Transfer Pricing Audit

Pakistan has introduced amendments in the Income Tax Ordinance, 2001 – the “Tax Ordinance” for conducting transfer pricing audits of multinational enterprises (“MNEs”). These amendments have been made in section 230E of the Tax Ordinance through Finance Supplementary (Second Amendment) Ordinance, 2019 and Tax Laws Amendment Act, 2020, thus shifting the focus to examining Transfer Pricing (“TP”) of MNEs – a historically overlooked area of the taxation sphere in Pakistan.

Amendments in the Transfer Pricing Audit Regime

The recent amendments relate to the procedure for conducting TP audits by the Tax Authorities. The responsibility to conduct TP audits lies with the Directorate General of International Tax Operations (“DGITO”) introduced in 2019. However, due to the absence of a clear procedure for carrying out TP audits, ambiguity surrounded the Tax Authorities and Taxpayers. According to recent amendments, TP audits will be conducted in accordance with section 177 of the Tax Ordinance – the existing audit provision for conducting an audit of the affairs of a taxpayer by calling records and other information is not limited to books of accounts. While TP audits will be governed by the section 177 framework, the following powers of the Commissioner Inland Revenue provided under section 177 shall not apply to audits:

• Power to amend the assessment under section 122 of the Tax Ordinance after issuance of Audit Report.
• Power to make the best judgement assessment under section 121 of the Tax Ordinance, in the event that no information is provided by the Taxpayer.
• Power to treat the return or revised return filed by the taxpayer as of no legal effect, if no information is provided during the audit procedures.

It has also been clarified that Commissioner Inland Revenue is empowered to determine the TP of the transactions at arm’s length between the associates while conducting the Audit of the Income Tax affairs of the Taxpayer under section 177, section 214C (random ballot based audits) or during the proceedings for the amendments in assessment under section 122 of the Tax Ordinance. The Transfer Price audit is an independent Audit as compared to Audit of Income Tax affairs of the Taxpayer and refers to the audit for determination of Transfer Price at arm’s length in the transactions between associates.

In conclusion, the following TP audit process has transpired from recent amendments:

• Federal Board of Revenue will notify the criteria for selection of taxpayers for TP audit in the Official Gazette.
• Directorate General of International Tax Operations will conduct the TP audit and issue Audit Report.
• Assessment proceedings on the basis of the Audit Report shall remain within the jurisdiction of Commissioner Inland Revenue having jurisdiction over the Taxpayer normally.