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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.
Section 108A of Income Tax Ordinance, 2001 has explained that when a transaction is not arm’s length a commission can obtain report from Chartered Accountant (CA) or Cost and Management Accountant (CMA).
108A. Report from independent chartered accountant or cost and management accountant.- (1) Where the Commissioner is of the opinion that a transaction has not been declared at arm’s length, the Commissioner may obtain report from an independent chartered accountant or cost and management accountant to determine the fair market value of asset, product, expenditure or service at the time of transaction.
(2) The scope, terms and conditions of the report shall be as may be prescribed.
(3) Where the Commissioner is satisfied with the report of the independent chartered accountant or cost and management accountant, the fair market value of asset, product, expenditure or service determined in the report shall be treated as definite information for the purpose of sub-section (8) of section 122.
(4) Where the Commissioner is not stratified with the report of the independent chartered accountant or cost and management accountant, the Commissioner may record reasons for being not satisfied with the report and seek report from another independent chartered accountant or cost and management accountant, to determine the fair market value of asset, product, expenditure or service at the time of transaction.
(5) The Commissioner shall seek report under sub-section (1) or sub-section (3), as the case may be, with prior approval of the Board.
108. Transactions between associates. — (1) The Commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm’s length transaction.
(2) In making any adjustment under sub-section (1), the Commissioner may determine the source of income and the nature of any payment or loss as revenue, capital or otherwise.
“(3) Every taxpayer who has entered into a transaction with its associate shall:
(a) maintain a master file and a local file containing documents and information as may be prescribed;
(b) keep, maintain and furnish to the Board prescribed country-by-country report, where applicable;
(c) keep and maintain any other information and document in respect of transaction with its associate as may be prescribed; and
(d) keep the files, documents, information and reports specified in clauses (a) to (c) for the period as may be prescribed.
(4) A taxpayer who has entered into a transaction with its associate shall furnish, within thirty days the documents and information to be kept and maintained under clause (a), (c) or (d) of sub-section (3) if required by the Commissioner in the course of any proceedings under this Ordinance.;
(5) The Commissioner may, by an order in writing, grant the taxpayer an extension of time for furnishing the documents and information under sub-section (4), if the taxpayer applies in writing to the Commissioner for an extension of time to furnish the said documents or information:
Provided that the Commissioner shall not grant an extension of more than forty-five days, when such information or documents were required to be furnished under sub-section (4), unless there are exceptional circumstances justifying a longer extension of time.”
107. Agreements for the avoidance of double taxation and prevention of fiscal evasion. —(1) The Federal Government may enter into a tax treaty, a tax information exchange agreement, a multilateral convention, an inter-governmental agreement or similar agreement or mechanism for the avoidance of double taxation or assistance in the recovery of taxes or for the exchange of information for the prevention of fiscal evasion or avoidance of taxes including automatic and spontaneous exchange of information with respect to taxes on income imposed under this Ordinance or any other law for the time being in force and under the corresponding laws in force in that country and may, by notification in the official Gazette, make such provisions as may be necessary for implementing the said instruments.”; and
“(1A) Notwithstanding anything contained in any other law to the contrary, the Board shall have the powers to obtain and collect information when solicited by another country under a tax treaty, a tax information exchange agreement, a multilateral convention, an inter-governmental agreement, a similar arrangement or mechanism.
(1B) Notwithstanding the provisions of the Freedom of Information Ordinance, 2002 (XCVI of 2002), subject to clause (a) of sub-section (3) of section 216 of this Ordinance any information received or supplied, and any concomitant communication or correspondence made, under a tax treaty, a tax information exchange agreement, a multilateral convention, a similar arrangement or mechanism, shall be confidential.
(2) Subject to section 109, where any agreement is made in accordance with sub-section (1), the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for at least one of the following –
(a) relief from the tax payable under this Ordinance;
(b) the determination of the Pakistan-source income of non-resident persons;
(c) where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan;
(d) the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and
(e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country.
(3) Notwithstanding anything in sub-sections (1) or (2), any agreement referred to in sub-section (1) may include provisions for the relief from tax for any period before the commencement of this Ordinance or before the making of the agreement.
106A. Restriction on deduction of profit on debt payable to associated enterprise.-(1) Subject to sections 108 and 109, a part of deduction for foreign profit on debt claimed by a foreign-controlled resident company(other than an insurance company, or a banking company) during a tax year, shall be disallowed according to the following formula, namely:-
B – (A+B) x 0.15
where-
A is the taxable income before depreciation and amortization; and
B is the foreign profit on debt claimed as deduction
(2) This section shall not apply to a foreign-controlled resident company if the total foreign profit on debt claimed as deduction is less than ten million rupees for a tax year.
(3) Where in computing the taxable income for a tax year, full effect cannot be given to a deduction for foreign profit on debt, the excessive amount shall be added to the amount of foreign profit on debt for the following tax year and shall be treated to be part of that deduction, or if there is no such deduction for that tax year, be treated to be the deduction for that tax year, be treated to be the deduction for that tax year and so on for three tax years.
(4) Notwithstanding the provisions of section 106, where deduction of foreign profit on debt is disallowed under this section and also under section 106, the disallowed amount shall be the higher of the disallowed amount under this section and section 106.
(5) This section shall apply in respect of foreign profit on debt accrued with effect from the first day of July, 2020, ever if debts were contracted before the first day of July, 2020.
(6) In this section-
(a) “foreign-controlled resident company” means a resident company in which fifty per cent or more of the underlying ownership of the company is held by a non-resident person either alone or together with an associate or association; and
(b) “foreign profit on debt” means interest paid or payable to a non-resident person or an associate of the foreign-controlled resident company and includes-
(i) interest on all forms of debt;
(ii) payments made which are economically equivalent to interest;
(i) expenses incurred in connection with the raising of finance;
(ii) payments under profit participating loans;
(iii) imputed interest on instruments such as convertible bonds and zero coupon bonds;
(iv) amounts under alternative financing arrangements such as Islamic finance;
(v) the finance cost element of finance lease payments;
(vi) capitalized interest included in the balance sheet value of related asset, or the amortisation of capitalised interest;
(vii) amounts measured by reference to a funding return under transfer pricing rules;
(viii) where applicable, national interest amounts under derivative instruments or hedging arrangements related to an entity’s borrowings;
(ix) certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance;
(x) guarantee fees with respect to financing arrangements; and
(xi) arrangements fee and similar cost related to the borrowing funds.
The Federal Board of Revenue (FBR) issued paper income tax return forms for tax year 2021 on Friday, just a month ahead of the looming filing deadline of September 30, 2021.
Pakistan Customs has successfully seized a cache of arms and ammunition from an Afghan registered import vehicle at Torkham station, as announced by the Federal Board of Revenue (FBR) on Friday.
