Transfer Pricing rules have not been sufficiently emphasized by the tax authority since the Income Tax Ordinance (ITO) Act 2001, the “Tax Ordinance,” was introduced.

The OECD Guidelines on the Transfer Pricing documentation have been included in the Pakistani Income Tax Ordinance, including the three-tier approach for such documentation in 2016 through the Finance Act; however, the Federal Board of Revenue (FBR) issued notification S.R.O. 144(i)/2018 with the documentation requirements in 2018.

Related Parties.

Article 85 of the ITO describes the related party terms below:

– A member of an association of entities/persons and the association, any person and trust benefiting or may be benefited under the trust, 50% or more direct and indirect control of the shareholders:

(i) Voting power, (ii) Rights to dividends, or (iii) Capital duty.

– A relative of the individual and the individual himself.

– Members of an association of persons (AOP).

– An individual who is a member of an association of persons and controls 50% or more of the association’s rights to income or capital, either alone or jointly with one or more other associates under another application hereof.

– A trust and all who benefit or may benefit from the trust.

– A shareholder in a corporation or if the shareholder of a corporation, either alone or jointly with an associate(s) under another application of this article, controls either directly or through one or more interposed persons.

Transfer Pricing Methods

The FBR enables the application of one of the following four methods to determine the market value of related party transactions:

  • Comparable Uncontrolled Price Method.
  • Cost Plus Method.
  • Resale Price Method.
  • Profit Split Method.

When the four methods set forth do not provide a reliable measure of an Arm’s Length Price, the FBR permits the use of another method.

Transfer Pricing Documentation

The OECD model rules for Transfer Pricing documentation have been implemented, which provide for a three-tiered approach. The thresholds for these requirements are as follows:

Country-by-Country Report

It must be filed by multinational companies with consolidated revenues exceeding € 750 million or an equivalent amount in PKR in the preceding tax year.

The filing of the CbCR is required within twelve months after the last day of the tax year of the tax return of the multinational group.

Master File

On the other hand, those multinationals with a group turnover exceeding PKR* 100 million shall file the Master File.

Local Report

Taxpayers with related party transactions exceeding PKR 50 million must prepare the Local Report.

Transfer Pricing Penalties

Failure to file the CbCR before the due date is subject to a penalty of PKR 2000 per non-compliance day (minimum penalty of PKR 25,000), while the penalty for failure to keep the Master File and Local Report is 1% of the value of the transactions.

Source: Federal Board of Revenue (FBR)

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