LAHORE: For years, Pakistan’s policy debates have centred on smuggling, under-invoicing and domestic tax evasion. Yet a quieter, more damaging threat to the economy lies in the parking of untaxed money in offshore accounts and the manipulation of transfer pricing by multinational corporations (MNCs).
The problem is not unique to Pakistan -- developed economies such as the US, UK and EU also grapple with it -- but their stronger governance, well-equipped tax authorities and strong international cooperation mean the losses are far smaller. For developing countries with weak enforcement, such as Pakistan, the impact is devastating.
According to the United Nations Conference on Trade and Development (UNCTAD), developing countries lose over $100 billion annually to profit shifting and transfer mispricing by global corporations. For Pakistan, this represents forgone revenue that could have funded schools, hospitals, clean water projects and infrastructure -- the foundations of sustainable growth.
MNCs operate within the framework of corporate governance but have perfected the exploitation of loopholes. A typical arrangement might see components made in one country, assembled in another, and sold in a third, with each stage handled by a subsidiary of the same parent company. Transactions between these subsidiaries are treated as if they were between independent entities, with prices set to move profits to low-tax jurisdictions and costs to high-tax ones.
For instance, a tech company selling in Pakistan may record most of its profits in a country with a 5.0 per cent corporate tax rate instead of Pakistan’s 29 per cent by inflating the cost of “imported” software or components from its own subsidiary. The outcome: Pakistan collects tax on only a fraction of the real profits.
Pakistan’s tax-to-GDP ratio is stuck at around 9-10 per cent -- among the lowest in the region -- compared with 16-18 per cent in India and over 30 per cent in developed economies. Yet, unlike richer nations, Pakistan relies far more heavily on tax revenue to fund essential services. Every rupee lost to profit shifting deepens the shortages in healthcare, education, and infrastructure.
Successive governments have wooed foreign investors with tax holidays, duty exemptions, and privatisation of state-owned enterprises, banking on foreign capital to spur growth. But without effective transfer pricing regulation and enforcement, much of the promised benefit drains into offshore accounts.
While most developed economies enforce strict transfer pricing laws aligned with the OECD’s Base Erosion and Profit Shifting (BEPS) framework, along with mandatory country-by-country reporting by MNCs, Pakistan has only partially adopted these measures, and enforcement remains weak.
High-risk sectors include automobiles and pharmaceuticals, where local profits are routinely understated through inflated import costs. In technology and digital services, payments sent abroad for “brand usage” or “technical services” erode taxable income. Commodity trading is another hotspot, with mispricing of raw material imports and exports to related parties.
Technology already exists to track such supply chain flows -- the same systems MNCs use for inventory control. The government could deploy these tools alongside automatic exchange-of-information agreements to detect and curb profit shifting.
Full implementation of OECD BEPS standards would require MNCs to disclose country-by-country profits, revenues, and taxes paid. The Federal Board of Revenue (FBR) also needs capacity-building, with trained forensic accountants and advanced IT systems to strengthen its specialised transfer pricing units.
Pakistan should renegotiate treaties with low-tax jurisdictions to prevent treaty shopping and bring tech giants into the tax net for revenues earned from Pakistani users through digital economy regulation.
The fight against domestic tax evasion is incomplete without addressing its sophisticated, cross-border counterpart. The money lost to profit shifting is not an abstract figure — it is the missing ventilator in a rural hospital, the unbuilt classroom in a village school, and the unpaved road to a farming community.
If ignored, Pakistan’s tax base will remain narrow, development will stagnate, and debt dependence will persist. Closing the transfer pricing loophole is not just a revenue measure -- it is a matter of economic sovereignty.