Setting up transfer pricing directorate for determining arm’s length transactions has been withdrawn by the government of Pakistan.
In a significant development, the Pakistani government has decided to withdraw the establishment of the Directorate General of Transfer Pricing, a move initially introduced to conduct audits for determining transfer prices at arm’s length transactions. The decision, outlined in the Finance Supplementary (Second Amendment) Bill of 2019, represents a shift in the regulatory landscape and has implications for the taxation and auditing framework in the country.
The Finance Supplementary Bill, presented on January 23, proposes the deletion of Section 230E of the Income Tax Ordinance of 2001. This section, introduced through the Finance Act of 2017, established the Directorate General of Transfer Pricing, outlining its structure, functions, and authority.
The relevant portion of Section 230E proposed for deletion is as follows:
Section 230E: Directorate-General of Transfer Pricing
Sub-Section (1): The Directorate-General of Transfer Pricing shall consist of a Director-General and as many Directors, Additional Directors, Deputy Directors, Assistant Directors, and such other officers as the Board may, by notification in the official Gazette, appoint.
Sub-Section (2): The functions of the Directorate General of Transfer Pricing shall be to conduct transfer pricing audit.
Explanation: For the removal of doubt, it is clarified that transfer pricing audit refers to the audit for the determination of transfer prices at arm’s length in transactions between associates and is independent of the audit under section 177, 214C, or 214D, which is the audit of the income tax affairs of the taxpayer.
Sub-Section (3): The Board may, by notification in the official Gazette, specify the criteria for the selection of the taxpayer for transfer pricing audit and may further specify functions, jurisdiction, and powers of the Directorate-General of Transfer Pricing.
The removal of the Directorate General of Transfer Pricing marks a shift in the government’s approach to taxation and auditing procedures. The original intent behind its establishment was to ensure fair pricing in transactions between associates, independent of other income tax audits. The decision to delete this section suggests a reevaluation of the necessity and effectiveness of a specialized entity dedicated solely to transfer pricing audits.
As the Finance Supplementary Bill progresses through the legislative process, it will be interesting to observe the discussions and reactions from tax experts, businesses, and regulatory bodies. The move raises questions about the government’s strategy in addressing transfer pricing concerns and whether alternative measures or amendments to existing structures will be introduced to maintain oversight and fairness in inter-company transactions.
The Finance Supplementary (Second Amendment) Bill of 2019 reflects the dynamic nature of tax legislation, as the government adapts its approach to meet the evolving needs of the economy and businesses in Pakistan.
