FBR proposes changes in tax laws to check profit shifting by MNCs

ISLAMABAD: The Federal Board of Revenue (FBR) has proposed changes in tax laws to check the “profit shifting” by multinational companies to their offshore companies.

Under the Finance Bill 2023, the definition of associates for income tax purposes expanded to include transactions with persons resident in zero-taxed jurisdictions.

On Monday, the authorities tried to explain to the Senate Standing Committee on Finance the ongoing phenomena of the “tax avoidance scheme” involving large entities which collaborate with their foreign associates to avoid taxes. The “tax avoidance scheme” is used by big companies and large corporate entities in connivance with their foreign associates.

The discussion on the said new provision of the Finance Bill 2023 would continue on Tuesday (today).

During the committee proceedings, the FBR Member Inland Revenue Policy informed that the loopholes in the existing law have been removed to check transactions between the multinational companies and their sister or parent companies where profits are shifted aboard for the purpose of tax avoidance. But we have to prove that such kind of arrangement is going on between the local company and the foreign associate to avoid taxes, the FBR Member added.

The definition of “associates” is proposed to be significantly widened to also include the following: (i) a person who sufficiently influences (either alone or together with an associate or associates) the other person. It has been explained that for the purpose of this section, two persons shall be treated as sufficiently influencing each other, where one or both persons, directly or indirectly, are economically and financially dependent on each other and, decisions are made in accordance with the directions, instructions or wishes of each other for common economic goal; or (ii) a person who enters into a transaction, directly or indirectly, with another person who is a resident of jurisdiction with zero taxation regime. The jurisdiction with zero taxation regimes shall be the one as may be prescribed.

By virtue of the above amendments, the provisions otherwise relating to transactions between associates, such as transfer pricing, would become applicable.

Copyright Business Recorder, 2023