Transfer Pricing in Pakistan

The legal framework

Transfer pricing in Pakistan rests on section 108 of the Income Tax Ordinance 2001, which sits in Chapter VIII with the general anti-avoidance provisions rather than in a standalone pricing code. Section 108(1) lets the Commissioner distribute, apportion or allocate income, deductions or tax credits between associates to reflect what they would have realised at arm's length; section 108(2) adds power to determine source and to characterise a payment or loss as revenue or capital. Operational detail sits in the Income Tax Rules 2002 — Chapter VI (Rules 20 to 27) for pricing, Chapter VIA (Rules 27A to 27Q) for documentation and country-by-country reporting.

Rule 23 frames the arm's length standard as the yardstick the Commissioner applies, not as a self-assessment duty on the taxpayer. What Pakistan has is a broad adjustment power supported by a documentation obligation, rather than a statutory duty to price at arm's length.

Scope is set by section 85. As substituted by the Finance Act 2023, persons are associates where one may reasonably be expected to act on the other's intentions, where one sufficiently influences the other — an Explanation now reaching economic and financial dependence — or where a person transacts with someone resident in a zero-taxation regime, a category left to be prescribed under section 85(5)(ii). Section 85(3) deems association at 50 per cent of voting power, dividend or capital rights. Section 108 is not limited to cross-border dealings, so domestic related-party transactions are in range. Pakistan's OECD country profile cites the Chapter VIA group definition instead of section 85, and does not reflect the 2023 widening even though it was updated in May 2025.

The OECD Guidelines are not named in Pakistani law. Rule 22 provides only that the Commissioner shall be guided by international standards, case law and guidance from internationally recognised tax bodies — persuasive weight, no fixed edition.

Methods, comparables and benchmarking

Rule 23(3) prescribes four methods and only four: comparable uncontrolled price, resale price, cost plus and profit split. The transactional net margin method, the workhorse of benchmarking almost everywhere else, is not codified — and Pakistan's OECD profile confirms as much, leaving the TNMM box unticked at Q4 even as it records a most-appropriate-method answer elsewhere. Domestic and adviser commentary that lists TNMM among Pakistan's methods is simply wrong. Rule 23(4) makes profit split a last resort; Rule 23(5) directs that among the other three the Commissioner applies whichever gives the most reliable measure of the arm's length result. Pakistan therefore has a partial hierarchy. The reconciling provision is Rule 23(6): where the arm's length result cannot be reliably determined under a prescribed method, another approach consistent with the arm's length standard may be used. Net-margin benchmarking enters Pakistan through that door, not the front.

The comparability apparatus is thin. Pakistan states it does not follow Chapter III of the Guidelines. There is no local comparables database, so searches run on regional or pan-Asian sets. Comparability adjustments are not required. Neither an arm's length range nor the interquartile range has any domestic legal foundation — Rule 23(5) asks for a single most reliable measure, which in audit becomes an argument for a point rather than a band. Secret comparables are not permitted, which is the clearest taxpayer protection in the framework.

There is no tested-party concept anywhere in the Rules: the phrase does not appear in the Ordinance or the Income Tax Rules 2002, and Rule 27N's local file list omits the tested-party item found in Annex II to Chapter V of the OECD Guidelines, asking under Rule 27N(d)(vi) only for an indication of the most appropriate method and the reasons for selecting it. Intangibles and financial transactions have no dedicated guidance: no DEMPE rules, no hard-to-value intangibles approach, no Chapter X analogue. Intra-group services and cost contribution arrangements are the exception — Pakistan says it broadly follows Chapters VII and VIII — but the simplified low value-adding services regime is unavailable, and there are no safe harbours of any kind.

Documentation: what the FBR expects

Section 108(3) requires every taxpayer transacting with an associate to maintain a master file and a local file, furnish a country-by-country report where applicable, and retain both. Thresholds are in the Rules. Rule 27K requires a master file only from a constituent entity of an MNE group with turnover above PKR 100 million; Rule 27L's contents track Action 13, including DEMPE ownership and intra-group financing. Rule 27M requires a local file wherever transactions with associates exceed PKR 50 million — transaction-value based, with no MNE qualifier, so it reaches purely domestic groups.

