Income Tax Law in Pakistan

Corporate Income Tax

Tax Rate

32 percent for tax year 2016, 31 percent for tax year 2017 and 30 percent for tax year 2018 and onwards (other than for a banking company for which the rate of tax is 35 percent). The exception to this is small companies, which are taxed at 25 percent.

Residence

A company is considered to be resident in Pakistan if it is incorporated, formed by or under any law in force in Pakistan. Companies incorporated under foreign law are considered to be Pakistan resident if control and management of the affairs of the company is situated wholly in Pakistan at any time during the year. Resident companies are taxed on their worldwide income. Non-resident companies are taxed only on their Pakistan source income.

Compliance Requirements

Assessment system – Self assessment. However, an assessment under self-assessment scheme may be subject to tax audit and amendment by the tax authorities.

Filing due date:
·  For companies with an income year ending between 1 July and 31 December: 30 September following the end of the income year
· For companies with an income year ending between 1 January and 30 June: 31 December following the end of the income year

International Withholding Tax Rates

Dividends paid to non-residents are subject to withholding tax of 12.5 percent. For dividends declared/distributed by a purchaser of a power project privatized by WAPDA (Water and Power Development Authority) or a company setup for power generation, the withholding tax rate on dividends is 7.5 percent. The withholding tax rate on dividend is 12.5 percent where the recipient is a filer of Pakistan tax return and 20 percent where the recipient is a non-filer.

Royalties and fees for technical service paid to non-residents (that have no permanent establishment in Pakistan) are subject to withholding tax of 15 percent.

Interest payments to non-residents (that have no permanent establishment in Pakistan) are subject to withholding tax of 10 percent.

Payments to non-residents (that have no permanent establishment in Pakistan) are subject to withholding tax, in the case of specified contracts at 7 percent, in the case of insurance & reinsurance premiums at 5 percent and in the case of advertisement services by media persons relaying from outside Pakistan at 10 percent.

Other payments to non-residents, for which a withholding tax rate is not specified in the Income Tax Ordinance, 2001, are subject to withholding tax of 20 percent.

The withholding tax rates may be reduced under the terms of applicable tax treaties.

Holding Rules

Dividends distributed by a resident company are taxable at the rate of 12.5 percent.

Dividends paid by a non-resident company are taxable at the corporate tax rate in the hands of resident company.

Capital gains tax applies in Pakistan. However, the tax treatment of the capital gain depends on a range of factors including the industry and the holding period.

For companies which are in the banking industry in Pakistan, gain on the sale of shares and dividend are taxable at the rate of 35 percent.

Capital gain tax rates on securities are as follows:

Held for less than 12 months	Held for 12 to 24 months	Held for 24 to 48 months
15%	12.5%	7.5%

However, for Tax Year 2017, the rates increase where the seller of securities is a ‘non-filer’ meaning it has not filed its latest Pakistan income tax return and is therefore not borne on the active taxpayers list of the Board of Revenue. The increased rates in this case are as follows:

Held for less than 12 months	Held for 12 to 24 months	Held for 24 to 48 months
18%	16%	11%

Where the security is held for more than four (04) years, the capital gains tax rate is 0 percent.

The term “Securities” has been defined to mean ‘share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital, debt securities and derivative products’.

Capital gains on capital assets other than securities is taxable at corporate tax rate, unless the capital asset has been held for more

than twelve months, in which case 75 percent of the gain will be taxable.

Bonus shares

Bonus shares issued by a company and received by a shareholder are to be treated as income and a tax rate of 5 percent is to be applied. In case of companies quoted on stock exchange, tax is to be applied on the value of the bonus shares determined on the basis of the day-end price on the first day of closure of the books, whereas in case of other companies, the value will be determined as per rules to be prescribed. Tax is to be collected at source by the company declaring the bonus shares and this shall also be considered as the final discharge of a person’s tax liability on such income.

Tax Losses

The tax loss rules in Pakistan differ depending on the type of revenue stream associated with the loss incurred.

· Losses associated with “income from business" can be offset against any other type of income during a tax year. To the extent the loss cannot be offset, it may be carried forward and offset against “income from business” (and not other tax types) for up to six years.
· Losses representing unabsorbed depreciation and amortization are allowed to be carried forward until completely set-off.
· Losses associated with “income from other sources" can be set off against any other type of income during a tax year. However, the amount that cannot be offset is not allowed to be carried forward.
· Losses associated with "capital gains – other than securities" are not allowed to be set off against any other income type but can be carried forward and offset against capital gains income in future periods for up to six years.
· Losses associated with "capital gains on the sale of securities" are allowed to be set off against other capital gains on the sale of securities. However, the amount that cannot be offset is not allowed to be carried forward.
· Foreign losses can be carried forward for up six years but can only be offset against foreign income.

There is no loss carry-back provision.

