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TAX NEWS - June 2010

Pakistan Tax: FBR unearths Rs500m tax evasion under transfer pricing

KARACHI -- The Federal Board of Revenue (FBR) has unearthed evasion of Rs500 million by leading multinational pharmaceutical companies under the head of transfer pricing, an official said on Wednesday.

The audit of 12 leading pharmaceutical companies was underway at the Large Taxpayers Unit (LTU) Karachi and the amount has been detected under the heads of purchases for active pharmaceutical ingredients, royalty, technical fee and services, a revenue body official said.

"The expenditures under these heads shown by the companies in annual returns do not match with the international standards," the official said.

"The major evasion took place at transfer pricing where companies posted exaggerated import prices purchased from their associate companies based abroad," the official said.

The Tax Department has adopted international standards to determine the import price of raw materials used for pharmaceutical industry. "In order to show more expenditure, the companies recorded high import value that shrunk the profitability and resultantly reduced the tax liability," he said.

The Tax Department took action on the basis of Section 108 of Income Tax Ordinance, 2001, which reads, "The commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm's length transaction."

The revenue body estimated that the issue of transfer pricing incurred around Rs2.4 billion losses to the national exchequer annually.

Around 90 pharmaceutical companies, including local and multinational are registered with the LTU Karachi. The Tax Department's audit of major companies included Smith Kline and French of Pakistan Limited; Abbot Laboratories (Pakistan) Limited; Reckitt Benckiser Pakistan Limited; Bayer Pakistan (Pvt) Limited; Pfizer Laboratories Limited; Parke Davis and Company Limited; Sanofi Aventis Pakistan Limited; and Merck Switzerland.
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