Transfer Pricing
Country Summary
Pakistan
This document summarizes the transfer pricing requirements and regulations in Pakistan. In Pakistan, transfer pricing (TP) regulations are heavily influenced by the OECD’s model rules, with a focus on arm’s length pricing. These rules were incorporated into Pakistani income tax law in 2016. The government has enabled the efficient implementation of Country-by-Country Reporting (CbCR) and formal TP documentation standards. The Federal Board of Revenue (FBR) plays a crucial role in enforcing these regulations.
Overview:
Regulatory Implementation:
Pakistan adopted the OECD’s TP documentation rules in its income tax law through the 2016 Finance Act. This move laid the foundation for Country-by-Country Reporting (CbCR) and formal TP documentation.
Applying the Arm’s Length Standard:
The Income Tax Ordinance empowers the FBR to allocate income, deductions, or tax credits to reflect arm’s length transactions. Section 108 of the Income Tax Ordinance outlines the methods for establishing the arm’s length standard, bearing similarities to the OECD Model Tax Convention.
Expansive Application:
Transfer pricing rules apply to a broad spectrum of companies, not limited to any specific class. It also covers transactions presented at non-arm’s length prices.
Related Party Definition:
The ITO defines related parties, covering associations, ownership structures, individuals, trusts, associations of persons, and shareholders in detail.
Transfer Pricing Documentation:
Companies must disclose related party transactions in their financial statements following International Financial Reporting Standards (IFRS). Significant transactions exceeding 50 million PKR with non-residents should be reported in tax returns.
Audit and Compliance:
Various task forces and units have been established to enforce transfer pricing rules and improve revenue collection. The Directorate-General for Transfer Pricing was created in 2017 to conduct TP audits, specifying the criteria for selection.
Comprehensive Documentation:
Specific documentation requirements were introduced in 2016 and detailed in the SRO 421(I)/2017. They include Country-by-Country Reporting, Master File, and Local File obligations, depending on financial thresholds.
Choice of Transfer Pricing Method:
The FBR prescribes methods, including the Comparable Uncontrolled Price Method (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), and Profit Split Method (PSM). The RPM is favored in Pakistan.
Penalties and Interest:
Penalties are imposed for non-compliance with documentation and reporting requirements. They range from fines for failure to submit documents to penalties based on transaction values. The ITO provides a six-year statute of limitations on filing.