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 2020) are as follows:
|Company type||Tax rate (%)|
|Public company other than a banking company||29|
|Any other company||29|
|Small company (see the Tax credits and incentives section for more information)||23|
The future tax rates applicable for ‘companies’ and ‘small companies’ will be as follows:
|Tax year||Company rate (%)||Small company rate (%)|
|2023 and onwards||29||20|
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 was introduced in 1992, whereby income of a certain category of persons (i.e. commercial importers, sale of goods, execution of contracts, etc.) was considered as final tax liability in respect of income of such persons.
Now, FTR has been abolished in a majority of the cases, and relevant incomes streams have been made subject to minimum tax in all cases (other than exports, dividends, prizes and winnings, sale of petroleum products, etc.), with tax deducted/deductible to be treated as minimum discharge of tax liability. However, in case tax liability on income worked out on a net income basis exceeds such liability, the excess amount would have to be paid/discharged by such persons, along with the return of income.
The tax rate for companies providing services is 8% of the turnover, except for certain specified services sectors, which are subject to 3% minimum tax. Further, the option to carry forward the minimum tax has also been done away with.
The rate of WHT for certain transaction, which currently prescribe an increased rate for non-filers, has been enhanced by 100% for persons not appearing on the Active Taxpayer List (ATL) of the FBR.
Taxation of a permanent establishment (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 is subject to ‘minimum tax’ 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 (i.e. cohesive business operation), constitutes Pakistan-source income.
‘Cohesive business operations’, 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.
In case of payment against transactions that constitutes part of an overall arrangement of a cohesive business operation, the Commissioner (on application made by the payer) may allow the person to make payment after deduction of tax equal to 30% of tax chargeable on such payment.
Minimum tax on turnover
Where the tax payable by a company is less than 1.5% of the turnover, the company is required to pay a minimum tax equivalent to 1.5% of the turnover. In certain cases/sectors, such turnover tax is payable at rates less than 1.5% (ranging from 0.25% to 0.75 % of 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.
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.
Super tax is presently leviable only upon banking companies at 4% for tax years 2020 and 2021. From tax year 2020 and onwards, such levy is no longer applicable for persons other than a banking company.
Local taxes on income
No provincial or local taxes are payable in respect of income of companies, other than agricultural income tax, which is subject to tax under the respective provincial laws.