Pakistan implements documentation and CbC reporting requirements

15 August, 2017

In Pakistan until 2016, no transfer pricing documentation was required under the Income Tax Ordinance (ITO). However, with effect from 1 July 2016, the Government has approved the new legislation to effectively implement the Country-by-Country Reporting (CbCR or CbC reporting) and introduce formal transfer pricing documentation requirements in Pakistan through Finance Act, 2016. The new legislation is generally in line with the three-tiered approach of Action 13 of the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.

The Finance Act has made the following documentation compulsory:

a master file and a local file containing documents and information as may be prescribed;
a prescribed country-by-country report, where applicable; and
any other information and documents as may be prescribed in respect of transactions with an associate.

CbC reporting requirements: The CbC reporting should contain all required 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.

All Pakistani tax resident entities that are part of a Multinational Enterprise (MNE) Group with consolidated group revenue of €750 million and above will need to comply with the CbCR requirements for the preceding fiscal year.

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 2017.

Documentation requirements: Every qualifying Pakistani group entity which is a member of a Multinational Enterprise 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:

Master file: MNE group turnover of more than PKR100 million (approximately US$950,000); and
Local file: Related party transactions of more than PKR50 million (approximately US$475,000).

Penalties for non-compliance:

For failure to furnish the CbC report by a reporting entity within the due date, a day wise penalty structure would apply (PKR2,000 for each day of default and subject to a minimum penalty of PKR25,000)
For failure to keep the records required under Section 108, a penalty of PKR10,000 or 5% of the amount of tax on income whichever is higher.
If the reporting entity has provided inaccurate information in connection with the CbC report, a penalty of PKR25,000 for the first default and PKR50,000 for each subsequent default shall apply.
For failure to keep and maintain documentation and information, a penalty of 1% of the value of a transaction, the record of which is required to be maintained under Section 108 of the Ordinance and Income Tax Rules, 2002.
Additionally, non-compliance with the new transfer pricing documentation obligations is likely to increase the audit risk.

Pakistan