FBR set to act against foreign firms involved in tax avoidance

KARACHI: The Federal Board of Revenue (FBR) is all set to tighten noose around foreign firms avoiding taxes in Pakistan by hiring services of contractors, under a new law that redefined the status of the latter as sister-concern of the former, officials said on Saturday.

An amendment into the Finance Act 2018 said the agent, providing services to foreign firms, “shall not be considered as of independent status acting in the ordinary course of business, where that agent is acting exclusively or almost exclusively on behalf of the person to which it is an associate”.

The officials said the apex tax authority is preparing cases against such foreign firms involved in tax avoidance by taking services of agents in the country.

“A number of foreign firms have been found involved in depriving the national exchequer of due taxes by taking advantage of the law,” an official at Regional Tax Office said.

“Such loopholes in the law have been fixed through amendment made into the Finance Act 2018. This amendment will help the authorities tighten noose around the foreign firms.”

Tax experts at chartered accountant firm Deloitte said new criteria of cohesive business operation of an individual and associates had been proposed to be introduced under the definition of permanent establishment.

They said that the term ‘cohesive business’ covers an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities undertaken or performed either by the foreign company or the associates of the company.

The experts said that supply of goods include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.

The amendment was introduced to address tax avoidance done through splitting the contracts for overall arrangement for supply of goods and installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities.

Officials said tax authorities started complying with the reporting standards for automatic exchange of information with foreign countries under the Organisation of Economic Cooperation and Development (OECD) convention.

In 2016, Pakistan became the 104th economy to join the most powerful multilateral instrument against offshore tax evasion and avoidance.

The government was proposed to amend the definition of permanent establishment (PE) dealing with dependent agents, considering an OECD’s law (Action 7 of Base Erosion and Profit Shifting) implementation to prevent the tax avoidance.

Previously, the permanent establishment only covers scenarios where an agent of dependent status habitually exercises an authority to conclude contracts on behalf of an individual or has no such authority but habitually maintains a stock-in trade or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the other individual.

The amendment also covers the instances where the agent plays the principal role leading to the conclusion of contracts.