Recharacterization of income for determining tax liability

Recharacterization of income for determining tax liability

Section 109 of Income Tax Ordinance, 2001 has stated that a commissioner may recharacterise a transaction for determining tax liability.

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 109 of the Income Tax Ordinance, 2001:

109. Recharacterisation of income and deductions. — (1) For the purposes of determining liability to tax under this Ordinance, the Commissioner may –

(a) recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme;

(b) disregard a transaction that does not have substantial economic effect; or

(c) recharacterise a transaction where the form of the transaction does not reflect the substance.

1(d) from tax year 2018 and onwards, disregard an entity or a corporate structure that does not have an economic or commercial substance or was created as part of the tax avoidance scheme.

(2) In this section, “tax avoidance scheme” means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person’s liability to tax under this Ordinance.

(3) Reduction in a person’s liability to tax as referred to in sub-section (2) means a reduction, avoidance or deferral of tax or increase in a refund of tax and includes a reduction, avoidance or deferral of tax that would have been payable under this Ordinance, but are not payable due to a tax treaty for the avoidance of double taxation as referred to in section 107.

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