Income Tax Ordinance 1984, Customs Act
1969, and VAT (value added tax) Law 1991.
In 2012, ADR became operational with the
enactment of three separate mediation rules
and the establishment of three ADR centers—
for income tax, VAT, and customs—in Dhaka
and Chittagong. Additional support for
these processes came through the formation
of a panel of mediators through stakeholder
consultation; capacity building for mediators
and National Board of Review (NBR) staff;
and awareness raising for taxpayers and NBR
staff. (See Figure 1.)
An Ounce of Mediation Is Worth a Ton
of Litigation: Breaking the Deadlock for
Tax Disputes in Bangladesh
A successful tax mediation regime not only can help the parties move away from
adopting entrenched litigious positions and toward focusing on early resolution
outside of the courts, but it can also help improve taxpayers’ views of the tax
system, thereby increasing voluntary compliance. IFC’s Tax ADR (alternative
dispute resolution) project showcases what it takes to introduce a new concept,
manage sensitive stakeholder relationships, and overcome rigid perceptions and
competing interests in the process of achieving reform. This SmartLesson shares
the ADR team’s experience in Bangladesh, working to establish mediation for tax
disputes for the first time in a developing country.
ABOUT THE AUTHORS
MAHJABEEN QUADER
is an Operations Officer,
Investment Climate business line,
and the team leader for the ADR
program in Bangladesh. Her
previous work includes
sustainable supply chain and
community investment and
investment policy and
promotion. Before joining IFC in
2002, Mahjabeen was with
Citibank N.A.
MD. MAZEDUL ISLAM
is an Operations Analyst,
Bangladesh Investment Climate
team, specializing in regulatory
simplification. His work also
includes institutional capacity
building, business regulation,
and investment policy. Before
joining IFC in 2010, Mazedul
worked with various
development organizations on
microfinance and extreme
poverty.
MOHD. FAHAD IFAZ
is a consultant working with the
Bangladesh Investment Climate
team on regulatory
simplification. Prior to joining IFC
in 2013, he was a senior business
consultant for an inclusive
market development project
funded by UKAid, SDC, and
DANIDA in Bangladesh.
APPROVING MANAGER
Masrur Reaz, Program Manager,
Investment Climate, South Asia.
Figure1:BenefitsofTaxADR
ADRwillallowNBRtogetthemoneytothe
exchequerandreducethebacklogofcases.
Currently,revenueworthalmost$1.90billionistied
upinalmost16,000pendingcasesbeforethecourts.
AccordingtoNBRstatistics,asofJanuary31,2012,a
totalof$0.60billionwastiedupinincometaxesin
6,283cases(2,074casespendingundertheappellate
division,1,304indifferenttribunals,and2,905inthe
HighCourt).Nearly$0.55billionintaxesistiedupin
2,500casesintheVATwingand$0.70billionin7,217
caseswiththecustomswing.
APRIL 2014

2. 2 SMARTLESSONS — APRIL 2014
The Tax ADR initiative by NBR is based on successful global
practices, particularly the South African model in use
since 2003. Its launch marks the first time an ADR system
designed specifically for tax disputes has been introduced in
a developing country. The ADR process allows taxpayers to
amicably settle their income tax, VAT, and customs disputes
out of court with the help of a mediator. It is not mandatory
for the disputing parties to reach an agreement, and if they
cannot arrive at a mutually agreeable outcome, the case is
referred to the usual legal channels. (See Figure 2.)
Two major challenges the team had to deal with during
implementation were 1) overall mistrust between NBR
and the business community and 2) a lawyer community
opposed to establishment of an ADR system. Moreover,
the team encountered skepticism and lack of enthusiasm
(as with any new initiative) within NBR, as well as a lack
of interest and lack of knowledge within NBR and the
business community and among taxpayers. Implementation
of such a complex program with major challenges is never
easy, and the team learned several valuable lessons during
the implementation.
Lesson 1: Behavioral change is as important as technical
and administrative changes.
IFC found out that in most cases, NBR representatives coming
to the ADR hearings come with very rigid propositions.
They do not have much space for negotiation in the offers
they put on the table for the businesses, which discourages
businesses from opting for ADR in the future.
The officials who represent NBR at the ADR hearings are
often instructed by their superiors not to negotiate with
the businesses. They feel that negotiating reflects badly on
their reputations, and that it is damaging to their careers if
they are not able to collect the full disputed amount.
Most NBR officials see ADR as a good initiative for speedy
dispute resolution, but several officials also see it as a risk.
