ISLAMABAD: The Federal Board of Revenue (FBR) has decided to introduce administrative and legal changes in the Income Tax Ordinance through Finance Bill, 2020, to allow assessing officers to also issue assessment orders to effectively deal with the issue of transfer pricing audit of multinational companies.
Official sources told Business Recorder that the FBR would amend Section 230E of the Income Tax Ordinance, 2001 to address the concerns of the UK tax authorities under a global "Tax Inspectors Without Borders" (TIWB) initiative.
This is a joint initiative of the Organisation of Economic Co-operation and Development (OECD) and the United Nations Development Programme (UNDP) designed to support developing countries to build tax audit capacity.
Presently, the commissioner issues the assessment orders on the basis of cases framed by the concerned assessing officer.
It is proposed that the concerned assessing officer should also have the authority and power to make assessment of the case.
The lacuna in the law has to be removed in the coming Finance Bill, 2020, to be presented in the federal budget to be announced on June 12, 2020.
According to sources, the functions and powers of the Directorate General of International Tax Operations (Section 230E of the Income Tax Ordinance, 2001) include to receive and send information from other jurisdictions under the Multilateral Competent Authority Agreement ("the MCAA")-a multilateral framework agreement that provides a standardised and efficient mechanism to facilitate the automatic exchange of information in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters that is automatic and/or on demand exchange of information under exchange of information agreements; levy and recover tax by passing an assessment order under Section I23(1A) in case of undeclared off-shore assets and incomes; receive, transmit and exchange country reports to the jurisdictions that are parties to international by country agreements with Pakistan
and conduct transfer pricing audit in cases selected for such audit by the director general of international tax operations.
The convention, signed by Pakistan on 14th September 2016, is a multilateral treaty designed to promote international co-operation and exchange of information for a better operation of national tax laws, while respecting the fundamental rights of taxpayers.
The convention provides for all possible forms of administrative co-operation between the parties in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion.
The board may, by notification in the official gazette, specify the criteria for selection of the taxpayer for transfer pricing audit.
The transfer pricing audit refers to the audit for determination of transfer price at arms length in transactions between associates and is independent tax audit under Section 177 and 2l4C, which is audit of the income tax affairs of the taxpayer.
Nothing contained in this section shall prevent the commissioner from determination of transfer price at an arm's length in transactions between associates, while conducting audit of income tax affairs of a taxpayer.
Sources said that the FBR had to deal with the issue of workforce requirements needed under the Directorate General of Transfer Pricing. The trained workforce is needed and the issue would be addressed in the coming budget.
When contacted, a tax expert said that the notification SRO 744(I)/2019, dated 9 July 2019 issued in exercise of the powers conferred by Section 230E of the Income Tax Ordinance, 2001 (XLIX of 2001), read with Section 208 and sub-section (1) of Section 209 thereof, the Federal Board of Revenue assigned the officers of the Directorate General of International Tax Operations specified in column (2) of table annexed to the said SRO, the powers of the authorities specified in column (3) of the said table, to exercise powers and perform functions under the provisions of the said Income Tax Ordinance, 2001 as specified in column (4) thereof, and having jurisdiction as specified in column (5) of that table.
Under Section 108 of the Income Tax Ordinance, 2002, the concerned commissioner is empowered to distribute, apportion or allocate income, deductions or tax credits in respect of transactions among persons, who are "associates" as is necessary to reflect the income that the persons would have realized in an arm's length transaction.
For this purpose, rules 20 to 27 of the Income Tax Rules, 2002, have been prescribed.
Moreover, the Finance Act, 2016, introduced various reporting requirements in Section 108 of the ordinance for taxpayers who enter into transactions with associates.
According to the expert, the UK's Her Majesty's Revenue and Customs (HMRC) that has been assisting tax authorities of the board has raised serious concerns about administrative weaknesses and legal shortcomings.
There are no advance transfer pricing agreements and the board also failed to utilise the data made available to recoup tax losses under Section 108 through effective audit.
It is in the best interest of Pakistan to overcome these entire shortcomings as early as possible, the expert added.
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