Tax Consolidation / Group relief

Pakistan has a tax consolidation regime whereby a holding company and its wholly-owned subsidiary companies may opt to be taxed as one fiscal unit, subject to specified conditions being met.

In addition, group relief is also available in certain circumstances. Under the regime, a company may surrender its assessed loss (excluding capital losses) for the tax year to its holding company, another subsidiary of its holding company or its own subsidiary.

Transfer of shares

Stamp duty at the rate of 1.5 percent of face value (par value) will apply to the transfer of shares. Capital Value Tax (CVT) at the rate of 0.01 percent of the purchase value of shares of a public listed company will also apply. The CVT will be collected by the respective Stock Exchange.

Transfer of assets

Land and buildings - stamp duty, capital value tax, property tax, town tax etc. at varying rates (according to prescribed tables/values) may apply to the transfer.

Other tangible assets - the transfer of tangible assets is treated as disposal and resulting gain / loss on disposal of such assets may have a tax impact.

Intangible assets – the transfer of intangible assets is treated as disposal and resulting gain / loss on disposal of such assets may have a tax impact.

Other assets – the transfer of other assets is treated as a disposal and any resulting gain or loss on disposal of such assets may have a tax impact.

Controlled Foreign Corporation Rules

There is no specific CFC regime in Pakistan. However, where the tax authority is of the opinion that profits being retained with an offshore subsidiary are without justification or commercial reasoning, they may seek to deem profits on the resident holding company.

Transfer Pricing

Pakistan tax law contains transfer pricing provisions. Documentation is not required by law; however it may be required during a tax audit.

There are no provisions in law for advance pricing agreements. However, the law contains rules for a mutual agreement procedure (MAP). A MAP will be relevant where a reference is received from the Competent Authority of a country outside Pakistan, under an agreement with that country, regarding any action taken by any income-tax authority in Pakistan.

Thin Capitalisation

Pakistan has a thin capitalisation regime. These rules apply where a foreign-controlled resident company (including a branch of a foreign company operating in Pakistan) has a foreign debt-to-foreign equity ratio in excess of 3:1 at any time during a tax year.

However, thin capitalization rules do not apply to the following:
· A foreign controlled resident company that is a financial institution or a banking company.
· Where the recipient of profit on foreign debt is subject to tax in Pakistan at corporate tax rate.

General Anti-avoidance

Pakistan tax law includes anti-tax avoidance rules under which transactions not reflecting substance, having no substantial economic effect or transactions entered into as part of a tax avoidance scheme may be disregarded or re-characterised. Further, tax law requires that all transactions between associates should be at arm’s length. Effective July 2016, the tax law has made it mandatory to keep detailed record of all transactions entered into with associates and to provide it to the Commissioner on demand.

Anti-treaty shopping

No specific anti-treaty shopping provisions.

Other specific anti-avoidance rules

Specific anti avoidance rules apply for salary paid by private companies, unexplained income or assets, security transactions, payment of royalty, management fee, interest by permanent establishment to head office or another permanent establishment of head office (except reimbursements).

Rulings

Advance rulings may be obtained by non-residents with the exception of permanent establishments of a non-resident.

Intellectual Property Incentives

A person is allowed an amortisation deduction under income tax law in a tax year for the cost of the person’s intangibles.

R&D Incentives

100 percent deduction is allowed for research and development expenditure incurred in Pakistan but is restricted to the extent of research which has been undertaken in Pakistan.

Other incentives

Non-residents operating through a branch in Pakistan can claim a deduction for head office expenses (including regional head office costs) which should be in the nature of executive and general administration expenses. Such expenses can be remitted to the head office without payment of withholding taxes, subject to approval from the State Bank of Pakistan.

Other tax incentives include:
· 25 percent initial allowance (tax depreciation / capital allowances) on plant and machinery
· 90 percent first year allowance (tax depreciation / capital allowances) for specified companies
· 90 percent accelerated tax depreciation for alternative energy projects
· Tax credit of 10 – 20 percent of the investment made for balancing, modernization and replacement
· Tax credit of 100 percent of tax payable for five years to newly established industrial undertakings
· Tax credit of 100 percent of tax payable for five years attributable to expansion projects or new projects by an existing industrial undertaking
· Tax credit of up to 10 percent of tax payable for new manufacturing entities for employment generated subject to specified conditions.

Tax exemptions, subject to meeting specified criteria, may be available in following sectors:
· Power generation
· Information Technology
· Agriculture

Special tax regimes for specific industries or sectors

Special tax regimes apply in the following industries:
· Insurance sector – Fourth Schedule to the Income Tax Ordinance, 2001
· Exploration and production / extraction of Petroleum / Mineral Deposits – Fifth Schedule to the Income Tax Ordinance, 2001
· Banking – Seventh Schedule to the Income Tax Ordinance, 2001

Related Business Factors

The forms of legal entities commonly used for conducting business in Pakistan are a body corporate and a company.

