Corporate Tax in Pakistan
A resident corporation is taxed in accordance to its international income. In Pakistan, non-resident corporations that are operating by means of a branch are taxed according to the Pakistan-source revenue attributable on rates that are valid on a corporation.
2021 Corporate Tax Rates are as follows:
|Company/Entity Type||Tax Rate (%age)|
|Public Companies (except banks)||29|
|Small Companies (refer to incentives and tax credits for detailed information)||22|
Future Tax Rates on companies and small entities will be as per the following:
|Tax Year||Companies (%age)||Small Companies (%age)|
|2023 and onwards||29||20|
A company that is listed on whichever stock exchange within the country is called a ‘public company’. This term is also applicable on a corporation with a minimum of fifty percent of its shares being held by a public trust or the federal government.
Tax is exempted from income, except for activities related to manufacturing and trading if there is a modaraba. However, this is only valid if ninety percent of the company’s profits are distributed in the form of cash dividends to certificate holders. Such modarabas are eligible to be exempted from the implication of the lowest tax @ 1.5% on revenue.
For people not listed on the Active Taxpayers List, the percentage of withholding tax on some transactions has been enhanced to a hundred percent.
What is Corporate Residence?
To qualify as a resident company in Pakistan, it has to be either incorporated and made under the Pakistani law. Companies that have their main base of management and control within Pakistan in that year will also be considered resident companies for that year.
The term company includes a wide range of things such as a finance society, a cooperative society, a trust, any other type of society that is under the law, any foreign association whether unincorporated or incorporated, and a corporate body combined outside of Pakistan. Anybody falling in these categories will be considered a company by the Central Revenue authorities.
What is a Permanent Establishment (PE)?
A permanent establishment is a platform from where the working of a nonlocal business is conducted either fully or partially. Permanent Establishments are places where multiple activities are carried out. They can be used as a lot of things such as an Office, workshop, Factory, branch, a place of management, stable sales exhibition, warehouse, a place for soliciting orders, a sales outlet, mines, and other places for the mining of natural resources, a construction site, and an installation project. They can also be used for supervisory activities granted they continue supervision over a site for more than ninety days over a course of 12 months. In this case, the agent that’s working for the company has the power to do business on the companies’ behalf, including things like the furnishing of services.
Taxation Principles on a (PE), Permanent Establishment
Whether the establishment is incurred elsewhere or in Pakistan, deductions will be allowed, along with executive, administrative and business expenditure.
If the ratio of turnover of the establishment is the same ratio as the non-resident’s total head office expenditure, deduction will be allowed in the form of office expenditure. This includes salaries, travel, rent and any other expenditure.
Interest on mortgages, royalties and compensation for management services from or to a Permanent establishment’s office will be considered when computing taxable revenue of the establishment.
Loans taken to finance the operations of an establishment by a non-resident will not have its interest deducted.
The income from interpretation of services, execution of contracts and trading sales of goods derived by a non-resident from a PE is liable to pay the minimum tax of gross consideration. Furthermore, a reduced tax rate of three percent is valid in accordance to the regime for resident service providers.
The services include:
- Cargo forwarding services
- Transport services
- Courier services
- Air transport services
- Hotel services
- Hotel services
- Software development facilities
- Security guard facilities
- IT services
- Advertisement services
- Car rental facilities
- Engineering services
- Share registrar facilities
- Engineering services
- Maintenance of buildings services
- Certification, inspection, training and testing services
- Tracking services
- Services by Pakistan Mercantile Exchange Limited and Pakistan Stock Exchange Limited
Tax Provisions on Contracts Executed by Non-residents
The income that is being derived from turnkey agreements by non-residents which are part of the arrangement for installation, supply of goods, construction, commission, assembly, supervisory activities, guarantee, establishes Pakistan source income.
Interconnected business processes include:
- An arrangement for the overall installation, supply of goods, construction, commission, assembly, supervisory activities and any other principal happenings are performed by the associates or the person themselves, and
- The supply of goods can include goods that have been imported using the name of the associate, whether the title passes from outside Pakistan or not.
Lowest Tax on Turnover
When the tax due by a corporation is lower than 1.5 percent of the revenue, the corporation is liable to pay a minimum rate of tax which is 1.5% of the revenue. However, in certain sectors, the turnover tax may be payable at rates like 0.25% or 0.75%.
Tax that has been paid in surplus of standard tax liability can be forwarded for adjusting against the tax liability for the following year. However, this can only be implemented and adjusted against the tax liability for 5 tax years.
Alternate Corporate Tax (ACT)
According to the ACT, the lowest tax liability of a corporation is 17% of the accounting income. Otherwise, the corporate tax liability is determined by the Ordinance, which includes minimum tax applied on turnover. This notion is applicable for all corporations except those engaged in exploration, insurance, banking, petroleum and those companies that are enjoying less tax rates.
The following are not under the Alternate Corporate Tax; capital gain for listed securities, taxable income under FTR, exempts incomes, trusts, income permitted to hundred percent tax credit of equity investment, welfare intuitions and income of non-profitable establishments.
This tax is leviable on banking companies only.
