FAVORABLE BUSINESS ENVIRONMENT

FAVORABLE BUSINESS ENVIRONMENT
The budget need to introduce measure designed to provide support to Pakistani businesses and help stimulate the economy in what are recognized as very difficult times.
Transfer Pricing and Advance Pricing AgreementsThe present rules relating to transfer pricing are provided in Income Tax Rules, 2002 that are not in line with specific transfer pricing legislation in developed countries. Given the global trend of tax reduction and the growth in popularity of use of international business vehicles which, if appropriately structured, pay little or no tax anywhere, there has been continuous drain of profit by way of transfer pricing out of Pakistan.
Moreover, international trade has inevitably called for the need of exchange of goods or services amongst group entities in different jurisdictions. Cross border activities are no longer confined to the transfer of goods and materials, but evolving in variety and sophistication.
Multinational companies engage in transfer of intellectual properties and provision of management and consultancy services, whilst financial institutions engage in projects with their international partners in fund raising, asset management and financial product trading.
All these activities involve allocation of income among parties different jurisdictions, and businesses are thus exposed to tax risks on transfer pricing either locally in Pakistan or in location where those entities operate. Consequently, double taxation may also arise in the absence of proper transfer pricing rules.
Lack of clear and unambiguous transfer pricing rules in Pakistan creates uncertainties in international and regional businesses in structuring their businesses or making commercial decisions. Businesses may also tend to allocate profits to jurisdictions with lower tax cost or to location they fear they may be challenged by tax authorities and thus depriving Pakistans fair share of revenue.
It is strongly suggested that the uncertainties surrounding the transfer pricing rules need to be eliminated by adopting the international practice in transfer pricing which includes allowing taxpayer to apply for Advance Transfer Pricing Agreement [APA] with the Inland Revenue department and other departments of FBR as Advance Ruling can not be equated with an APA.
Proper transfer pricing legislation can ensure the predictability of tax liabilities of taxpayers in their cross border transactions as well as they are not doubly taxed in Pakistan and other jurisdictions. Certainty in taxation of cross border activities is essential in promoting international trade and businesses while ensuring businesses that engage in cross border activities with related entities do pay their fair share of tax in Pakistan.

Article courtesy of Muhammad Ashraf