The local file is not filed. It must be made available on request at any time after the section 118 return due date, which for a company with a 30 June year end is 31 December. Once requested, section 108(4) allows thirty days; section 108(5) permits a written extension capped at forty-five days absent exceptional circumstances. The CbC report falls outside that rule because it goes to the Board separately.

Country-by-country reporting follows the standard architecture: a EUR 750 million consolidated revenue threshold measured on the preceding year's accounts (Rule 27A); notification of the ultimate or surrogate parent's identity and residence by the return due date (Rules 27B and 27C); filing by a resident parent within twelve months of the reporting year end (Rules 27D and 27G); and secondary local filing on parent-jurisdiction failure (Rule 27E). Rule 27Q requires electronic submission in the Board's format, with cbcr@fbr.gov.pk as the stated interim channel — confirm currency before relying on it.

There is no transfer pricing return or schedule annexed to the income tax return. Records are kept six years under section 174(3), longer while proceedings are pending, and section 179 lets the Commissioner demand a certified Urdu or English translation.

Audits, penalties and the enforcement climate

Section 230E establishes the Directorate General of International Tax Operations and gives it the transfer pricing audit function. Cases are selected by its Director General against criteria the Board may notify in the Gazette, though no notification appears to have been published. Audits run through the section 177 procedure with several taxpayer safeguards disapplied, and the statutory Explanation confirms that TP audit is independent of ordinary income tax audit under sections 177, 214C or 214D. Section 230E(6) preserves the Commissioner's parallel power to fix arm's length prices in an ordinary audit or in section 122 proceedings.

The faster route is section 108A, inserted by the Finance Act 2019 and absent from Pakistan's OECD profile. With prior Board approval, the Commissioner may commission a report from an independent chartered accountant or cost and management accountant fixing the fair market value of the asset, product, expenditure or service. If satisfied, that value becomes definite information for section 122(8), unlocking amendment under section 122(5) — no comparables search, no method debate. Section 109 sits alongside, permitting recharacterisation and, since tax year 2018, disregard of entities lacking economic substance.

Penalties are asymmetric. A reporting entity that fails to furnish information or a CbC report under sections 107, 108 or 165B pays PKR 2,000 per day, minimum PKR 25,000 (section 182(1), Table, serial 17). Failure to keep and maintain section 108 documentation costs one per cent of the value of the transactions concerned, uncapped (serial 18) — on a PKR 5 billion related-party flow, PKR 50 million. Pakistan's OECD profile instead quotes PKR 2,500 a day with a PKR 10,000 floor, cited to section 182 sub-section 1A; that figure is the taxpayer-profile penalty at serial 4A, inserted in 2020 and omitted in 2021, not the late-return penalty and not the documentation penalty. The Ordinance table governs.

There is no documentation-based penalty protection against an adjustment, and no reasonable-cause defence either: Rule 27P lets the Board permit late furnishing on application, but section 183 is a discretionary exemption exercisable by the Federal Government or the Board, not a taxpayer right, and the Explanation to section 182(2) states that mens rea need not be established to levy a penalty. Assessments may generally be amended within five years of the end of the financial year in which the original order issued.

Dispute resolution and advance certainty

Pakistan has no advance pricing agreement programme — unilateral, bilateral or multilateral. There are no APA provisions, no procedure, no fee and no rollback; the OECD profile records that Pakistan has no APAs at the moment, and the FBR's December 2024 MAP Guidelines state expressly that they do not deal with APA applications. The nearest instrument is the section 206A advance ruling, available to any non-resident taxpayer since the Finance Act 2017 omitted the proviso that had excluded non-residents with a Pakistani permanent establishment. It binds the Commissioner where disclosure was full and true and prevails over an inconsistent circular, but it is directed at the application of the Ordinance, not at a price.

That leaves the mutual agreement procedure, proceduralised in Rules 19D to 19G and elaborated in the December 2024 Guidelines. The competent authority is the Director General, International Taxes Operations, Islamabad. The filing window is treaty-driven — typically three years from first notification, with a two-year default where the treaty is silent. A request is presented only once the paragraph 4.1 minimum information is in: periods, the action complained of, parties, facts, assessment orders, appeal status and the taxpayer's analysis. The competent authority must say within thirty days if it declines, endeavours to close within two years, and the Commissioner must implement an accepted outcome within thirty days notwithstanding any limitation in the Ordinance.

