Pakistan implements documentation and CbC reporting requirements

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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. In addition, the activities of all entities in each country should be disclosed.

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 signs Multilateral Competent Authority Agreement

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On 22 June 2017, Pakistan’s Ministry of Finance signed the Multilateral Competent Authority Agreement (MCAA) on the automatic exchange of Country-by-Country (CbC) reports. The signing took place at a ceremony held during the third meeting of the inclusive framework on BEPS on 21–22 June 2017.

By signing on to this agreement, Pakistan commits to the implementation of the Standard for Automatic Exchange of Financial Account Information for all Financial Institutions within its jurisdiction.

Pakistan: FBR extends super tax on banking companies

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Federal Board of Revenue (FBR), through a circular, has explained the explanation and extension of super tax for the financial year 2017-18.

According to Finance Bill for the financial year 2017-18, Super Tax is levied at the rate of 4% on the income of Banking Companies and at the rate of 3% for other persons. Super Tax was introduced in the budget for the financial year 2015-16.

However, the government has given a sigh of relief to branchless banking sector through exemption of withholding tax on cash withdrawal on branchless banking channels. Accordingly, agents could save their amount from deduction from the account maintaining in their microfinance/ commercial banks.

The exemption of withholding tax had been a long pending demand from branchless banking companies because the requirement of cash is inevitable for agents who used to suffer extra cost while paying additional tax on the withdrawals of above Rs 50,000.

Pakistan: National Assembly Passes Finance Bill 2017

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The National Assembly on 13 June 2017 passed the Finance Bill 2017 by majority vote to give effect to measures announced in the annual budget proposals for the fiscal year 2017-18.  Therefore, from 1 July 2017 the following major changes in corporate taxation have occurred in Pakistan:

  • The corporate tax rate is reduced from 32% to 31% for the tax year 2017 and will fall to 30% for the tax year 2018 onwards.
  • New withholding tax provisions require a deduction of 20% final tax from payments to non-residents for foreign-produced commercials.
  • Withholding tax from payments to print and electronic media for providing advertisement services is treated as a final tax liability.
  • The rate of withholding tax from non-filers on payment of dividends is increased from 17.5% to 20%.
  • The rate of withholding tax from payments on the execution of construction or allied contracts and for service contracts including advertisements is increased to a fixed rate of 7% from the existing 6% and for non-filers to 12%.
  • Exemption of inter-company dividends for companies availing group relief is cancelled.
  • For transfer pricing purposes additional documents, information, and applications are introduced to examine transactions between associates.
  • Tax authorities are empowered to call for the income tax return of any of the last ten years from non-filers.
  • Depreciation on assets used during the period of exemption is deemed to be allowed. After the exemption period, the value of assets for depreciation is to be based on the cost as reduced by tax depreciation for the period of exemption.
  • To enjoy exemption from tax on capital gains on disposal, retention of shares of a public limited company increased from two years to four years.
  • Corporate service providers are required to pay a minimum tax of 8% of the turnover.

Pakistan: FBR increases sales tax rates

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On July 1, 2017, the Federal Board of Revenue (FBR) amended the rules in SRO 583 (I) / 2017 as regards the payment of increased sales tax by the steel industry. The FBR has increased the sales tax to 10.5% from 9% for the consumption of each distinct amount of electricity consumed for the production of steel bolts, raw blocks and mild steel products without stainless steel.

However, the payment of the sales tax of 10.5% per electricity unit is the final discharge of tax for the steel circulation plants and composite units of melting and re-rolling including their preheating sections, which are powered by other fuels  than electricity.

The FBR also increased the sales tax rate for ship breakers. They will now pay sales tax of Rs 8,500 per ton, increased from earlier rates of Rs 8,000 per metric ton, on re-rollable scrap and other materials obtained from ship breaking.

Hong Kong: IRD gazettes orders on treaties with Latvia, Belarus and Pakistan

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Three orders made by the Chief Executive in Council under the Inland Revenue Ordinance to implement the Comprehensive Agreements for the Avoidance of Double Taxation (CDTAs) with Latvia, Belarus and Pakistan respectively were gazetted on June 30 2017.

The CDTAs ensure that investors will not have to pay tax twice on a single source of income. The CDTAs will bring tax savings and a greater certainty on taxation liabilities for investors from the respective treaty partner countries when they engage in trade and investment activities with Hong Kong and vice versa.

The three orders will be tabled at the Legislative Council on July 5 2017 for negative vetting. The CDTAs will enter into force after both Hong Kong and the treaty partners have completed their ratification procedures. Hong Kong signed the CDTAs with Latvia, Belarus and Pakistan in April 2016, January 2017 and February 2017 respectively.

Pakistan: Proposes documentation and CbC reporting requirements

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On June 5, 2017, Pakistan’s Federal Board of Revenue has presented a notification (Notification SRO 421 (I) / 2017) regarding Documentation and country-by-country reporting requirements in respect of transfer pricing. The proposed requirements are generally in line with the three-tiered approach set out in the BEPS Action 13 guidelines.

The CbC report form, the details of the reporting and certification authority, and the three standard CbC report tables included in the notification 421 (I) / 2017.