Taxes on Income (Local)
Local taxes or no provincial are due in respect of the incomes of corporations. This excludes the agricultural tax which is subjected to tax according to provincial laws respectively.
Taxation of Developers and Builders
There are certain benefits that developers and builders can gain by following some particular conditions that have been listed in the newly released 100D. Some key benefits have been listed below:
- A schedule based tax regime that is fixed for developers and builders, that can be chosen for certain eligible projects, whether they are new or ongoing ones.
- Authorities that deal with taxes are not allowed to get any explanation about the source and nature of the investments being used in projects and to the 1st buyers of the building, which includes units in existing and new projects.
- The facility for developers and builders to incorporate their gains and profits in account books up to 10 times the quantity of fixed tax that is paid under the regime on certain projects.
- Dividend circulated by corporate developer or builder out of gains and profits of qualified projects, with particular exemption from tax suppression on such circulation.
Developers and builders pardoned from withholding tax according to the section 153 of the Ordinance on the procurement of services and materials provided by service providers that are non-corporate.
Valuation of Inventory
Inventories should be specified at the lower of cost. The FIFO, First In First Out and other mediocre methods are acceptable. For tax and book reporting, conformity of procedures is required and the procedure used needs to be constantly applied.
Capital Gain Consequential on Removal of Possessions by Foreign Residents Outside Pakistan
Any gain on disposal of an asset derivative from outside Pakistan through a non-resident in regard to any asset that is located in the country will establish Pakistan-source revenue.
However, in accordance to the shares of a corporation, the assets can be treated to be positioned in the country if:
- The interest or share derives, indirectly or directly, its value wholly or principally from the assets in Pakistan.
- The interest or share which represents ten percent of the capital share of a foreign corporation is alienated or disposed.
- As mentioned before, the interest or share derives the value principally through an asset that is sited in Pakistan. This applies only if the previous tax year, the value of the asset surpasses PKR ten mn and represents nonetheless fifty percent of the total assets’ value.
When the whole assets of nonresident business are outside the country, that is Pakistan, the location of an interest or share in it will be considered as Pakistan.
The gain mentioned above is subjected to income excise on a maximum of:
- Twenty percent of the sum that represents the variation between cost of procurement and fair market value
- Ten percent of the asset’s fair market value
The dividend revived from a business is generally subjected to a final tax of fifteen percent; however, there can be a change in the rate according to some of the following circumstances:
- When the dividend funded by the Independent Power Purchasers is in form of a permit through article under the applicable energy contracts and is obligatory to be compensated by the related entity at the rate of 7.5 percent
- Dividend from a corporation where tax is not applicable, due to carrying forward the business losses at the rate of twenty-five percent.
The interest produced by a corporation is liable to tax as its revenue from other bases. Interest that is obtained by a non-resident corporation in the absence of a PE in the country attracts the WHT on the percentage of ten percent, unless when a minimum rate is given in the relevant DTT that is considered the final tariff on revenue.
Income from Fees and Royalties for Offshore/Technical Digital Services
The royalties given to non-residents are considered to arise or accrue in Pakistan and are liable to tax if the resident pays in Pakistan.
The income generated from ‘fees for offshore digital services’ and ‘fees for technical services’ are considered arising or accruing if it is remunerated by a Pakistani local or support by a PE of a non-local.
Additional Significant Articles
Liabilities that are allowed as tax reduction in one year and the rest unpaid for 3 years are considered as income in the 1st tax year after the 3 years mentioned before. Thus, such articles are allowed as a reduction in the year when liability/accountability is discharged.
Income of agriculture is exempted from tax on income.
Foreign income and worldwide income is collectively charged on a resident corporation as earned. Through means of foreign tax acclaims, twofold taxation of foreign revenue is evaded; this is allowed for a resident corporation on twofold taxed revenue at the minimum of foreign or Pakistan tax percentage.
Foreign cost can be offset only against foreign revenue and might carry on for 6 years.
Profit sharing, also known as Modaraba, is a vehicle of financing that helps a management corporation in managing and controlling the trade of a modaraba corporation with the equity participation of ten percent. This management corporation is obliged to payment based on a settled rate of yearly profits of the business. The revenue of a modaraba that does not relate to manufacturing or trading activities is exempted from tax liability if ninety percent of its incomes are dispersed as cash payments. A modaraba can either have many purposes or a single purpose and can be more a long time period or a short one.
Every depreciable asset that has been put to use in Pakistan for the 1st time amidst one tax year shall be entitled to deduction according to a section of the Ordinance. The whole rate of the capital will be allowed an initial percentage of twenty-five percent of the rate of the capital. This excludes road transport automobiles that are not plying for leasing, buildings, machinery and plant used in Pakistan before and furniture. The preliminary depreciation percentage for building structures is fifteen percent. This allowance is obtainable for only listed capitals.
Book depreciation does not need to adapt to tax devaluation. If tax depreciation that is unabsorbed is not established in contradiction to the annual income, then it is carried ahead and is summed up to the reduction of the same corporation assets of the matching year. The adjustment of tax depreciation against future year incomes can be approved for an unrestricted timeframe. However, this type of depreciation can be allowed to set off only to the degree of fifty percent of a certain year’s taxable profits. This only applies to circumstances where the equivalent is of more than or equal to PKR 10 mln. However, the left over amount can be carried ahead in upcoming tax years.
