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June 14, 2024 Pakistan | Summary of corporate tax amendments proposed in Finance Bill, 2024
Executive summary The Finance Bill, 2024 (the Bill), presented at the National Assembly on 12 June 2024, proposes a host of changes relevant to corporations and multinational entities. Proposals in the Bill affect entities involved in trade, banking, mergers and acquisitions, retail sales, purchasing and disposing of securities, manufacturing and more. This Tax Alert is tailored for multinational entities. A separate Alert will cover all tax amendments contained in the Bill, including individual and indirect tax measures. Corporate tax developments Exports The proposed legislation seeks to introduce an extra advance tax of 1% on the proceeds exporters receive from goods they export. This would be on top of the existing 1% tax that foreign exchange dealers or banking companies already deduct on the proceeds from exported goods. Additionally, it appears from the language of proposed amendment that tax deducted (other than additional advance tax collection of 1%) would be considered a minimum tax liability. As a result, income derived from exports would be subject to Normal Tax Regime (NTR). Quarterly advance tax In the event that a taxpayer fails to disclose its turnover or the turnover is unknown, the Bill proposes to authorize the Commissioner to calculate the quarterly advance tax as 120% of the turnover from the latest tax year for which the taxpayer has filed a return, compared to the current rate of 110%. Additionally, the Commissioner is proposed to have the authority to reject a taxpayer's estimate of advance tax if the supporting documentary evidence is deemed unsatisfactory or if the estimate does not include necessary details as required by law. In such cases, the taxpayer will be required to pay advance tax based on the tax-to-turnover ratio for the latest assessed tax year applied on the turnover of the quarter. The proposed amendment that would give the Commissioner the power to reject the estimate filed by a taxpayers of his advance tax was initially introduced by the Finance Act, 2018, but later repealed by the Finance Act, 2021. The Bill mandates that taxpayers provide the following details to the Commissioner when calculating the estimate of the tax payable for the quarter:
The requirement to submit this information could be duplicative, as it is already covered in section 147(6) of the Income Tax Ordinance. Taxation of banking companies Provision for advances and off-balance sheet items Specific rules are provided to allow provisions for advances and off-balance sheet items. Presently, bad debts classified as "sub-standard" or "doubtful" under the Prudential Regulations issued by the State Bank of Pakistan (SBP), are not allowable as an expense. With the adoption of International Financial Reporting Standard 9 — Financial Instruments (IFRS-9), banks are now required to provide for possible future credit losses against advances, off-balance sheet items or any other financial asset classified in Stage I, II or III as performing, under-performing and nonperforming. The Bill proposes to disregard any provision made in a bank's annual accounts classified as above while working out its taxable income. This will be allowed when the debt pertaining to nonperforming assets is classified as "loss" under the Prudential Regulations issued by the SBP. The Bill also proposes to disregard any provision or Expected Credit Loss for advances and off-balance-sheet items or any other financial asset under IFRS-9 that existed before or after 1 January 2024. Notional gains and losses Under the law, any adjustment made in the annual accounts on account of application of International Accounting Standards 39 (Financial Instruments: Recognition and Measurement) and 40 (Investment Property) is to be disregarded when determining a company's taxable income. Pursuant to adoption of IFRS-9, the Bill now proposes that adjustments made in the annual accounts of a banking company due to any applicable accounting standard, policy, guidelines, or instructions of SBP shall be excluded in computing the taxable income. Levy of super tax The Bill proposes to clarify that super tax shall be leviable on banking companies for tax year 2023 and for all subsequent tax years. Option to obtain exemption certificate withdrawn The Bill proposes to abolish the concept of issuance of "exemption certificate" for tax withholding from payments to resident persons or nonresident persons having permanent establishment in Pakistan (for sale of goods or execution of contracts). Instead, such persons would be entitled to obtain "reduced rate withholding certificate." Deduction of tax on payment against sale of shares of a private company Under the Finance (Supplementary) Act, 2023, every person acquiring shares of a company, other than a listed company, is