The government has decided to place a foolproof mechanism to control ongoing “profit shifting” by multinational companies to foreign jurisdictions to evade taxes in Pakistan.
This was disclosed by Federal Board of Revenue (FBR) Chairman Asim Ahmad before the meeting of the Senate Standing Committee on Finance.
According to the FBR officials, under the Finance Bill 2023, the definition of associates for income tax purposes expanded to include transactions with person resident in zero-taxed jurisdictions.
The “tax avoidance scheme” is used by multinational companies in connivance with their foreign associates or offshore companies. There is also nexus of the multinational companies with their offshore companies to avail the “tax avoidance scheme”.
During the committee proceedings, 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.
However, the FBR has to prove that such kind of arrangement is going on between the local company and the foreign associate to avoid taxes, FBR Member added.
The definition of ‘associates’ is proposed to be significantly widened to also include the following:
- 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
- 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 a zero taxation regime shall be the one as may be prescribed.
