A resident company is taxed on its worldwide income. Non-resident companies operating in Pakistan through a branch are taxed on their Pakistan-source income, attributable to the branch, at rates applicable to a company.
The federal corporate tax rates on taxable income are as follows:
||Tax rate (%)
|Public company other than a banking company
|Any other company
|Small company (see the Tax credits and incentives section for more information)
Note that the corporate tax rate for tax year 2018 and onwards is 30% for companies other than banking companies.
The term ‘public company’ implies a company listed on any stock exchange in Pakistan or one in which not less than 50% of the shares are held by the federal government or a public trust.
In the case of a modaraba (see the Income determination section for a definition), income, except relating to trading activities, is exempt from tax, provided that 90% of its profit is distributed to the certificate holders as cash dividends.
The final tax regime (FTR) for resident taxpayers, a presumptive tax scheme where taxes are withheld at the source on the sale of goods and execution of contracts or collected at the time of import (for other than industrial raw materials), is considered the final tax liability in respect of income arising from the sale, contract, or import.
In the case of exports, tax collected at the time of realisation of foreign-exchange proceeds is treated as the final tax for that income.
The FTR is also applicable to non-resident taxpayers, at their option. However, it is only applicable in cases of receipts on account of the execution of a contract for construction, assembly, or installation, including a contract for the supply of management activities in relation to such project as well as certain contracts for services and contracts for advertisement services rendered by television satellite channels.
Taxation of a permanent establishment (PE) of a non-resident
The following principles shall apply in computing taxable income of a PE:
- It is a distinct and separate entity dealing independently with the non-resident of which it is a PE.
- In addition to business expenditure, executive and administrative expenditure, whether incurred in Pakistan or elsewhere, will be allowed as deductions.
- Head office expenditure, including rent, salaries, travelling, and any other expenditure that may be prescribed, shall be allowed as a deduction in proportion to the turnover of the PE in the same proportion as the non-resident’s total head office expenditure bears to its worldwide turnover.
- Royalties, compensation for services (including management services), and interest on loans (except in banking business) payable or receivable to or from a PE’s head office shall be considered in computing taxable income of the PE.
- No deduction will be allowed for any interest paid on loans acquired by a non-resident to finance the operations of a PE (or for the insurance premium in respect of such loans).
Minimum tax on turnover
Where the tax payable by a company is less than 1% of the turnover, except where the company is in a loss position before charging depreciation and other inadmissible expenses, the company is required to pay a minimum tax equivalent to 0.5% of the turnover. Tax paid in excess of normal tax liability can be carried forward for adjustment against tax liability of a subsequent tax year. However, such tax can only be adjusted against tax liability of the five tax years immediately succeeding the tax year for which the amount was paid.
The minimum tax rate for companies providing services is 8% of the turnover, except for certain specified services sectors, which are allowed concessions with conditions.
Alternate Corporate Tax (ACT)
Under the ACT, the minimum tax liability of a company is the higher of 17% of accounting income or the corporate tax liability determined under the ordinance, including minimum tax on turnover. This concept is applicable for all companies except insurance companies, companies engaged in exploration and production of petroleum, banking companies, and companies enjoying a reduced rate of tax. Exempt income, income taxable under the FTR, gain on disposal of specified listed securities, income entitled to 100% tax credit on account of equity investment, and income of non-profit organisations, trusts, and welfare institutions are not taxable under the ACT.
Super tax was introduced through Finance Act, 2015 whereby 4% of super tax was payable by banking companies and 3% by other companies if the income of the company was 500 million Pakistani rupees (PKR) or more. Super tax was payable only for tax years 2015 and 2016.
Local taxes on income
No provincial or local taxes are payable in respect of income of companies.