Special rules are applicable for computation of income from exploration and production of petroleum, mineral deposits, insurance, builders and land developers, SMEs, and banking business.
United States (US) Foreign Account Tax Compliance Act (FATCA)
In Pakistan, FATCA compliance is effective from 1 July 2014 for personal accounts and from 1 January 2015 for business accounts. The Central Bank in Pakistan has advised all financial institutions to complete the registration process with the US Internal Revenue Service (IRS) as a participating foreign financial institution (PFFI) to avoid negative repercussions of non-compliance with FATCA regulations.
Base Erosion and Profit Shifting (BEPS)
On 12 September 2016, Pakistan signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (‘Convention’) under the aegis of the Organisation for Economic Co-operation and Development (OECD), as part of prevention of BEPS. BEPS refers to tax planning strategies that exploit gaps and mismatches in national tax laws to shift profits to low or no tax locations. Accordingly, on the recommendations of the BEPS Action Plan, certain amendments have also been incorporated in the relevant fiscal laws in order to fulfil its obligations under the Convention.
Pursuant to the above Convention, the following agreements were signed by Pakistan:
- Automatic Exchange of Tax Related Information.
- Multilateral Competent Authorities Agreement.
Keeping in view these Conventions/Agreements, relevant fiscal laws have been amended/enacted to provide for the following:
- Transfer pricing documentation and country-by-country (CbC) reporting (see Transfer pricing in the Group taxation section for more information).
- Controlled foreign companies (see Controlled foreign companies [CFCs] in Group taxation section for more information).
- Treaty abuse/shopping (see below).
- Common Reporting Standard (see below).
The FBR issued a notification, S.R.O 405(I)/2021, dated 1 April 2021, for enforcing the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). With this development, certain DTTs entered into by Pakistan were expected to be amended, subject to certain reciprocal actions by the respective treaty partners.
Consequent to the above, the FBR has released revised versions of certain DTTs as well.
The multilateral conventions are expected to bring about important changes to the DTTs covered by the MLI, including a new preamble, anti-treaty abuse measures, and more stringent rules on dividends, capital gains, and the definition of a PE. On the other hand, the MLI seeks to improve the dispute resolution process and provide for corresponding adjustments in case of transfer pricing primary adjustments, therefore easing the compliance burden.
Tax authorities are empowered to disregard an entity or a corporate structure not having any economic substance or that entered into such as a part of a ‘tax avoidance scheme’, such expression being defined to mean a transaction entered into with the primary purposes of tax avoidance or ‘reduction in tax liability’. ‘Reduction in tax liability’, inter alia, includes within its scope that achieved as a result of availing benefit under a DTT.
Further, provisions of law granting an overriding status to treatment provided for in DTTs have also been qualified to the effect that any re-characterisation of income/transactions would not be ineffective on account of such provisions so that substance of the transaction forms the basis of taxation and no rescue is available on the basis of structure designed to avail treaty benefits.
Common Reporting Standard (CRS)
In order to implement the directives contained in the Convention, the FBR was earlier empowered to obtain information from banks/financial institutions regarding non-resident persons for the purposes of automatic exchange of information under bilateral agreements. In exercise of these provisions, the CRS has already been made part of the income tax law, by way of insertion in the relevant Income Tax Rules.
Under the CRS, tax authorities of countries that are signatory to the Convention/Information Exchange Agreements can share information with the FBR with respect to financial accounts (broadly meaning accounts maintained by banks/financial institutions, including custodial and depository accounts) in their jurisdiction held by Pakistani residents. Pakistan will also be able to provide corresponding information to the foreign tax authorities on accounts held by residents of jurisdiction in Pakistan.
The CRS requires the banks and other financial institutions to provide certain information or to undertake certain due diligence with respect to certain financial accounts. The CRS is aimed to reduce tax evasion by taxpayers using offshore financial accounts held both directly and indirectly through enhanced information sharing and collaboration.
The FBR has introduced compulsory enrolment of financial institutions. Furthermore, time lines have been specified for filing of CRS reports by the financial institutions with the FBR.