One of the major risks they presume is the anti-corruption
law, whereby the anti-corruption commission (ACC) can
investigate any government official it suspects of being
engaged in any malpractice. The officials are uncomfortable
about releasing any amount while negotiating with
a taxpayer, for fear that the ACC will put them under
investigation.
The other side of the coin is that the lawyers who attend
the hearings on behalf of the businesses are unwilling to
negotiate and do not value the mediation process.
IFC realized that while technical trainings on mediation and
negotiation are important to kick-start the ADR program,
other innovative activities are needed to raise awareness
and ensure behavioral change among the NBR officials and
businesses. This change is necessary for the parties to ADR
to learn to cooperate, develop valuable skills, and adopt
Figure2:SolvingTaxDisputesthroughADR
Source:Mid-termStudyonADRforTaxDisputes,2013.

3. SMARTLESSONS — APRIL 2014 3
flexible strategies, which can ensure an effective ADR
process for tax disputes. Keeping these objectives in mind,
IFC organized various trainings and workshops to develop
the mediation and negotiation skills of taxpayers and NBR
staff. The team conducted open dialogues between the
taxpayers and NBR staff, with the NBR leadership present
to answer critical questions from the private sector, lawyers,
and, more importantly, NBR officials, to develop their
confidence in ADR.
Lesson 2: Who does and who pays? Have a clear
sustainability roadmap for the client from Day One!
IFC has been supporting NBR in the operationalization of
ADR for customs, VAT, and income tax disputes. During the
implementation phase, IFC contracted a firm to provide
critical administrative support to operationalize ADR
for nine months. The expectation was to use this time to
establish a demonstration effect for NBR so they could
learn and later take over this role. A prerequisite for NBR to
take over was for the relevant line ministry to approve the
budget and clear the allocation of funds.
However, IFC had to continue providing administrative
supportbeyondtheagreedtimelineandendedupextending
for another 12 months. During that period, IFC persistently
reminded NBR of the need to ensure the budget for ADR so
NBR could sustain the program on its own once IFC support
ended. Also, frequent changes of senior staff—the people
IFC regularly interacted with for the project—resulted in
lack of coordination among the different departments in
NBR, and IFC had to start over and establish relationships
with the new focal people every time there was a change.
This turnover also delayed NBR’s decision to take over this
function entirely by seeking budget approval from the line
ministry. Ultimately, the interministerial bureaucracies and
repeated changes of key NBR staff kept NBR from ensuring
the budget and coordinating development of a plan
between the three departments on the process of taking
over the ADR centers.
While working with complex institutions such as NBR,
where frequent change of staff is not uncommon and
decision making does not rest with one person, it is
important to form a core working group with the client
to ensure that any change of senior staff does not halt the
entire implementation and decision process. In addition, it
is equally important to involve mid-level staff along with
senior staff during implementation, so the client does not
relax its effort.
Lesson 3: To put the pieces of the puzzle together, you
need better coordination and communication within
the client.
In July 2011, IFC initiated work that resulted in the
operationalization of three ADR centers—for income tax,
VAT, and customs—in Dhaka and Chittagong, beginning in
March 2012.
The team observed a lack of coordination between the
income tax, VAT, and customs ADR centers, and this
affected smooth operation and disrupted information
flow to and from NBR. The members (NBR officials working
directly under the chairman of NBR and having decision-
making authority for their respective departments) focused
only on increasing the number of cases and organizing
events such as training and awareness campaigns for their
departments. Most of the NBR officials are not aware of the
larger context or the updates from the other departments
regarding ADR. As a result, the private sector might get
mixed messages rather than a coordinated message with
specific information about income tax, VAT, and customs.
NBR needed to take a holistic view of the overall ADR
mechanism rather than looking at it only through the lens
of departmental priorities.
Issues hindering ADR for tax disputes could be solved with
better coordination between the departments on matters
related to ADR. One such case involved NBR’s inability to pay
the facilitators’ fees, since there was no separate budget
item for ADR. The payment was made by taxpayers. On the
other hand, a separate bank account existed in Chittagong
from which the department paid the facilitators’ fees
for customs cases. Interestingly, this information was not
known to the other departments, and as a result many
unhappy facilitators were not paid.
An ADR cell was established in NBR to coordinate the overall
activities and to make sure information flow is symmetrical
among the departments. IFC has also conducted several
meetings and discussions with NBR officials from the three
departments on improving their coordination on ADR-
related matters. Steps are now being taken to avoid any
further issues with facilitators’ payments.
