In order to check tax evasion by multinational companies, the Federal Board of Revenue (FBR) has enforced from April 1, 2021, multinational convention to implement “tax treaty-related measures to prevent base erosion and profit shifting” to prevent artificially shifting of profits by companies from Pakistan to non-taxation or reduced taxation jurisdictions or countries.
The FBR has issued SRO.405(I)/2021 here on Friday to enforce the said convention with the contracting jurisdictions.
According to the notification, the governments lose substantial corporate tax revenue because of aggressive international tax planning that has the effect of artificially shifting profits to locations where they are subject to non-taxation or reduced taxation.
The base erosion and profit shifting (BEPS) is a pressing issue not only for industrialized countries but also for emerging economies and developing countries. The importance of ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.
The FBR’s SRO stated that the government welcomes the package of measures developed under the OECD/G20 BEPS project (OECD/G20 BEPS package). The OECD/G20 BEPS package included tax treaty-related measures to address certain hybrid mismatch arrangements, prevent treaty abuse, address artificial avoidance of permanent establishment status, and improve dispute resolution.
The government is conscious of the need to ensure swift, co-ordinated and consistent implementation of the treaty-related BEPS measures in a multilateral context. There is a need to ensure that existing agreements for the avoidance of double taxation on income are interpreted to eliminate double taxation with respect to the taxes covered by those agreements without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in those agreements for the indirect benefit of residents of third jurisdictions).
The government recognizes the need for an effective mechanism to implement agreed changes in a synchronized and efficient manner across the network of existing agreements for the avoidance of double taxation on income without the need to bilaterally renegotiate each such agreement, FBR added.