The depreciation deduction which is allowed in the 1st year of the accumulation of a capital that is used for business operations will be decreased by fifty percent.
Amortization of Intangibles Assets
Rate incurred on the procurement of an invention, patent, model or design, copyright, property, intellectual property, quota, software, process or secret formula, expenditure and license that gives a benefit or advantage for more than a year. This is permissible as an abstraction on a straight-line plan due to the life of an asset. However, this does not exceed the timeframe of twenty-five years.
Any arising adjustments on the basis of accounting action are omitted from the scope of intangible assets. No amortization is permitted thereon.
Tax amortization that is unabsorbed and does not start out in contrast to the revenue of a year, is then carried ahead and is added to the amortization of the business’s assets of the subsequent year. The adjustment of tax amortization has an unrestricted time period. However, this type of amortization can be allowed to set off only to the degree of fifty percent of a specific year’s taxable profits. This only applies to circumstances when the same is of more than or equal to PKR 10mn. However, the left-over sum can be adjusted in the upcoming tax years.
Start-up and Organizational Costs
The expenditure that is incurred before starting a business is exclusively and wholly to derive revenue that is indictable to tax, thus it is given a reduction over a 5-year time period.
The interest expenditure is a cost. If necessary, WHT is deposited and deducted in the administration’s resources.
These are allowed in the form of deductible expenses if the conditions listed below are met:
- Debts are shown beforehand in the revenue indictable to tax.
- Reasonable explanation in order to believe that the certain debt is not recoverable.
- Debts are mentioned in financial statements.
Penalties and Fines
Such fines which are not payable or paid for any type of irregularity in rule, law or regulation can be allowed as a tax-deductible cost.
Income tax is not deductible. Excise tax and sales tax can be tax-deductible when these are used for the business. Or else, these are delivered to the consumers.
Other Provisions and Issues
These instructions are applicable for the calculation of income from production and exploration of insurance, banking business, petroleum, and mineral deposits.
Foreign Account Tax Compliance Act (FATCA), United States (US)
Pakistan is currently under negotiations with the US for settling an arrangement for amenability with Foreign Account Tax Compliance Act (FATCA). Nevertheless, banks and various other entities that have been troubled by FATCA are supposed to file with the United States IRS, Internal Revenue Service.
BEPS- Base Erosion and Profit Shifting
On September 12th, 2016, under the guidance of OECD, Organization for Economic Co-operation and Development, Pakistan signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This was done to prevent Base Erosion and Profit Shifting (BEPS). This refers to the tax planning plans that exploit mismatches and gaps in nationwide tax regulations in order to move profits to no or low tax locations. Thus, in regard to the endorsements of the BEPS Action Plan, changes have been made in certain fiscal laws as to achieve its duties under the Convention.
In accordance to the Convention mentioned above, the following terms were signed off by Pakistan:
- Dated 21 June 2017- Multilateral Competent Authorities Agreement
- Dated 7 June 2017- Automatic Exchange of Tax-Related Information
While keeping these conventions, specific monetary laws have been changed in order to provide these:
- CbC, Country-by-Country reporting, and transfer pricing documents
- Treaty shopping/abuse (mentioned below)
- Controlled foreign corporations
- Common Reporting Standard
Tax authorities have the power to disregard any corporate structure or entity that does not have an economic substance. This also applies to those who enter as part of an excise evasion scheme, which means that a transaction is made solely for the purpose of avoiding tax payment. Among other things, a decrease in tax accountability includes hat which is attained as a result of availing assistance under a DTT.
Furthermore, provisions of the regulation that are approved an overriding rank to treatment that is provided in DTTs have been approved to the outcome that any re-classification of transactions/income will not be fruitless on the interpretation of any provisions. This is so that the substance of transaction creates the basis of tax policy and so that no release is accessible on the basis of structure designed for benefiting from treaty assistance.
CRS- Common Reporting Standard
The FBR has been given the power to secure information from financial institutions that are related to non-resident people for the perseverance of automatic interchange of data under agreements that are bilateral. This is done in order to apply the directives listed in the Convention. The CRS is now part of the income excise regulation through the method of insertion in relevant rules of income tax.
Tax authorities of different nations, that are under the CRS and have a signatory with the Convention/Information Exchange Agreements, are allowed to share data with the FBR while keeping in mind the financial accounts in the area that are in the ownership of Pakistani inhabitants. Pakistan will be able to give corresponding data to foreign tax establishments through accounts in ownership of citizens of dominion in the country.
CRS requires financial institutes and banks to give specific information or undertake specific due diligence regarding certain accounts. CRS has an aim to decrease tax evasion by using offshore accounts that are held indirectly and directly through enhanced collaboration and information sharing.
The board has announced obligatory registration of financial institutions. To add to this, timelines have been highlighted for the registration of common report standard reports by banks and other financial entities with the board.