Group Tax Consulting in Pakistan

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Group Taxation

Tax may be applied on a locally combined subsidiary and the company of a hundred percent owned group in the form of 1 group through giving it a binding option for tax as 1 fiscal unit. Relief will not be given for losses proceeding to the creation of the group. If the corporations are entitled to benefit from the group assistance given by the Securities and Exchange Commission of Pakistan, the group is made available. However, inter-corporate payments are given immunity from tax liability when entities avail group assistance and group taxation.

Any corporation that is supplementary to a holding corporation can hand over its estimation of loss for a financial year to the holding corporation. It can also hand it over to an alternate subsidiary of the same company, only if the main company has fifty-five percent or more investment if any of the businesses is considered a listed corporation. If this is not the case, then the holding firm has to have seventy-five percent or more assets. Three years is the maximum amount of time for surrendering a loss. However, the surrender of a loss is not compulsory anymore in order to gain exclusion from inter-corporate dividends.

Transfer Pricing

Regarding any transaction amid associates to apportion, deductions, distribute, tax credits or distribute income, the tax authorities possess the power to redirect the revenue that could be realized in a transaction. Documentation and specified records are expected to be kept safely by corporations for all transactions between various associates, and the authorities in charge of tax are allowed to ask for such documents and information.

The Commissioner has the power to appoint a Management Accountant or Charter Accountant with the endorsement of the FBR. This regulates the rational market rate of a product, asset, service, or expenditure. This is in regard to the operation when the Commissioner is not satisfied with the report. However, if the Commissioner is content with the details of the report, then he can continue by undertaking the same as certain information for alteration of assessment. If the Commissioner is no satisfied, then they can seek the report again from another auditor.

Country-by-Country (CbC) Reporting and Transfer Pricing Documentation  

Recently, the necessities of Transfer pricing documentation have been released in law. Thus, it can now be complied with according to the necessities of different international agreements/conventions that are implemented by the administration. This includes the following:

  • Each taxpayer that is an essential entity of an international entity group (MNE) that has a turnover of PKR 100 mn or more, has to maintain, keep and provide a ‘Master File’ which contains certain information.
  • Each taxpaying individual in Pakistan, who has taken on transactions that exceed the monetary boundary of PKR fifty mn with relevant parties, has to maintain, keep and provide a ‘Local File’ that contains prescribed details.

All surrogate parent entities or ultimate parent entities in the country that are part of the MNE group and have a consolidated revenue of 750 mn euros or more throughout a financial year are required to hand in a Country-to-Country (CbC) report for every country they operate in.

Another requirement of a fundamental entity of an MNE group is to furnish the CbC report if:

  • The final parent does not need to hand in such a report in the country it resides in, other than when their consolidated revenue is below or equal to 750 mn euros.
  • The final parent has to file a report in their nation of dwelling, but that country has no Competent Authority Agreement with Pakistan.
  • Data cannot be traded due to an error in the system.

The report has to contain the information listed below:

  • Revenues from unrelated and related parties
  • Loss/profit before tax on revenue
  • Paid tax of the income
  • Accumulated tax income
  • Main business operation activities
  • Number of workers
  • Accumulated earnings
  • Resources other than money that are tangible
  • Stated capital

Thin Capitalization

The deduction will not be allowed for interest (profit on debt) compensated by the corporation on portions of the debt that surpasses the ratio 3:1. This applies to a foreign-controlled company or its branch that operates in Pakistan and has a foreign-debt-to-foreign-equity ratio that exceeds 3:1.

The introduction of a new procedure has been made in order to limit the deduction on ‘profit on debt’ of any extraneous entity that has control over a resident corporation in the country. Along with this, a mechanism is given for the overall limits on a yearly basis.

[B] – [(A + B) x 0.15]

A = taxable revenue before amortization and depreciation

B = overseas profit on debt requested as a deduction

However, this change will not apply to an overseas controlled company that claims deduction on ‘revenue on debt’ which is fewer than PKR 10 mn in a year.

Moreover, it has been delivered that the denial on this case will be higher than the quantity decided on the origin of foreign debt and overseas equity ratios.

CFCs – Controlled Foreign Companies

Attributable revenues of CFCs that are not repatriated and are retained to the country are subjected to tax in accordance with the tax percentage which is applicable on dividends.

A corporation is listed as a controlled foreign company (CFC) if:

  • Fifty percent or more voting rights or capital is indirectly or directly held by residents of Pakistan or if forty percent or more of the voting rights or capital is apprehended by one Pakistani resident.
  • The tax that is paid in regard to revenue accrued or derived in a year of tax is fewer than sixty percent of the payable amount written on the Ordinance.
  • The stocks of a business are not transacted on a stock exchange which is recognized in the jurisdiction.
  • The non-resident business does not derive business revenue that is active. If the capital or voting rights that are held by a resident are fewer than ten percent or if the income of CFC is fewer than PKR ten mn, that there shall not be any tax incidence according to the provisions.