As Pakistan becomes increasingly integrated into the global economy, the way companies price transactions between their local and foreign subsidiaries has come under intense scrutiny. This pricing, known as transfer pricing, lies at the heart of international tax regulation — and has become a critical area for legal compliance, tax enforcement, and corporate governance.

Over the years, multinational enterprises (MNEs) have used transfer pricing not only as a business mechanism but, at times, as a tax planning tool — shifting profits from high-tax jurisdictions to lower ones through manipulated intercompany pricing. To counter this, Pakistan has gradually developed its transfer pricing regime to align with global standards, notably those set by the Organisation for Economic Co-operation and Development (OECD) and enforced under the Financial Action Task Force (FATF) guidelines.

The legal foundation of transfer pricing in Pakistan rests primarily in Section 108 of the Income Tax Ordinance, 2001, which requires that transactions between associated enterprises reflect the arm’s length principle — the price that would be charged between unrelated parties in a free market. If a taxpayer fails to adhere to this principle, the tax authorities are empowered to recharacterise or disregard the transaction entirely, recalculating the taxpayer’s income as if the transaction had occurred on market terms.

Supporting this statutory backbone is a set of detailed rules under the Income Tax Rules, 2002, particularly Rules 231 to 246. These outline the scope of “associated persons”, such as companies with common ownership, control, or management, and establish acceptable pricing methods. These include internationally recognised methods such as the Comparable Uncontrolled Price method, the Resale Price method, the Cost Plus method, the Profit Split, and the Transactional Net Margin Method (TNMM). The selection of the method must be backed by solid documentation and justified as the “most appropriate” for the transaction in question.

As Pakistan positions itself as a responsible global economic player, building trust in its tax and regulatory systems is essential

In practice, however, transfer pricing is more than a theoretical or technical tax concern. It is increasingly intertwined with anti-money laundering (AML) and financial transparency initiatives. Under the Anti-Money Laundering Act, 2010, any concealment or misstatement of intercompany income can be deemed a predicate offence for money laundering. This expands the reach of compliance from tax penalties to potential criminal liability. The Financial Monitoring Unit, operating under Pakistan’s FATF action plan, now views unjustified cross-border fund movements and related-party transactions as high-risk indicators subject to suspicious transaction reporting.

To address the issue of cross-border corporate opacity, Pakistan has also taken significant steps to enforce transparency of ownership structures. One of the key FATF recommendations is to ensure that tax and corporate authorities can identify the ultimate beneficial owners (UBOs) behind companies.

Accordingly, Pakistan amended the Companies Act, 2017, introducing Section 123A, which obligates all companies to maintain a register of their UBOs — natural persons who ultimately own or control at least 25 per cent of the company’s shares or voting rights, or who exercise control through other means. Non-compliance can invite serious penalties under Section 453 of the Act. These measures are designed to pierce through corporate veils and hold actual decision-makers accountable for their financial dealings.

The importance of pricing transparency is not limited to direct taxes. The Sales Tax Act, 1990, also plays a critical role, particularly when goods or services are exchanged between related parties. While the law doesn’t refer to “transfer pricing” per se, it does allow the Federal Board of Revenue (FBR) to re-determine the value of supplies where transactions between associates don’t reflect market value. This is primarily governed by Section 25(7), which ensures that even in the realm of indirect taxation, fairness and transparency in related-party pricing must prevail.

Despite the growing sophistication of Pakistan’s legal framework, the practical enforcement of transfer pricing still faces hurdles. Limited access to comparable data, the absence of an Advance Pricing Agreement (APA) mechanism, and delays in audit resolutions often complicate compliance for both taxpayers and tax administrators.

Moreover, while Pakistan has introduced country-by-country reporting through SRO 872(I)/2021, requiring disclosure by multinational groups with revenue over 750 million, a full OECD-style three-tier documentation framework is still lacking for domestic taxpayers.

Nonetheless, the FBR has started to build capacity by setting up specialised Transfer Pricing Units and issuing frameworks to guide audits. Increased scrutiny has already been observed in industries such as pharmaceuticals, technology, consumer goods, and logistics, where intra-group service agreements, royalties, and management fees are common.

Ultimately, transfer pricing is not just a matter of fiscal compliance; it is a matter of economic justice and international credibility.

The writer is the Chief Financial Officer at Craft Industrial Co., Saudi Arabia.

Published in Dawn, The Business and Finance Weekly, August 25th, 2025