Two points repay attention. MAP may run alongside domestic appeals, but the competent authority will wait where the matter is before the High Court or Supreme Court, so sequencing is a live decision. And where a treaty lacks an Article 9(2), Pakistan will still consider correlative relief under Article 9(1). Pakistan has adopted MLI Article 16 but not mandatory binding arbitration.

Domestically, after the Finance Act 2025 an appeal lies to the Commissioner (Appeals) under section 127, with a new option to surrender that tier and go directly to the Appellate Tribunal; section 126A, the 2024 pecuniary-jurisdiction rule, has been omitted. Reference to the High Court follows under section 133. Reported transfer pricing jurisprudence is close to non-existent.

Pillar Two and what changes in 2026

Pakistan has not enacted Pillar Two. The Ordinance as amended to 30 June 2026 contains no income inclusion rule, no undertaxed profits rule and no qualified domestic minimum top-up tax. Pakistan is an Inclusive Framework member but was among the few that did not join the October 2021 two-pillar statement. Large-company burden comes instead through super tax under section 4C and the minimum and alternative corporate taxes — which means Pakistani effective rates will be computed for GloBE purposes under other jurisdictions' rules.

Amount B is under consideration rather than adopted. Pakistan told the OECD in March 2025 that no implementing regulation existed, while confirming it will respect a covered jurisdiction's application of the approach. Pakistan is itself on the OECD's June 2024 covered-jurisdiction list, so the commitment runs both ways once it moves.

The Finance Act 2026 changed nothing in transfer pricing: not section 108, not section 108A, not section 85, not the penalty entries, not Chapters VI or VIA. The last substantive change remains the Finance Act 2024's section 108(6), and it is sharp. Where a deduction has been claimed in the year or either of the two preceding years for royalty paid to an associate for a brand name, logo, patent, trademark or similar right, and the taxpayer fails on notice to show that no benefit was conferred, twenty-five per cent of its entire sales promotion, advertising and publicity spend is disallowed and allocated to that associate. It overrides section 108(1) and requires no comparables analysis.

The same Act brought significant economic presence into section 101(3A) and (3B), where the prescribed payment-volume and user-number thresholds still await notification. The Digital Presence Proceeds Tax Act 2025 is a different case. It is fully specified — five per cent of the gross proceeds of a foreign vendor with a significant digital presence in Pakistan, that presence turning on annual proceeds above PKR 1 million together with other factors, charged on digitally ordered goods and services supplied from outside Pakistan to Pakistani users and paid for by electronic remittance. But FBR notification SRO No. 1366(I)/2025 of 30 July 2025 rendered the Act inapplicable, so the levy is switched off rather than merely awaiting thresholds. Confirm its status before advising, since a further notification could revive it.

How practitioners should respond

Three features should shape the Pakistani file. First, the codified method set is narrow, so a regional TNMM study cannot simply be dropped in. Explain in the local file why CUP, resale price and cost plus were tested and rejected, and anchor the net-margin analysis expressly in Rule 23(6). Second, because no domestic provision recognises a range, present the interquartile result but also identify and defend a point within it — Rule 23(5) asks for the most reliable measure, not a band.

Third, section 108A changes the risk calculus. A careful benchmarking study is no answer to an independent accountant's valuation that has already become definite information. The defensive work is factual and contemporaneous: intercompany agreements describing what is actually delivered, evidence of benefit received for services and royalties, and — since section 108(6) — a documented answer to what the brand owner does for the Pakistani advertising spend it does not fund. Note too that nothing in the framework rewards good documentation with penalty protection, and that there is no reasonable-cause defence to fall back on.

Operationally, calendar the section 118 return date, since it drives CbCR notification and starts the clock on local-file requests; build files producible within thirty days; keep records six years in English. And treat this as a snapshot. The framework has been stable since 2024, but the FBR's transfer pricing manual is still in development and Amount B is still under consideration.