required to deduct from the gross amount being paid as consideration for the shares a tax at 10% of the fair market value of the acquired shares. The Bill seeks to amend this requirement, proposing that withholding of tax is required at the earlier of when consideration is actually paid or upon registration of shares with the Securities and Exchange Commission of Pakistan/SBP. Consequently, it seems that deduction of tax will be required when the shares are registered even if actual payment for the shares has not been made. The Bill also proposes to introduce a penalty equal to 50% of the tax involved, for noncompliance with this withholding tax provisions. Advance tax on sales to distributors, dealers and wholesalers Currently, manufacturers or commercial importers engaged in pharmaceuticals, poultry and animal feed, edible oil and ghee, auto parts, tires, varnishes, chemicals, cosmetics, information technology (IT) equipment, electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textiles, beverages, paint or foam sectors are required to collect advance tax at specified rates at the time of sales to distributors, dealers and wholesalers. The Bill proposes to expand the scope of this advance tax collection to encompass all items sold by manufacturers or commercial importers to distributors, dealers and wholesalers. Advance tax on sales to retailers Similarly, manufacturers, distributors, dealers, wholesalers or commercial importers operating in pharmaceuticals, poultry and animal feed, edible oil and ghee, auto-parts, tires, varnishes, chemicals, cosmetics, IT equipment electronics, sugar, cement, iron and steel products, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint, or foam sectors are obligated to collect advance tax at specified rates during sales to retailers. Additionally, every distributor or dealer transferring goods to other wholesalers within these sectors is also subject to this requirement. The Bill proposes to broaden the application of this advance tax collection to include all items sold by manufacturers, distributors, dealers, wholesalers or commercial importers to retailers and distributor or dealer to another dealer, distributor or wholesalers. Consequences of not furnishing income tax return for discontinued business Every person discontinuing a business is required to notify the Commissioner in writing of the discontinuance. Moreover, the business is also required to furnish a return reporting income for the period commencing on the first day of the tax year in which the discontinuance occurred through the date of discontinuance. If a notice of discontinuance is not filed, and the Commissioner has reasons to believe that the business has been discontinued or is likely to be discontinued, the Commissioner may issue a notice requiring the business to file a return of income for a specified period within the time specified in the notice. Currently, if the business fails to comply with the notice issued as above, no penal action has been prescribed under the law. The Bill proposes to introduce penalty for nonfiling of return in respect of a discontinued business, pursuant to a notice issued by the Commissioner, which is to be levied at the higher of:
The minimum penalty is proposed at Rs.10,000 for individuals and Rs.50,000 in all other cases. Similarly, the Bill proposes to treat the failure to file a return of income in respect of a discontinued operation, after receiving a notice from the Commissioner, as a prosecutable offence, which could entail a fine or imprisonment for a term not exceeding one year, or both. Any subsequent default may further entail a fine up to Rs.50,000 or imprisonment for a term not exceeding two years, or both. Additionally, the Bill proposes that if the person responsible for the discontinued business fails to furnish his last return of income, the Commissioner may proceed with a best judgement assessment. Default surcharge The Bill proposes to impose a default surcharge at the Karachi Interbank Offered Rate (KIBOR) plus an additional 3% per annum. At present, the surcharge is set at a flat rate of 12%, which is substantially lower than the prevailing interbank rate. This modification is intended to bring the surcharge in line with the current economic and market conditions, thus creating a deterrent against late payment of taxes. Tax appeals system On 3 May 2024, the Tax Laws (Amendment) Act, 2024 (TLAA) was enacted, bringing significant changes in the appeal procedures provided in the federal tax laws. According to the changes introduced, pecuniary thresholds were prescribed for appeals to be filed against orders passed by the Revenue Officers. For cases concerning income tax, if the "value of assessment of tax" or "refund of tax" in an order passed by a Revenue Officer exceeds Rs.20m, the appeal would lie directly with the Appellate Tribunal. In cases below the Rs.20m threshold, the appeal would be filed before the Commissioner (Appeals). The next forum in both cases would be the High Court. Due to varied interpretations of these requirements, the Bill proposes the following definitions:
