Proposals to deter foreign companies from tax evasion

Two other proposed amendments in income tax ordinance to address concerns of OECD before it gives Pakistan membership

ISLAMABAD: The government has proposed an amendment in the income tax law to plug a loophole, due to which foreign companies and their local associates have been avoiding billions of rupees in income taxes by inflating the cost of goods sold by the legal entities of an enterprise.

The amendment is also a requirement of the Organisation of Economic Cooperation and Development (OECD).

The government has also proposed two other amendments in the Income Tax Ordinance 2001 through Finance Bill 2016 to address concerns of the OECD before it gives Pakistan membership.



Pakistan hopes to become a signatory of the Convention on Mutual Administrative Assistance in Tax Matters before the end of this year.

The convention is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion.

The OECD recently held the ‘Pakistan’s Peer Review Group’ for gauging the standards of transparency and exchange of information for tax purposes and found the country largely compliant.

A Global Forum of OECD conducts such peer reviews. It will take at least two more years for Pakistan to be able to get information from OECD.

Income Tax Ordinance amendments

One of the most significant proposed amendments is an insertion of a new clause, which will make it legally binding for multinational companies’ local associates to maintain the record of every transaction they conduct.

“The purpose of the proposed amendment is to plug a legal lacuna, which is being exploited by the companies,” said Finance Minister Ishaq Dar.



It has been proposed that every taxpayer entering into a transaction with associates will maintain and keep the specified records in specified formats. It is related to the transfer pricing between the parent company and its associate in Pakistan.

The transfer pricing is the setting of price for goods and services sold between legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.

“Certain multinational companies have been overstating the cost of their products to show higher than actual expenses to avoid taxes,” said Federal Board of Revenue (FBR) officials. “These companies usually import goods from related entities, which are registered in jurisdiction that have relatively low tax rates.”

Dar said that while working in Libya in 1976 he had discovered that the international petroleum companies avoided $4.6 billion income tax that year alone.

According to the budget proposal, every taxpayer that has entered into a transaction with its associate will maintain a master file and a local file containing documents and information as may be prescribed.

The taxpayer will keep and maintain prescribed country-by-country report where applicable. The taxpayer will also keep and maintain any other information and document in respect of transaction with its associate and will keep files documents, information and reports.

The taxpayer will furnish this information within a month to the tax authorities.



The government has also proposed two other amendments in the law to meet the conditions of OECD. According to an amendment, any information acquired under the Income Tax law will be confidential and no public servant will disclose any such information, except where required by the law.

“The federal government may enter into a tax treaty, a tax information exchange agreement, a multilateral convention, an inter-governmental agreement or similar agreement or mechanism for the avoidance of double taxation or exchange of information for the prevention of fiscal evasion or avoidance of taxes,” stated the second proposed amendment.

The finance minister, while addressing a pre-budget seminar had hoped that the country would soon get the membership of OECD’s global forum after meeting the required criteria.

In a recently held Peer Group review, the OECD forum scrutinised the country’s capacity whether the authorities were capable of sharing their required information such as furnishing account details of individuals and companies investing here in the country or not.

Published in The Express Tribune, June 5^th, 2016.

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