FBR outlines arm’s length rules, documentation requirements and tax adjustments for transactions between associated persons in Tax Year 2027.
ISLAMABAD: The Federal Board of Revenue (FBR) has outlined the tax rules governing transactions between associated persons, including provisions allowing the Commissioner Inland Revenue to adjust income, deductions and tax credits where transactions do not reflect arm’s length conditions.
The rules are contained in Section 108 of the Income Tax Ordinance, 2001, as amended up to June 30, 2026, and apply for Tax Year 2027, covering the period from July 1, 2026 to June 30, 2027. The FBR’s published text confirms the adjustment and documentation requirements under Section 108.
Commissioner empowered to make adjustments
Under Section 108, the Commissioner Inland Revenue may, in relation to transactions between associates, distribute, apportion or allocate income, deductions or tax credits between the parties where necessary to reflect the income that would have been realised if the transaction had been conducted on an arm’s length basis.
The Commissioner may also determine the source of income and establish whether a payment or loss should be treated as revenue, capital or otherwise when making an adjustment.
The arm’s length principle is intended to ensure that related-party transactions are assessed on terms comparable with those that would have applied between independent parties.
Documentation requirements for taxpayers
Section 108 also places documentation obligations on taxpayers entering into transactions with associates.
Taxpayers are required to:
• Maintain a master file and local file containing prescribed documents and information.
• Keep and furnish a prescribed country-by-country report, where applicable.
• Maintain other information and documents relating to transactions with associates as prescribed.
• Retain the relevant files, documents, information and reports for the period prescribed under the law.
The FBR’s transfer-pricing rules further specify documentation requirements. For example, a local file is required for transactions exceeding Rs50 million with associates, while master-file requirements apply to certain taxpayers that are constituent entities of multinational enterprise groups.
Documents to be furnished within 30 days
Where the Commissioner requires relevant documentation during proceedings under the Income Tax Ordinance, the taxpayer must furnish the required documents and information within 30 days.
The Commissioner may grant an extension through a written order where the taxpayer submits a written application seeking additional time.
Under Section 108, the extension generally cannot exceed 45 days where the relevant information or documents are required under subsection (4), unless exceptional circumstances justify a longer extension.
Special rule for royalty payments
Section 108 also contains a specific provision concerning certain royalty payments made or payable to associates.
For transactions covered by the provision, taxpayers claiming deductions for royalty payments relating directly or indirectly to intellectual property and similar rights may be required to substantiate the economic basis and benefit associated with the expenditure.
The relevant rights can include brand names, logos, patents, inventions, designs or models, secret formulas or processes, copyrights, trademarks, scientific or technical knowledge, franchises, licences and other intellectual property or contractual rights.
Where the Commissioner issues a notice and the taxpayer fails to provide the required explanation or evidence concerning the benefit conferred on the associate, the provision can result in an adjustment relating to specified sales promotion, advertisement and publicity expenditure.
The rule therefore places particular importance on supporting documentation and evidence concerning the substance and commercial basis of related-party transactions.
Compliance implications for Tax Year 2027
For Tax Year 2027, taxpayers engaging in transactions with associated persons should maintain the prescribed records and supporting evidence needed to substantiate the basis on which income, deductions, tax credits and related expenditure have been reported.
Section 108 forms part of Pakistan’s transfer-pricing and anti-avoidance framework, while the FBR’s separate country-by-country reporting rules provide additional documentation requirements for qualifying multinational enterprise groups.
The provisions give the tax authorities a framework for examining whether related-party transactions reflect arm’s length outcomes and for making adjustments where the reported treatment does not reflect those conditions.