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Pakistan Corporate - Significant developments

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  • The generally applicable corporate tax rate of 30% (relevant for tax year 2018) will be reduced by 1% each year until a rate of 25% is applicable for tax year 2023 and onwards.
  • The corporate tax rate for ‘small companies’, presently 25%, will also be reduced by 1% each year until a rate of 20% is applicable for tax year 2023 and onwards.
  • Super tax, presently leviable at 3%, is to be gradually phased out in the case of persons (including companies, other than banking companies) by 1% each year, until tax year 2021.
  • Tax on ‘undistributed reserves’ in case of public companies has been reduced from 7.5% to 5%. Previously, no tax was payable where a company distributed at least 40% of after tax profits. Such threshold is now being reduced to 20%. Moreover, issuance of bonus shares shall no longer be considered as distribution of profits for the purposes of these provisions.
  • Tax at 5% earlier applicable on issue of bonus shares has been abolished.
  • ‘Fees for offshore digital services’ received by non-resident persons have been made subject to final tax (like royalties and ‘fees for technical services’) at the rate of 5% of the gross amount.
  • Income from turnkey contracts derived by non-resident persons and their affiliates, that form part of an overall arrangement for supply of goods, installation, construction, assembly, commission, guarantee, and supervisory activities, is to be considered as Pakistan-source income.
  • Under the domestic law, scope of expression of ‘permanent establishment’ (PE) has been enhanced to include (i) fixed place of business used by non-resident persons/affiliates for execution of ‘composite’ contracts and (ii) those persons who are habitually engaged in execution of contracts on behalf of non-residents.
  • The concept of controlled foreign company (CFC) has been introduced with the aim to bring into the tax net passive incomes earned by foreign companies, owned by residents, that are not repatriated into Pakistan.
  • Gain derived outside Pakistan on disposal of a Pakistani asset, held by a non-resident company, has been included in the ambit of Pakistan-source income.
  • Income from services rendered by PEs of non-resident persons have now also been made subject to ‘minimum tax’ (and thus brought on par with resident corporate service providers).
  • Tax authorities have been empowered to disregard an entity/corporate structure having no economic substance or executed as part of a ‘tax avoidance scheme’.
  • Adjustment of unabsorbed depreciation/amortisation against taxable profits of subsequent years has been restricted to 50% of taxable profits in case of profits of 10 million Pakistani rupees (PKR) or more. The remaining amounts shall, however, remain eligible for carryforward/adjustment in future years.
  • Gain on disposal of listed and other securities held for more than five years but less than six years were earlier taxable at 0%; however, now these have been made taxable at 15% (20% for non-filers).
  • The rate of tax chargeable/deductible on dividends received by a company from collective investment schemes, real estate investment trust (REIT) schemes, or mutual funds (other than stock funds) has been reduced from 25% to 15%.
  • ‘Commercial importers’, earlier subject to tax on a presumptive basis, have now been made subject to tax under the normal tax regime, with tax at 5% of the import value considered to be a minimum tax on related transaction.
  • The exemption on income from export of computer software, information technology (IT) services, or IT-enabled services, has been extended to tax year 2025.
  • The tax credit on investment in plant and machinery and newly established undertakings is extended for a period up to 30 June 2021.
  • A one-time amnesty scheme has been announced for declaration of undisclosed domestic incomes/assets by 30 June 2018 for companies on the basis of payment of tax at 2% to 5% (depending on the category of such assets).

Last Reviewed - 30 June 2018

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