The minimum capital requirement for a Private limited company is Rs.20, for a Public unlisted limited company is Rs.30 and for a Public listed limited company is Rs.70

There are no other significant local requirements for establishing a legal entity - even 100 percent foreign equity is allowed.

Foreign exchange dealings are regulated under the Foreign Exchange Regulation Act, 1947. Foreign currencies are made available to persons / companies doing business in Pakistan for all purposes under rules which have been clearly defined by the Central Bank i.e. State Bank of Pakistan (SBP). There are no restrictions on the availability of foreign currency for imports (except for import of banned items or for imports from Israel). Business houses can buy foreign currencies for all other commercial transactions like payments for export claims, commission payment to foreign agents on exports, royalties, franchise / technical fees and dividends software licenses / maintenance / support fees, advertisement abroad in newspapers and magazines, business travel etc. under the rules laid down by SBP.

Foreign investment in Pakistan enjoys full protection and repatriation facilities. The Foreign Private Investment (Promotion and Protection) Act, 1976 provides guarantees for repatriation of foreign investment to the extent of original investment, profits earned on such investment, and appreciation of capital.

Personal Taxation

Tax Rate

Personal tax rates differ between salaried taxpayers and non-salaried taxpayers.

Tax Rate for Salaried Individuals
S. No.	Annual Taxable Income	Tax Rate (%)
1	Where the taxable income does not exceed Rs. 400,000	0%
2	Where the taxable income exceed Rs. 400,000 but does not exceed Rs. 500,000	2% of the amount exceeding Rs. 500000
3	Where the taxable income exceed Rs. 500,000 but does not exceed Rs. 750,000	Rs. 2,000 + 5% of the amount exceeding Rs. 500000
4	Where the taxable income exceeds Rs.750,000 but does not exceed Rs.1,400,000	Rs.14,500+10% of the amount exceeding Rs.750,000
5	Where the taxable income exceeds Rs.1,400,000 but does not exceed Rs.1,500,000	Rs.79,500+12.5% of the amount exceeding Rs.1,400,000
6	Where the taxable income exceeds Rs.1,500,000 but does not exceed Rs.1,800,000	Rs.92,000+15% of the amount exceeding Rs.1,500,000
7	Where the taxable income exceeds Rs.1,800,000 but does not exceed Rs.2,500,000	Rs.137,000+17.5% of the amount exceeding Rs.1,800,000
8	Where the taxable income exceeds Rs.2,500,000 but does not exceed Rs.3,000,000	Rs.259,500+20% of the amount exceeding Rs.2,500,000
9	Where the taxable income exceeds Rs.3,000,000 but does not exceed Rs.3,500,000	Rs.359,500+22.5% of the amount exceeding Rs.3,000,000
10	Where the taxable income exceeds Rs.3,500,000 but does not exceed Rs.4,000,000	Rs.472,000+25% of the amount exceeding Rs.3,500,000
11	Where the taxable income exceeds Rs.4,000,000 but does not exceed Rs.7,000,000	Rs.597,000+27.5% of the amount exceeding Rs.4,000,000
12	Where the taxable income exceeds Rs.7,000,000	Rs.1,422,000+30% of the amount exceeding Rs.7,000,000

Tax Rate for Non-Salaried Individuals
S. No.	Annual Taxable Income	Tax Rate (%)
1	Where the taxable income does not exceed Rs.400,000	0%
2	Where the taxable income exceeds Rs.400,000 but does not exceed Rs.500,000	7% of the amount exceeding Rs.400,000
3	Where the taxable income exceeds Rs.500,000 but does not exceed Rs.750,000	Rs.7,000+10% of the amount exceeding Rs.500,000
4	Where the taxable income exceeds Rs.750,000 but does not exceed Rs.1,500,000	Rs.32,000+15% of the amount exceeding Rs.750,000
5	Where the taxable income exceeds Rs.1,500,000 but does not exceed Rs.2,500,000	Rs.144,500+20% of the amount exceeding Rs.1,500,000
6	Where the taxable income exceeds Rs.2,500,000 but does not exceed Rs.4,000,000	Rs.344,500+25% of the amount exceeding Rs.2,500,000
7	Where the taxable income exceeds Rs.4,000,000 but does not exceed Rs.6,000,000	Rs.719,400+30% of the amount exceeding Rs.4,000,000
8	Where the taxable income exceeds Rs.6,000,000	Rs.1,319,500+35% of the amount exceeding Rs.6,000,000

Social Security

The following are payable by employers:
· Social Security – 6 percent of minimum wage of insurable employees
· Employees Old Age Benefit (EOAB) – 5 percent of minimum wage of insurable employees

For EOAB, employees are also liable to pay Rs. 130 per month, being one percent of the minimum wage, in addition to the contribution made by the employer. Usually, employers deduct this amount from the salary and pay it over to the EOAB Institution on behalf of their employees together with the employer’s contribution.

-------------------------------------------------------------------------------------------------

Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.