Pakistan tweaks rules in accordance with OECD to restrict tax avoidance


ISLAMABAD: Pakistan has tweaked its legal framework in accordance with Organization for Economic Cooperation and Development (OECD) for restraining tax avoidance by international companies.

This move would restrict multinational corporations from moving their profits to tax-havens and from claiming larger expenditures, reported Express Tribune.

Recently, the Federal Board of Revenue (FBR) made revision to Income Tax Rules 2002, tweaking them with requirements of the OECD. These revisions follow a legal provision which was introduced in the federal budget 2017-18 last year in May.

Under these new revisions, the government has eased restrictions for companies where they were stricter. The tax regulator has recently changed Rule 27G of ITR 2002, by which it removed the stipulation on MNCs for filing country-by-country reports for tax year 2017.

As per the revised rules, now the companies would be required to file these reports for 2018. MNCs have been moving their profits to low-tax countries to circumvent heavy taxation and expenses to areas where expenditures are counted at higher rates.

OECD to curb this practice has taken many steps on transfer pricing accounting standard which permit various entities of MNCs conduct transactions with each other to restrict tax avoidance.

The G20 nations have framed a 15-point action plan to rein in tax evasion. Point 13 of this recommendation gives details regarding transfer pricing documentation and lays out a standardized reporting format called Country-by-Country Reporting (CBCR).

As per FBR regulations, MNCs are bound to preserve records of documents and transactions which their associates initiate.

According to CA firm, Tola Associates CBCR may have a major impact on taxpayers and the FBR. It added the requirement of maintaining master file and CBCR would overwhelm the companies, which were already complying with local documentation requirements.

This may increase the cost for these MNCs, said Tola Associates. The country has been working in tandem with OECD to make its legal framework more robust and CBCR peer review was concluded during mid-February and would be presented in March, said FBR officials.

This new transfer pricing mechanism formulated under OECD guidelines could have an effective check on MNCs. By bringing revisions to Rule 27D, the tax regulator has extended the scope of retrieving information.

As per further revisions in Rule 27D, MNCs would now be required to file CBCR to the board within 12 months of the end of its financial year.

The FBR is bound to share CBCR information with jurisdictions which are part of this competent authority agreement.

As per this sub-rule, it is mandatory to automatically exchange reports between the relevant jurisdictions. And it has been notified via the SRO any provision of these rules won’t be applicable on transactions before 1st of January 2016.