ISLAMABAD: The UK tax authorities have suspended cooperation with Pakistan under a global “Tax Inspectors Without Borders” (TIWB) initiative due to their concerns over legal and administrative structures that hamper audit of multinational companies on the basis of information received from abroad.
If Pakistan does not address legal issues highlighted by UK tax experts in the upcoming budget, it can lose a chance to catch big fish like it lost the opportunities that were available to it in the shape of information of 154,000 individuals’ foreign bank accounts and money stashed in Swiss banks.
The Her Majesty’s Revenue and Customs (HMRC) was providing help to Pakistan on how to use transfer pricing information of MNCs being received under the Country-by Country Reporting (CbCR) regime of the Organization of Economic Cooperation and Development (OECD).
The suspension is likely to dampen prospects of recovering taxes that some multinational companies have evaded or avoided to pay in Pakistan. Pakistan has been receiving information from the foreign jurisdictions about such companies under the CBCR regime but it has remained unable to utilise this information, which irritated the HMRC, said the sources.
The Federal Board of Revenue (FBR) declined to comment on the record for this story but its top ranking officials on Monday confirmed to The Express Tribune that the HMRC has put its cooperation with the FBR on hold under the TIWB initiative.
The HMRC has linked future cooperation with legal and administrative changes aimed at removing obstacles in determining transfer pricing by the MNCs, according to the sources. The HMRC was providing the transfer pricing technical assistance to FBR since 2015 but since September 2018 when Asad Umar as finance minister approached the OECD for assistance, the HMRC was providing help under the TIWB initiative.
The transfer pricing is the price at which a subsidiary sells and buys goods and services from parent multinational company. The companies often exaggerate its expenditures and input cost to avoid and evade taxes. In order to check this practice, the OECD had launched the TIWB initiative to support member countries in building tax audit capacity.
The OECD was implementing this initiative in Pakistan through the HMRC-UK. A Pakistani national, Amina Khalif, is TIWB Project Director, based in Paris.
Pakistan receives CBCR and financial accounts information under the Automatic Exchange of Information.
Under the automatic exchange of information Pakistan has been receiving details of bank accounts of individuals under the Common Reporting Standards (CRS) regime and transfer pricing under the CBCR. It has not been able to make a big recovery from the individuals on the basis of information received from the OECD.
Similarly, despite making tall claims about $200 billion stashed in Swiss banks nothing has moved forward. Pakistan had revised its bilateral treaty with Switzerland but the exchange of information under the revised treaty is not going to take place before September next year, according to the sources in the FBR.
The HMRC was sending expert tax auditors to assist Pakistani authorities for tax audit of multinational companies. The sources said that the HMRC conveyed to Pakistan that it was pulling out its experts until Pakistan removes the barriers.
The HMRC’s main concern was about human resources deputed for transfer pricing, particularly, said the sources. The legislative deficiencies have also made it more challenging for transfer pricing audits. Due to legislative flaws, the burden of proof is on FBR rather than on the taxpayer. The weak information powers have made it extremely difficult for the FBR to prove that pricing was wrong.
The HMRC has asked Pakistan to appoint experienced staff for audit of transfer pricing cases. Its main recommendation was that Pakistan should change the legislation to place the onus of proof on to the taxpayer to self-assess on arm’s length basis. It also urged the FBR to once again allow its officers to visit company’s premises for data collection purposes.
One of the concerns was that the FBR should have an arrangement to audit MNC’s liaison offices cases with the help of HMRC.
Companies doing business in cars assembling, food and beverages and pharmaceuticals often indulge into practices of shifting higher profits abroad through royalties, technical fees and commissions. The transfer pricing cases take usually longer times to conclude but the time spent is worth of the revenues that the countries recover from the MNCs.
The sources said that the UK tax experts objected over not using the transfer pricing information by Pakistan, which could have helped it starting a process to recover revenues from these big global firms. Pakistan did not analyse the CBCR information that it has received from the foreign countries due to its lack of capacity.
The HMRC experts noted that there were restrictions on the FBR’s officers deputed on transfer pricing audit cases for dissemination of data, which restricted their work.
The sources said that in order to address legal hurdles, the government may have to amend section 230E of the Income Tax Ordinance.
Published in The Express Tribune, June 3rd, 2020.
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