Tax Overview and Recommendations

Controlled Foreign Corporation Rules Transfer Pricing There is no specific CFC regime in Pakistan. However, where the tax authority is of the opinion that profits being retained with an offshore subsidiary are without justification or commercial reasoning, they may seek to deem profits on the resident holding company. Pakistan tax law contains transfer pricing provisions. Documentation is not required by law; however it may be required during a tax audit. There are no provisions in law for advance pricing agreements. However, the law contains rules for a mutual agreement procedure (MAP). A MAP will be relevant where a reference is received from the Competent Authority of a country outside Pakistan, under an agreement with that country, regarding any action taken by any income-tax authority in Pakistan. Thin Capitalisation General Anti-avoidance Anti-treaty shopping Other specific anti- avoidance rules Rulings Intellectual Property Incentives Pakistan has a thin capitalisation regime. These rules apply where a foreign-controlled resident company (including a branch of a foreign company operating in Pakistan) has a foreign debt-to-foreign equity ratio in excess of 3:1 at any time during a tax year. However, thin capitalization rules do not apply to the following: " A foreign controlled resident company that is a financial institution or a banking company. Where the recipient of profit on foreign debt is subject to tax in Pakistan at corporate tax rate. Pakistan tax law includes anti-tax avoidance rules under which transactions not reflecting substance, having no substantial economic effect or transactions entered into as part of a tax avoidance scheme may be disregarded or re-characterised. Further, tax law requires that all transactions between associates should be at arm's length. Effective July 2016, the tax law has made it mandatory to keep detailed record of all transactions entered into with associates and to provide it to the Commissioner on demand. No specific anti-treaty shopping provisions. Specific anti avoidance rules apply for salary paid by private companies, unexplained income or assets, security transactions, payment of royalty, management fee, interest by permanent establishment to head office or another permanent establishment of head office (except reimbursements). Advance rulings may be obtained by non-residents with the exception of permanent establishments of a non-resident. A person is allowed an amortisation deduction under income tax law in a tax year for the cost of the person's intangibles. KPMG © 2016 KPMG International Cooperative ("KPMG International"). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved. 5

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