Although the amendments to the appeals procedure took effect from 3 May 2024, all appeals that met the pecuniary threshold of Rs.20m and were pending before the Commissioner (Appeals) were to be transferred to the Appellate Tribunal by 16 June 2024. The Bill proposes to replace this date with 16 September 2024. The Bill also proposes to clarify that the time limit for filing of appeals in respect of appellate orders passed by the Commissioner (Appeals) or the Appellate Tribunal and served before 3 May 2024 would follow the law in place before promulgation of TLAA. Tax rate on dividend income The rates of tax on dividends, including dividends received from mutual funds remains unchanged for the tax year 2024. However, the Bill proposes to tax dividend received from a mutual fund deriving 50% or more of its income through profit on debt at 25%. Corresponding changes have also been made in the withholding tax provisions. Capital gain tax rates on disposal of securities The Bill proposes to replace the tax rates on capital gains arising on sales of securities. For securities purchased on or before 30 June 2024, no change is proposed. However, the Bill proposes to rescind the concessional rate of tax on sales of securities based on the holding period of securities purchased on or after 1 July 2024. This income would be taxed at 15% for persons appearing on the Active Taxpayers' List (ATL) on the date of acquisition and on the date of disposal. For persons not appearing on the ATL, capital gain is proposed to be taxed at the corporate tax rate for companies, and applicable slab rate with a minimum rate of 15% for individuals and Associations of Persons (AoPs). The proposed rates of capital gain tax on securities for the tax year 2024 and onward follow:
The tax rate for companies' debt securities remains at 29%. For mutual funds, collective investment schemes or real estate investment trust (REIT) schemes, capital gain tax on redemption is proposed to increase from 10% and shall be deducted as follows:
For stock funds with dividend income that is less than capital gains, the withholding tax rate is proposed to increase from 12.5% to 20%. Further, no capital gain shall be deducted if the holding period of the securities acquired on or before 30 June 2024 is more than six years. This proviso applies only in case of a mutual fund or collective investment scheme or REIT scheme. Withholding tax on toll manufacturing The Bill proposes to increase the withholding tax rate on payments to be made the sale of goods by a toll manufacturer from 5% to 9% in the case of a company and to 11% in other cases. Advance Tax on purchase, registration and transfer of motor vehicles The Bill proposes to revise the rates of collection of advance tax on purchases, registrations and transfers of motor vehicles, as follows:
International tax developments Transactions with associates In relation to transactions between associates, the Commissioner is empowered to distribute, apportion, or allocate income, expenditures or tax credits between associates. The Bill proposes to introduce a new condition whereby, notwithstanding the arm's-length principle, a claim of expenditure for sales promotion, advertisement and publicity (SAP) would be allowed to the extent of 75% of the total expenditure if any amount, in addition to SAP, is claimed for a royalty paid or payable (directly or indirectly) to an associate for the tax year or the two preceding tax years. The remaining 25% of SAP expense will be disallowed and allocated to the associate. In this context, royalty is considered to be attributable to consideration on account of use of, or the right to use brand name, logo, patent, invention, design or model, secret formula or process, copyright, trademark, scientific or technical knowledge, franchise, license, intellectual property or other like property or right or contractual right. Note that a Pakistan-source royalty earned by a nonresident person is taxable on a gross basis under the Final Tax Regime. Under such circumstances, the SAP expense allocated to the nonresident associate earning the royalty from Pakistan would not be allowed as an expense. It is important to note that the Bill proposes to give retrospective effect to the application of the above principle by making it applicable for the tax year 2024 and onward. Implications The amendments proposed in the Bill could be modified before they are enacted as the Finance Act 2024 and then become effective from 1 July 2024 (Tax Year 2025). Taxpayers that may be affected by the proposed changes will want to reach out to their tax advisors for assistance in analyzing the proposals and planning ahead.
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