ISLAMABAD: In order to tax evasion by multinational companies, the Federal Board of Revenue (FBR) has made amendment in income tax rules to work along with the Organization for Economic Cooperation and Development (OECD).
The multinational companies are in practice of tax avoidance through shifting profits to tax-havens and claiming higher expenditures. The FBR has recently made new amendments to the Income Tax Rules 2002, making them compatible with requirements of the OECD. By amending Rule 27G of the Income Tax Rules 2002, the FBR has withdrawn the condition of filing country-by-country report by the multinational companies for tax year 2017. Now the companies will be required to file these reports for 2018.
Multinational companies are shifting their profits to low-tax countries to avoid heavy taxation and expenses to destinations where they are counted at higher rates. The OECD has undertaken a number of initiatives to counter this phenomenon. The OECD is working to align transfer pricing – an accounting standard where various entities of a multinational company transact with each other – with value creation to curb tax avoidance.
G20 nations have developed a 15-point action plan to curb tax avoidance in which point 13 gives detailed guidelines for transfer pricing documentation and also provides a standardised reporting format called Country-by-Country Reporting (CBCR).
Commenting on the new FBR amendments, Tola Associates, a chartered accountancy firm, said that CBCR was likely to cause a meaningful impact on both the FBR and taxpayers.
But it said the requirement of maintaining the Master File and CBCR would overburden the companies that were already meeting local documentation requirements. This may significantly enhance the cost and create new administrative challenges for the multinational companies, it added.
The chartered accountancy firm said the FBR’s risk-based approach for transfer pricing assessment would help tax authorities to identify the mismatch in value creation and allocation of income by the multinational companies. The turnover limit for reporting purposes is Rs50 million for the local file and Rs100 million for the Master File.
Pakistan is closely working with the OECD to strengthen its legal framework. The CBCR Peer Review was completed by the middle of current month and its report is expected next month, said the FBR officials.
