Author: Hamza Shahnawaz

Section 108 of Income Tax Ordinance, 2001 deals with income and deduction for tax in respect of any transaction between associates.

The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.

Following is the text of Section 108 of the Income Tax Ordinance, 2001:

108. Transactions between associates. — (1) The Commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm’s length transaction.

(2) In making any adjustment under sub-section (1), the Commissioner may determine the source of income and the nature of any payment or loss as revenue, capital or otherwise.

“(3) Every taxpayer who has entered into a transaction with its associate shall:

(a) maintain a master file and a local file containing documents and information as may be prescribed;

(b) keep, maintain and furnish to the Board prescribed country-by-country report, where applicable;

(c) keep and maintain any other information and document in respect of transaction with its associate as may be prescribed; and

(d) keep the files, documents, information and reports specified in clauses (a) to (c) for the period as may be prescribed.

(4) A taxpayer who has entered into a transaction with its associate shall furnish, within thirty days the documents and information to be kept and maintained under clause (a), (c) or (d) of sub-section (3) if required by the Commissioner in the course of any proceedings under this Ordinance.;

(5) The Commissioner may, by an order in writing, grant the taxpayer an extension of time for furnishing the documents and information under sub-section (4), if the taxpayer applies in writing to the Commissioner for an extension of time to furnish the said documents or information:

Provided that the Commissioner shall not grant an extension of more than forty-five days, when such information or documents were required to be furnished under sub-section (4), unless there are exceptional circumstances justifying a longer extension of time.”

Agreements for avoidance of double taxation

Section 106A of Income Tax Ordinance, 2001 explained restriction on deduction of profit on debt payable to associated enterprises.

The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.

Following is the text of Section 106A of the Income Tax Ordinance, 2001:

106A. Restriction on deduction of profit on debt payable to associated enterprise.-(1) Subject to sections 108 and 109, a part of deduction for foreign profit on debt claimed by a foreign-controlled resident company(other than an insurance company, or a banking company) during a tax year, shall be disallowed according to the following formula, namely:-

B – (A+B) x 0.15

where-

A is the taxable income before depreciation and amortization; and

B is the foreign profit on debt claimed as deduction

(2) This section shall not apply to a foreign-controlled resident company if the total foreign profit on debt claimed as deduction is less than ten million rupees for a tax year.

(3) Where in computing the taxable income for a tax year, full effect cannot be given to a deduction for foreign profit on debt, the excessive amount shall be added to the amount of foreign profit on debt for the following tax year and shall be treated to be part of that deduction, or if there is no such deduction for that tax year, be treated to be the deduction for that tax year, be treated to be the deduction for that tax year and so on for three tax years.

(4) Notwithstanding the provisions of section 106, where deduction of foreign profit on debt is disallowed under this section and also under section 106, the disallowed amount shall be the higher of the disallowed amount under this section and section 106.

(5) This section shall apply in respect of foreign profit on debt accrued with effect from the first day of July, 2020, ever if debts were contracted before the first day of July, 2020.

(6) In this section-

(a) “foreign-controlled resident company” means a resident company in which fifty per cent or more of the underlying ownership of the company is held by a non-resident person either alone or together with an associate or association; and

(b) “foreign profit on debt” means interest paid or payable to a non-resident person or an associate of the foreign-controlled resident company and includes-

(i) interest on all forms of debt;

(ii) payments made which are economically equivalent to interest;

(i) expenses incurred in connection with the raising of finance;

(ii) payments under profit participating loans;

(iii) imputed interest on instruments such as convertible bonds and zero coupon bonds;

(iv) amounts under alternative financing arrangements such as Islamic finance;

(v) the finance cost element of finance lease payments;

(vi) capitalized interest included in the balance sheet value of related asset, or the amortisation of capitalised interest;

(vii) amounts measured by reference to a funding return under transfer pricing rules;

(viii) where applicable, national interest amounts under derivative instruments or hedging arrangements related to an entity’s borrowings;

(ix) certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance;

(x) guarantee fees with respect to financing arrangements; and

(xi) arrangements fee and similar cost related to the borrowing funds.

Taxation on permanent establishment in Pakistan

Section 106 of Income Tax Ordinance, 2001 explained the tax treatment on income of a foreign controlled resident company.

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