Navigating Transfer Pricing Documentation: Understanding Country-by-Country Reporting in Pakistan

The Global Push for Tax Transparency: Why CbCR Matters Now

In today's interconnected global economy, multinational enterprises (MNEs) operate across numerous jurisdictions, creating complex webs of intercompany transactions. This complexity, while essential for business growth, has also raised concerns among tax authorities worldwide about potential tax base erosion and profit shifting (BEPS). Pakistan, as a signatory to the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, is actively implementing measures to enhance tax transparency and combat aggressive tax planning. One of the most significant of these measures is the adoption of Country-by-Country Reporting (CbCR). For businesses operating in Pakistan with a global presence, understanding and complying with CbCR requirements is no longer optional; it's a critical aspect of their tax strategy and risk management. This guide aims to demystify CbCR for Pakistani businesses, outlining its purpose, scope, requirements, and implications.

What is Country-by-Country Reporting (CbCR)?

Country-by-Country Reporting (CbCR) is a BEPS Action 13 initiative designed to provide tax authorities with a consolidated view of an MNE's global operations. It requires MNEs to report key financial and tax information on a country-by-country basis annually. This information includes:

• Revenue
• Profit or loss before income tax
• Income tax paid (on a cash basis)
• Income tax accrued
• Stated capital
• Accumulated earnings
• Number of employees
• Tangible assets (excluding cash and cash equivalents)
• The identity of each entity within the MNE group and their tax residence.

The primary objective is to enable tax authorities to assess transfer pricing risks and identify potential BEPS activities more effectively.

Who is Required to Comply with CbCR in Pakistan?

In Pakistan, the requirement for CbCR is primarily driven by the consolidated group's revenue. An MNE group is subject to CbCR if its total consolidated group revenue in the financial year immediately preceding the reporting year is **in excess of PKR 87 billion (approximately EUR 750 million)**. This threshold is consistent with the OECD guidelines. For Pakistani resident MNEs, if they meet this revenue threshold, they will be required to prepare and submit a CbCR report to the Federal Board of Revenue (FBR). This includes parent companies resident in Pakistan and any subsidiary or permanent establishment of a foreign MNE that is resident in Pakistan and where no other entity in the group is obligated to file CbCR in its jurisdiction, or where a qualified competent authority agreement is not in place.

The CbCR Notification and Filing Process in Pakistan

The process for CbCR compliance in Pakistan involves several key steps:

1. Determining Applicability: First, assess your consolidated group revenue for the preceding financial year against the PKR 87 billion threshold.
2. Identifying the Reporting Entity: Determine which entity within the MNE group has the primary obligation to file the CbCR report. This is typically the ultimate parent entity. If the ultimate parent is not a Pakistani resident, then a Pakistani subsidiary or permanent establishment may have a secondary obligation.
3. Notification to FBR: Resident entities of an MNE group that are not the ultimate parent must notify the FBR whether they are filing the CbCR report themselves or if another group entity is filing. This notification is typically required by the due date for filing the CbCR report, which is usually 12 months after the close of the reporting fiscal year.
4. Data Gathering and Consolidation: Collect the required financial and operational data from all group entities for the relevant reporting period. This is often the most challenging part, requiring robust internal systems and cooperation across different business units.
   • Example: A Pakistani manufacturing company with subsidiaries in Dubai and the UK must gather data for its Pakistani operations, the Dubai entity, and the UK entity, consolidate it, and then break it down by jurisdiction.
5. Preparing the CbCR Report: The report must be filed in the prescribed XML format through the FBR's designated portal or system. The template for the CbCR report is standardized globally based on OECD guidelines.
6. Filing Deadline: The CbCR report must be filed within 12 months after the end of the fiscal year to which it relates. For example, for a financial year ending December 31, 2023, the report would typically be due by December 31, 2024.

Key Considerations for Pakistani Businesses

Compliance with CbCR is not just about filing a report; it's about understanding the implications and preparing your business accordingly.

1. Data Accuracy and Availability

The accuracy of the CbCR report hinges on the quality and availability of data from all group entities. Businesses need to:

• Establish clear data collection processes and internal controls.
• Ensure intercompany transactions are properly documented and priced in accordance with transfer pricing principles.
• Have access to employee headcounts and tangible asset details for each jurisdiction.

2. Transfer Pricing Interplay

CbCR is intrinsically linked to transfer pricing. The information reported will be used by tax authorities to identify high-risk transactions and trigger transfer pricing audits. It is imperative that your intercompany transactions are at arm's length and well-documented through robust transfer pricing policies and master/local files, as required under Section 107B of the Income Tax Ordinance, 2001.

Pro Tip: Regularly review your transfer pricing policies and documentation. The CbCR report provides a high-level overview; your detailed transfer pricing documentation (Master File and Local File) will be the basis for substantiating the figures reported.

3. Penalties for Non-Compliance

Non-compliance with CbCR requirements can attract significant penalties in Pakistan. While specific penalty amounts can vary based on the nature of the violation and subsequent assessments, Section 211 of the Income Tax Ordinance, 2001, provides for penalties for failure to furnish information or documents. For failure to furnish the CbCR report, a penalty of **PKR 500,000** can be levied, with further penalties for continued non-compliance.

4. Impact on Tax Audits

CbCR reports offer tax authorities a bird's-eye view of your MNE's global operations and tax profile. This can lead to:

• Increased scrutiny of high-risk jurisdictions or transactions.
• More targeted and in-depth transfer pricing audits.
• Potential for tax adjustments if discrepancies are found.

The Future of CbCR and Pillar Two

It's important to note that the global tax landscape is constantly evolving. The OECD's Pillar Two, aiming to ensure large MNEs pay a minimum effective tax rate of 15%, is expected to have significant implications for CbCR and transfer pricing. While Pillar Two is still being implemented, businesses should stay abreast of these developments.

Actionable Steps for Pakistani Businesses

To ensure compliance and mitigate risks:

1. Assess Your Group Structure and Revenue: Proactively determine if your consolidated group revenue exceeds the PKR 87 billion threshold.
2. Review Data Management Systems: Ensure your systems can accurately capture and consolidate the required CbCR data.
3. Strengthen Transfer Pricing Practices: Align your intercompany transactions and documentation with the arm's length principle. Consider seeking expert advice on your transfer pricing policies.

   For expert guidance on transfer pricing and CbCR compliance, explore our dedicated services at https://javidlawassociates.com/services.

4. Understand Notification Obligations: Be aware of the notification requirements for non-parent entities within an MNE group.
5. Seek Professional Advice: Consult with tax professionals and transfer pricing experts to navigate the complexities of CbCR and ensure accurate, timely filing. We are here to assist; contact us for a consultation.

Conclusion

Country-by-Country Reporting represents a significant shift towards greater tax transparency for MNEs. For businesses operating in Pakistan, understanding and complying with these requirements is paramount to avoiding penalties, managing tax risks, and maintaining good standing with tax authorities. By proactively addressing data management, transfer pricing, and compliance processes, Pakistani businesses can navigate the CbCR landscape effectively and ensure their global operations are aligned with both local and international tax regulations. ---