Unit headed by Special Assistant to FBR Chairman Dr Muhammad Iqbal is likely to meet in last week of January
ISLAMABAD: The Federal Board of Revenue (FBR) has formed a unit on transfer pricing to identify relevant policy and operational issues faced by the tax authorities in this regard.
The unit is being headed by Special Assistant to FBR Chairman Dr Muhammad Iqbal while Secretary Khalid Jamil, additional commissioner LTU Karachi, Girghari Mal additional commissioner LTU Karachi and Deputy Commissioner LTU Lahore Abdul Jawad are members of the unit.
“Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise,” a well placed source in the FBR told Customs Today. He said if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price and legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned ultimately by the parent corporation.
“Transfer pricing results in the setting of prices among divisions within an enterprise and transfer price should match either what the seller would charge an independent, arm’s length customer, or what the buyer would pay an independent, arm’s length supplier,” the source said, adding that unrealistic transfer prices did not affect the overall enterprise directly, they become a concern when they were misused to lower profits in a division of an enterprise that was located in a country that levies high taxes and raise profits in a country that was a tax haven that levies no or low taxes.
“Transfer pricing is the major tool for corporate tax avoidance also referred to as Base Erosion and Profit Shifting (BEPS),” the source added.
The source said that Transfer Pricing Law in Pakistan, Income Tax Ordinance, 2001 provided that where business transactions between a resident and a non-resident person were not on arm’s length basis and such transactions result in diversion of business profits to the nonresident, the tax authorities were empowered to re-compute the profits in a manner that these reflect the correct profits due to the resident person.
“Before invoking the legal provisions, the tax authorities are required to ensure that the business dealings between the resident and non-resident persons are on a basis other than arm’s length,” the source said, adding that to establish that the dealings had been not on an arm’s length basis, financial and commercial conditions have been made or imposed between the resident and non-resident persons which differ from those which would have been made between two independent persons.
“Due to these conditions, profits which would have accrued to the resident person have not so accrued because law creates a fiction of deeming income, the relevant provisions must be strictly construed before action is taken under these provisions,” the source said. He added that they would be applicable only if all the ingredients and transactions, particularly amongst the members of a transnational group.
“Equally important is to very clearly understand the internationally acceptable approach for determination of arm’s length price in the event a set of transactions is found to be at non-arm’s length. Income Tax Rules prescribe the methods for determination of arm’s length price” the source added.
The source said that objective of the constitution of unit on transfer pricing is to identify policy issues on transfer pricing and to look into operational problems.
“Basically the unit has been constituted to derive out maximum benefits out of agreement with HM Revenue & Customs (HMRC)UK’s tax authority, responsible for making sure that the money is available to fund the UK’s public services and for helping families and individuals with targeted financial support.”
“First meeting of the Unit on Transfer Pricing has been convened in last week of January,” the source said, adding that the unit would frame proposals and then present to the chairman FBR on the said issue. The source said that unit would work on capacity building of officers.
The source said that certain jurisdictions consider entities to be under common control if they shared family members on their boards of directors and it could be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before tax to countries where it does business.
Term “transfer pricing” covers the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property (including intangible property) via separate accounting for each related party. Transfer prices among divisions of an enterprise should reflect allocation of resources among such components.
