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
· 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.
· 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.
· 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.
· 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
· 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
· 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
· 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.
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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.
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