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SECP thrashes out transfer pricing issue: Companies Ordinance 4th Schedule amended

KARACHI (January 23 2003) : The Securities and Exchange Commission of Pakistan (SECP) has amended the Fourth Schedule to the Companies Ordinance, 1984 to address the issue of transfer pricing prevalent in the corporate sector.

Consequently, companies are required to disclose the accounting policy in respect of related party transactions and transfer pricing to identify that all such transactions are at arm's length prices, determined in accordance with any of the admissible methods.

The admissible methods have been determined in line with the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines.

Consequent to these amendments, the SECP has communicated to the three stock exchanges of the country that their respective listing regulations should be amended so that listed companies are required to measure transactions between related rates at arm's length price, maintain adequate records and give necessary disclosures in this respect.

Under the SECP's directive, no listed company would be allowed departure from arm's length transfer price in measuring related party transactions except in extremely rare circumstances where, subject to the approval of the Board of Directors and for reasons to be recorded in writing, it is in the interest of the company to do so.

The SECP, under its directive, requires directors of listed companies to formulate a transfer pricing policy for each related party transaction.

In addition, listed companies are required to maintain a statement to record the methods for determining transfer pricing in various types of related party transactions, a record of all related party transactions as well as file quarterly returns with the Commission.
<br> Further, every listed company has been asked to file, along with its annual report, a report on implementation of transfer pricing policy wherein a detailed account of relevant information about related party transactions will be given. Additional disclosures in directors' report have also been prescribed in this regard.

The SECP also requires that the record of related party transactions and the report on implementation of transfer pricing policy together with all relevant documents, agreements calculations and explanations should be presented to the external auditors for the purpose of statutory audit.

Necessary guidelines for auditors may be issued by ICAP, in the wake of the recent amendments, to outline the audit procedures for reviewing compliance with the legal requirements.

The amendments in the Fourth Schedule and the directive to the stock exchanges are a result of the SECP's initiative to tackle the issue of transfer pricing.

It has become essential to subject transactions between related parties to strict vigilance and regulation in view of increasing use of transfer pricing for “creative accounting” within the corporate sector, In finalising the amendments and its directives, the SECP took cognisance of international developments on the subject, which reveal that similar initiatives are being taken in other jurisdictions.

The amendments made by the SECP are aimed at a fairer measurement and recognition of related party transactions and are expected to ensure that such transactions would take place at arm's length prices as opposed to the non-competitive practices in the past.

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