Lesson 4: Success is measured in numbers.
IFC expected that cases would be referred at the same rate
for all three departments (customs, VAT, and income tax),
once the ADR system became operational. But there was
a significant difference in the number of cases referred,
with income tax being the recipient of most cases. The
number of cases resolved was also higher in the income tax
department. (See Table 1.)
Table1:NumbersofTaxDisputeCasesfromInceptiontill
December2013
Type Cases Referred Cases Settled
Value of
Funds
Released
(USD)
Income Tax 232 182 78,426,239
Customs 38 25 293,174
VAT 3 1 43,120
Total 273 208 78,762,533

4. 4 SMARTLESSONS — APRIL 2014
DISCLAIMER
SmartLessons is an awards
program to share lessons learned
in development-oriented
advisory services and investment
operations. The findings,
interpretations, and conclusions
expressed in this paper are those
of the author(s) and do not
necessarily reflect the views of
IFC or its partner organizations,
the Executive Directors of The
World Bank or the governments
they represent. IFC does not
assume any responsibility for the
completeness or accuracy of the
information contained in this
document. Please see the terms
and conditions at www.ifc.org/
smartlessons or contact the
program at smartlessons@ifc.org.
The success of the income tax wing can be
attributed to the proactive and effective
measures taken by the ADR head of that
department, who has been involved from
the outset and has been an active advocate
for ADR. On the other hand, multiple staff
changes have occurred at the customs and
VAT departments, with staff having limited
knowledge about ADR. Those factors affected
the momentum and ultimately resulted in the
low case base.
When the client has different departments run
by different people with different agendas
and priorities, it is important to identify and
incentivize them accordingly. Also, when the
client experiences frequent changes in key
positions, it is necessary to anticipate the
changes and to engage a core team—instead
of just one person—at the client.
In the project design phase, NBR developed
a panel of facilitators (mediators) comprising
former NBR members and renowned
representatives from the private sector.
Almost all of them were from Dhaka. The
private sector people were kept on the panel
with the assumption that their presence
would stimulate participation and gain the
confidence of the private sector in the ADR
process. IFC agreed to the panel of facilitators,
expecting that the panel would expand to
include more technically qualified people as
the ADR program gained momentum.
When the implementation started, the panel
of facilitators did not change, despite IFC’s
initial expectation and continual advice that
it be expanded.
Not surprisingly, the ADR process suffered
when a case was referred to private sector
facilitators, whose lack of availability was
understandablebecauseofpriorcommitments
to their own businesses. In addition, some
of the cases outside Dhaka could not be
administered, because most of the facilitators
are Dhaka-based, and commuting was not
cost-effective. This situation resulted in a few
cases going back into the court system, and it
was a factor in discouraging many more from
using ADR.
For Tax ADR, it is important to have technically
qualified people as facilitators rather than
only those who are prominent. It is also
important to ensure that each location has its
own qualified facilitators.
Conclusion
Theinitialsuccesses(Box1)ofTaxADRhavehad
some positive spillover effects as well. Private
entities are becoming increasingly more
receptive to the idea of ADR in all aspects of
commercial activities. The advantages of ADR
in reducing the time and costs that businesses
incur in resolving tax disputes are becoming
self-evident. The success of mediation for
speedily resolving disputes—as a result of
the Tax ADR intervention—showcased the
potential of mediation for resolving all
sorts of commercial disputes in general. This
success was one of the contributing factors to
the recent amendment to the Code of Civil
Procedure, making mediation mandatory for
all civil cases. The team is now greatly engaged
in the sustainability of the initiative and is
working very closely with NBR to continue the
momentum, retain the advocates identified,
and ensure that NBR assumes full ownership.
Box1:AchievementstoDate
• IncorporationofADRsectionsinall
revenue-administeringacts(IncomeTax
Ordinance1984,CustomsAct1969,and
VATLaw1991);
• EnactmentofthreeseparateADRrules
bytheNationalBoardofRevenueunder
theseacts;
• Formationofapanelof14mediators;
• FormationofpilotADRcentersinthree
revenue-collectioncentersinDhakaand
Chittagongforincometax,VAT,and
customs;
• 208casesresolved,releasing$78.7million;
• 204NBRstafftrained;
• 1milliontaxpayersreachedthrough
awarenessworkshopsandmedia;and
• DedicatedADRcellformedwithinNBR,
withnecessarybudgetaryallocation.