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 (for tax year 2018) 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)
The tax rates for ‘companies’ as well as ‘small companies’ will be reduced gradually from tax year 2019 in the following manner:
||Small company (%)
|2023 and onwards
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 and manufacturing 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, is considered the final tax liability in respect of income arising from the sale or contract.
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 exporters can also opt out of such regime, subject to the condition that tax deducted on exports is offered as minimum tax.
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.
Commercial importers (persons engaged in the import of goods where the goods are sold in the same condition as they were when imported) were subject to tax on presumptive tax basis, though an option was provided for under the law to opt out of FTR. This regime has now been abolished, and commercial imports have been made taxable under the normal tax regime, with tax at 5% of import value (as increased by applicable duties/taxes) considered as a ‘minimum tax’ on such transaction.
Taxation of a PE
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).
- Income from rendition of services derived by a PE of a non-resident person has been made subject to ‘minimum tax’ at 8% (of the gross consideration).
Taxation of certain contracts executed by non-resident persons
Income derived by non-resident persons/their affiliates from turnkey contracts that are part of an overall arrangement for supply of goods, installation, construction, assembly, commission, guarantee, and supervisory activities, including offshore supply of goods, now constitutes Pakistan-source income.
Necessary amendments to this effect have also been made in the definition of a PE by way of introduction of the concept of ‘cohesive business operations’, which includes:
- an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees, or supervisory activities, and all or principal activities are undertaken or performed either by the person or the associates of the person, and
- supply of goods include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.
The objective of these amendments seems an attempt to tax income of a non-resident arising from transactions wholly undertaken outside Pakistan (such as income relating to supply of goods where the title is passed outside Pakistan) in case the same is part of a ‘cohesive business operation’. It is, however, clear that the double tax treaty (DTT) provisions would override these provisions and thus the same would only apply in non-treaty cases.
Minimum tax on turnover
Where the tax payable by a company is less than 1.25% of the turnover, the company is required to pay a minimum tax equivalent to 1.25% 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, subject to fulfilment of certain 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 incomes, income taxable under the FTR, capital 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 subject to levy of ACT.
The levy of ‘super tax’ has been extended up to tax year 2021 in the case of banking companies and up to tax year 2020 in the case of other persons. The revised rates of super tax are as follows:
||Banking company (%)
||Persons other than banking company (%)
Local taxes on income
No provincial or local taxes are payable in respect of income of companies.