Pakistan implements formal transfer pricing documentation and Country-by- Country Reporting requirements

Transcription

1 7 August 2017 Global Tax Alert News from Transfer Pricing Pakistan implements formal transfer pricing documentation and Country-by- Country Reporting requirements EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary In 2016, the Pakistan Government approved new legislation 1 to effectively implement the Country-by-Country Reporting (CbCR or CbC reporting) and introduce formal transfer pricing documentation requirements in Pakistan through Finance Act, On 5 June 2017, the Federal Board of Revenue (FBR) released draft guidelines providing details on the requirements for preparing CbCR and transfer pricing documentations for public consultation, which are expected to be finalized in the coming weeks. The new legislation is generally in line with the three-tiered approach of Action 13 of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project. As per the new legislation, qualifying Pakistan companies and establishments will have to comply with new transfer pricing documentation requirements from 1 July 2016 and CbCR requirements for financial years ending on or after 1 July 2017.

2 2 Global Tax Alert Transfer Pricing Detailed discussion Background Transfer pricing is not a new concept in Pakistan. The arm length principle was first introduced in Section 108 of the Income Tax Ordinance, 2001 (Ordinance) which provided powers to the FBR to distribute, apportion or allocate income, expenditures or tax credits between associates in respect of transactions not made in accordance with the arm s length principle. After the announcement of the OECD s BEPS project, Pakistan joined the BEPS Inclusive Framework which allowed Pakistan to work with OECD and G20 members on developing standards on BEPS related issues and reviewing and monitoring the implementation of the entire BEPS Package. Members of the Inclusive Framework are required to develop a monitoring process for the four minimum standards (Actions 5, 6, 13 and 14) as well as put in place the review mechanisms for other elements of the BEPS Package. The FBR now intends to implement the recommendations of Action 13 on CbC reporting into Pakistan legislation. This Alert summarizes the key aspects of this new legislation. New legislation The legislation on transfer pricing documentation implements the OECD s model legislation into the Pakistan income tax law, implementing the three-tiered approach for transfer pricing documentation consisting of the CbCR, the master file, and the local file. The detailed rules corresponding to the legislation will be included in the Income Tax Rules, CbC reporting The CbC reporting should contain the following information for each country where entities of the Multinational Enterprise (MNE) group operate: gross income, profit/loss before tax, income tax paid, accrued income tax, the nature of the group entities core business operations, and other measures of economic activity. In addition, the activities of all entities in each country should be disclosed. For Pakistan, if the ultimate parent entity (UPE) of an MNE group with a consolidated group turnover equal to or exceeding 750 million is a Pakistan tax resident, the entity must prepare and submit a CbCR form to the FBR within 12 months as of the last day of the financial year. To ensure that the FBR has access to the CBCR form, a Pakistani company that is part of an MNE group should also file a CbCR with the Pakistan tax authorities in one of the following cases: The UPE is not required to submit a CbC report in its country of residence The UPE is required to submit a CbC report, but there is no automatic exchange of CbCR between Pakistan and the country of residence of the UPE The UPE is required to submit a CbC report, and there is an automatic exchange of CbCR, but due to a systematic failure, no effective exchange of information takes place In these three cases, a group can alternatively decide to appoint a so-called surrogate parent entity (SPE) to comply with these requirements. A Pakistani MNE group entity will need to notify the FBR, whether it is the UPE or SPE or constituent entity. The information contained in the CbC report will be automatically exchanged with other concerned tax authorities according to the stipulations provided by the relevant international instruments. The CbC report should be prepared in English. As currently proposed, the CbC report is applicable for financial years ending on or after 1 July For the Pakistani headquartered groups, there may potentially be a risk that a secondary filing obligation may be enforced in other countries where they have a presence if the local countries filing deadline falls before 1 July 2017, i.e., before the Pakistani law has formally entered into force. A detailed analysis of the rules in countries in which multinational groups operate would be needed in order to assess the level of this risk. It is also possible to consider appointing a SPE outside Pakistan as a way to manage the risk. Transfer pricing documentation Every qualifying Pakistani group entity which is member of an MNE group will be required to prepare a master file and every Pakistani group entity will be required to prepare a local file if it meets the following threshold: 2 Master file MNE group turnover of more than PKR100 million (approximately US$950,000) Local file Related party transactions of more than PKR50 million (approximately US$475,000) The master file and local file should be maintained by taxpayers. There is no fixed submission date however, it needs to be provided to the tax authority within 30 days from the date of request. It is expected that this obligation would come into effect from 1 July 2016.

3 Global Tax Alert Transfer Pricing 3 Other considerations Failure to submit the CbCR, master file or local file will result in penalties discussed below. Furthermore, non-compliance with the new transfer pricing documentation obligations is likely to increase the audit risk. Offenses Any reporting financial institution or reporting entity who fails to furnish information or a CbC report to the Board as required under Section 107, 108 or 165B of the Ordinance within the due date Any person who fails to keep and maintain documentation and information required under Section 108 of the Ordinance or Income Tax Rules, 2002 Where a person fails to maintain records required under Section 108 Where any person fails to furnish the information required under Section 108 Penalties Such reporting financial institution or reporting entity shall pay a penalty of PKR2,000 for each day of default subject to a minimum penalty of PKR25,000 1% of the value of transaction, the record of which is required to be maintained under Section 108 of the Ordinance and Income Tax Rules, 2002 PKR10,000 or 5% of the amount of tax on income whichever is higher PKR25,000 for the first default and PKR50,000 for each subsequent default Implications Pakistani tax resident entities that are part of an MNE or local group and meet the financial thresholds will need to comply with the new transfer pricing documentation requirements from 1 July 2016 and CbCR requirements for financial years ending on or after 1 July The implementation of transfer pricing requirements is generally in line with the standardized threetiered approach defined by OECD. Considering the new requirements, MNEs with a presence in Pakistan should take immediate action in order to make sure that their transfer pricing policies are properly documented and properly implemented. Future Alerts will report on any further developments with respect to BEPS Action 13 legislation. Endnotes 1. This legislation was approved on 24 June The exchange rate may vary.

4 4 Global Tax Alert Transfer Pricing For additional information with respect to this Alert, please contact the following: EY Ford Rhodes, Tax Services Leader Pakistan & Afghanistan, Islamabad, Pakistan Tariq Jamil Ernst & Young Middle East, Transfer Pricing Leader Middle East & North Africa, Dubai, United Arab Emirates Guy Taylor guy.taylor@ae.ey.com Ernst & Young Middle East, Transfer Pricing, Dubai, United Arab Emirates Danial Khalid danial.khalid@ae.ey.com Ernst & Young LLP, Middle East Desk, Houston Gareth Lewis gareth.lewis1@ey.com

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