Karachi, September 30, 2024 – The Federal Board of Revenue (FBR) has introduced new guidelines for transactions between associates under the Income Tax Ordinance, 2001. These rules aim to clarify and regulate how income, deductions, and tax credits should be managed between related parties.
The guidelines come under Section 108 of the Income Tax Ordinance, which explains how transactions between associates should be handled. According to Section 108, the FBR said that the Commissioner of Inland Revenue has the power to adjust income and expenses between related parties, ensuring that the amounts reflect what they would have been if the transaction had been made at an “arm’s length.” An arm’s length transaction is one where both parties act independently and in their own best interests.
The FBR further explained that the Commissioner can determine the source and type of income, whether it is revenue, capital, or otherwise, as part of the adjustments.
One important aspect of the new guidelines is the requirement for taxpayers involved in transactions with associates to maintain specific documentation. These include:
1. A master file and a local file that contains important documents and information about the transaction.
2. A country-by-country report, if applicable, which gives details about the operations of the associated entities across different countries.
3. Other relevant documents and information about the transaction.
Taxpayers are required to keep these files for a certain period as prescribed by the FBR. If the Commissioner requests these documents during an investigation, the taxpayer must provide them within 30 days. However, the Commissioner can extend this deadline by up to 45 days in special cases.
Moreover, from the tax year 2024 onward, if a taxpayer claims a deduction for royalty payments to an associate for the use of intellectual property like brand names, logos, patents, or trademarks, they must provide proof that the transaction benefited the associate. If they fail to do so, 25% of their sales promotion, advertising, and publicity expenses will be disallowed.
These guidelines are part of the FBR’s effort to ensure transparency in tax matters and to prevent tax evasion through inappropriate transactions between related parties.
