Karachi, July 26, 2023 – In a bid to strengthen its efforts against tax avoidance, the Federal Board of Revenue (FBR) has taken a significant step by enlarging the scope of associate.
The move comes as part of the FBR’s ongoing commitment to ensure fair taxation practices in the country.
The FBR’s decision was conveyed through Circular No. 2 of Income Tax, which aims to clarify the recent changes made to the Income Tax Ordinance, 2001, introduced through the Finance Act of 2023.
Key among the amendments made in the Finance Act 2023 is the alteration of section 85 of the Income Tax Ordinance, 2001, which pertains to the definition and scope of an associate.
The new definition of an associate is as follows:
(i) Relationship Influence: Two persons will be considered associates if their relationship is such that one may reasonably be expected to act in accordance with the intentions of the other, or both persons may reasonably be expected to act in accordance with the intentions of a third person.
(ii) Sufficient Influence: Associates will also be deemed to exist when one person has sufficient influence, either individually or jointly with other associates, over the other person. An explanation has been included in the section to clarify that sufficient influence exists when one or both persons, either directly or indirectly, are economically and financially dependent on each other. Furthermore, decisions made by these individuals should align with each other’s directions, instructions, or wishes to achieve common economic goals.
(iii) Transactions in Zero Taxation Regime: The amended section also includes provisions to consider two persons as associates when one of them engages in a transaction, directly or indirectly, with the other, who is a resident of a jurisdiction with a zero taxation regime.
The expansion of the scope of associate under section 85 has been introduced to strengthen the application of anti-avoidance measures and uphold the principle of arm’s length in taxation matters. By broadening the definition of associates, the FBR aims to address any potential loopholes in the tax system and ensure that all taxpayers are subject to fair taxation.
The FBR has been vested with the authority to prescribe rules related to section 85, specifically concerning residents of jurisdictions with zero taxation regimes. This measure is expected to provide further clarity and guidance to taxpayers and tax authorities alike.
The FBR’s move to enlarge the scope of associate demonstrates its commitment to combat tax avoidance and foster a more transparent and equitable taxation system in the country. By strengthening the anti-avoidance measures, the revenue board aims to bolster tax collection efforts, which, in turn, can contribute to the country’s economic growth and development.
