Pakistan

A locally incorporated holding company and subsidiary of a 100%-owned group may be taxed as one group by giving an irrevocable option for taxation as one fiscal unit. In such a case, besides consolidated group accounts, computation of income and tax payable shall be made for tax purposes. 

Group relief is not available for losses prior to formation of the group. Group relief is available if the companies are designated as entitled to avail group relief by the Securities and Exchange Commission of Pakistan. Inter-corporate dividends are, however, exempt from levy of tax in case of entities availing group taxation.

Any company that is the subsidiary of a holding company may surrender its assessed loss for the year to its holding company or its subsidiary (in the proportion of the shareholding held by the holding company in the subsidiary), or between another subsidiary of the holding company, provided that the holding company directly holds 55% or more capital of the subsidiary if one of the companies is a listed company. However, if none of the companies is a listed company, the holding requirement is 75% or more. The loss can be surrendered for a maximum of three years, and the required holding is for at least five years. 

Transfer pricing

The tax authorities have the power in respect of a transaction between associates to distribute, apportion, or allocate income, deductions, or tax credits between such associates to reflect the income that would have been realised in an arm’s-length transaction. Companies are required to maintain specified records and documents for transactions between associates, and tax authorities can require information and documents for such transactions.

The Commissioner is empowered to appoint, with prior approval of the FBR, a Chartered Accountant or a Cost and Management Accountant to determine the fair market value of an asset, product, expenditure, or service in respect of a transaction where the Commissioner is of the view that the same has not been undertaken on an arm’s-length basis. In case the Commissioner is satisfied with the report, the Commissioner can proceed by considering the same as definite information for amendment of assessment. In case of being dissatisfied, the Commissioner can also seek report from another accountant.

Through the Finance Act 2024, the Commissioner has been empowered to disallow 25% of the total expenditure on account of sales promotion, advertisement, and publicity and allocate to an associate with whom an arrangement for royalty on certain intangibles is in place where such taxpayer (upon issuance of notice by the Commissioner) fails to furnish any explanation or evidence that no benefit has been conferred on the associate as a result of incurring such expenditure. For non-residents protected by an applicable DTT, it can be argued that no such allocation is permissible as long as the royalty itself is on an arm's-length basis.

Transfer pricing documentation and country-by-country (CbC) reporting

Transfer pricing documentation requirements have also been provided in law in order to comply with the requirements of various international Conventions/Agreements executed by the government (see Base Erosion and Profit Shifting [BEPS] in the Other issues section), inter alia, including the following:

• Every taxpayer, being a constituent entity of a multinational entity (MNE) group having turnover of more than PKR 100 million, is required to keep, maintain, and make available a ‘Master File’, containing certain prescribed information.
• Every taxpayer entity in Pakistan that has undertaken transactions exceeding the monetary limit of PKR 50 million with related parties is required to keep, maintain, and make available a ‘Local File’, containing the prescribed information/details.

Every ultimate parent entity or surrogate parent entity in Pakistan that is part of an MNE group resident in Pakistan and whose consolidated group revenue is 750 million euros (EUR) or more during a fiscal year is required to file a CbC report for each country wherein the constituent entities of the MNE group operates.

A constituent entity (including a PE of a company) of an MNE group (not being the ultimate parent or surrogate parent) is also required to furnish a CbC report in case:

• The ultimate parent is not obligated to file such report in its country of residence (other than in cases where its consolidated group revenue is EUR 750 million or below).
• The ultimate parent is required to file a CbC report in its country of residence, but such country does not have any Competent Authority Agreement in place with Pakistan.
• There has been a systemic failure due to which such information cannot be exchanged.

The CbC report should contain the following information for each country wherein the constituent entities of the MNE group operates:

• Revenues from related and unrelated parties.
• Profit/loss before income tax.
• Income tax paid.
• Income tax accrued.
• Stated capital.
• Accumulated earnings.
• Number of employees.
• Tangible assets other than cash.
• Main business activities.

Thin capitalisation

Where a foreign-controlled resident company (other than a financial institution or a banking company) or 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 year, a deduction shall be disallowed for the profit on debt (interest) paid by the company in that year on that part of the debt that exceeds the 3:1 ratio.

A new formula (in addition to that explained above) has been introduced to restrict the deduction of foreign ‘profit on debt’ incurred by any foreign-controlled resident company in Pakistan (other than a banking and insurance company) during a tax year with a carry forward mechanism provided (up to a period of three years) subject to the same overall limits each year.

B – ([A + B] x 0.15)

Where:

• 'A' is the taxable income before depreciation and amortisation, and
• 'B' is the foreign profit on debt claimed as deduction.

This change shall not apply to a foreign-controlled resident company if the total foreign profit on debt claimed as deduction is less than PKR 10 million for a tax year.

It has also been provided that disallowance on this account shall be the higher of the amount of determined on the basis of the foreign debt-foreign equity ratios and that arrived as per the above formula.

Controlled foreign companies (CFCs)

Attributable incomes of CFCs that are retained and not repatriated to Pakistan are subject to tax on the basis of the tax rate applicable to dividends (i.e. 15%).

A company shall be classifiable as a CFC if:

• more than 50% of its capital or voting rights are directly or indirectly held by Pakistani resident persons or if more than 40% of such capital or voting rights is held by a single Pakistani resident person
• tax paid in respect of income derived or accrued in a foreign tax year is less than 60% of tax payable on the said income under this Ordinance
• the non-resident company does not derive active business income (as defined in the provisions), and
• the shares of the company are not traded on any recognised stock exchange in the relevant jurisdiction. 

There will be no tax incidence under these provisions in case the voting rights or capital held by the resident person is less than 10% or income of the CFC is less than PKR 10 million. Moreover, no further tax is payable at the time of actual distribution.