Historically, TP rules have not received sufficient attention from the tax authority since the introduction of the Income Tax Ordinance, 2001 - the “Tax Ordinance”. It was not until 2018 that the Federal Board of Revenue (FBR) issued notification S.R.O. 144(i)/2018 which prescribes Pakistan’s MF, LF and CbCR requirements. Also, the tax authority was empowered to examine TP of MNEs on modern lines.
Recent TP Developments
Rules on Documentation and CbCR
FBR has introduced rules relating to documentation and CbCR requirements for compliance with the provisions of domestic law dealing with the transactions between associates. The OECD’s model rules for TP documentation that provide for a three-tiered approach have been implemented. The thresholds for these requirements are as follows:
- CbCR for MNEs with consolidated revenue of more than EUR 750 million or an equivalent amount in PKR in the previous tax reporting year;
- MF preparation for MNEs with a group turnover of more than 100 million PKR*;
- LF preparation for related party transactions of more than 50 million PKR.
The CbCR submission is required within twelve months after the last day of the tax reporting FY of the MNE group. The CbC notification is required to be submitted by the Constituent Entity (CE) before the deadline for filing tax returns. The scope of the term CE has been enhanced so that it also includes the Permanent Establishment in Pakistan of the non-resident person.
Failure to furnish CbCR by the due date is subject to a penalty of PKR 2,000 for each defaulting day (minimum penalty of PKR 25,000). The penalty for not maintaining the MF or LF is 1% of the value of transactions.
TP Enforcements and Audit
A new Directorate, namely the “Directorate General of International Tax Operations” (DGIT) has been established with the Finance Amendment Act, 2019. DGIT will be mainly responsible for concluding agreements with different jurisdictions for exchanging information.
DGIT’s most important function is to conduct taxpayers’ transfer pricing audits involved in cross-border transactions. The selection criteria for transfer pricing audits are designed by the FBR after analysing the data made available under agreements for exchanging information. A paradigm shift in FBR’s approach regarding TP is evident since, in the past, no significant TP audits/examinations were carried out. TP audits are separate from and in addition to the conventional tax audits. It is expected that the drive to improve TP compliance will gain momentum over the next few years. In this regard, the tax authority has empowered DGIT officials through a notification of 9 July 2019. Various programmes for building on officials’ capacity are also being implemented with the cooperation of international institutions.
It is not surprising that FBR believes TP is the preferred tool of MNEs for shifting profits outside the country, which has the effect of not only eroding the tax base of the country, but also liquidating the country’s hard-earned foreign exchange. Given the recent paradigm shift in TP, and the fact that Pakistan has not yet introduced APAs, the tax disputes involving transfer pricing adjustments are expected to rise in an unprecedented manner in future.
*1 EUR is approximately 173.45 PKR
Contact
Laeeq Siddique
Email: laeeqs@enfoque.com.pk
