2016/17
FOREWORD A country's tax regime is always a key factor for any business considering moving into new markets. What is the corporate tax rate? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed? Since 1994, the PKF network of independent member firms, administered by PKF International Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provide international businesses with the answers to these key tax questions. As you will appreciate, the production of the WWTG is a huge team effort and we would like to thank all tax experts within PKF member firms who gave up their time to contribute the vital information on their country's taxes that forms the heart of this publication. The PKF Worldwide Tax Guide 2016/17 (WWTG) is an annual publication that provides an overview of the taxation and business regulation regimes of the world's most significant trading countries. In compiling this publication, member firms of the PKF network have based their summaries on information current on 30 April 2016, while also noting imminent changes where necessary. On a country-by-country basis, each summary such as this one, addresses the major taxes applicable to business; how taxable income is determined; sundry other related taxation and business issues; and the country's personal tax regime. The final section of each country summary sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. While the WWTG should not to be regarded as offering a complete explanation of the taxation issues in each country, we hope readers will use the publication as their first point of reference and then use the services of their local PKF member firm to provide specific information and advice. Services provided by member firms include: Assurance & Advisory; Financial Planning / Wealth Management; Corporate Finance; Management Consultancy; IT Consultancy; Insolvency - Corporate and Personal; Taxation; Forensic Accounting; and, Hotel Consultancy. In addition to the printed version of the WWTG, individual country taxation guides such as this are available in PDF format which can be downloaded from the PKF website at www.pkf.com PKF Worldwide Tax Guide 2016/17 1
IMPORTANT DISCLAIMER This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International Limited (PKFI) administers a family of legally independent firms. Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. PKF INTERNATIONAL LIMITED JUNE 2016 PKF INTERNATIONAL LIMITED All RIGHTS RESERVED USE APPROVED WITH ATTRIBUTION PKF Worldwide Tax Guide 2016/17 2
STRUCTURE OF COUNTRY DESCRIPTIONS A. TAXES PAYABLE COMPANY TAX BRANCH PROFITS TAX MINIMUM TAX SALES TAX / VALUE ADDED TAX LOCAL TAXES OTHER TAXES ALTERNATE CORPORATE TAX EXCISE DUTY PROPERTY, WATER AND CONSERVANCY TAXES STAMP DUTY B. DETERMINATION OF TAXABLE INCOME DEPRECIATION STOCK / INVENTORY CAPITAL GAINS ON IMMOVABLE PROPERTY CAPITAL GAINS ON DISPOSAL OF SECURITIES DIVIDENDS STOCK DIVIDENDS INTEREST INCOME LOSSES INCENTIVES C. FOREIGN TAX RELIEF D. CORPORATE GROUPS E. TRANSFER PRICING F. PERSONAL INCOME TAX G. TREATY AND NON-TREATY WITHHOLDING TAX RATES PKF Worldwide Tax Guide 2016/17 3
MEMBER FIRM City Name Contact Information Karachi Faheem Rauf +92 21 3531 5175 faheemrauf@pkf.com.pk Lahore Nouman Razak Khan +92 42 3750 3381 nouman@pkf.com.pk Sialkot Zulfiqar Nasir +92 52 426 5194 zanasir@pkf.com.pk Islamabad Ejaz Hussain Rathore +92 51 282 5775 ejaz@pkf.com.pk Multan Muhammad Talib +92 61 451 0242 talib@pkf.com.pk Peshawar Zeeshan Ali +92 91 527 9691 zeeshan@pkf.com.pk BASIC FACTS Full name: Islamic Republic of Pakistan Capital: Islamabad Main languages: English, Urdu and 18 regional languages Population: 196,174,380 (2014 estimate) Major religion: Islam Monetary units: Pakistani Rupee (PKR) Internet domain:.pk Int. dialling code: +92 KEY TAX POINTS Income/Profits of corporate entities are taxed at 33% and the companies falling under the category of small company are taxed at 25%. The rates of tax for a branch of a company incorporated outside Pakistan are the same as those applicable on resident companies. However, such Branch Office operating in Pakistan through Permanent Establishment is entitled to set off all expenses incurred in or outside Pakistan, including allocation of share of Head Office General and Administrative Expenses. Some sources of income are taxed on presumptive tax basis, where the withholding tax suffered on such income constitutes full and final discharge of tax liability. In certain cases withholding tax on services is considered as minimum tax. Some other classes of taxpayers have also to pay minimum tax in relation to their turnover. Where a resident taxpayer derives foreign-source income on which income tax has been paid in the foreign territory, the taxpayer is allowed proportionate tax credit on the tax payable in respect of that income in Pakistan. In allowing expenses for the tax computation, some conditions, like payment through crossed cheque and compliance with withholding tax requirements do apply. All tax statements (returns) are accepted under self-assessment, and the declared results are deemed to be assessment. However, up to 5% cases are selected for audit through computer balloting by the Federal Board of Revenue. Commissioners also have powers to select some cases for audit. The Assessments completed on the basis of return can be amended on the basis of information gathered through audit or any definite information coming in possession of the tax officials. The assessment can also be amended, where it is considered to be erroneous and prejudicial to the interest of revenue. PKF Worldwide Tax Guide 2016/17 4
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 realized in an arm s-length transaction. VAT (locally termed as sales tax ) is a Federal tax, ordinarily levied at 17% on the value of goods, unless specifically exempt, or chargeable under reduced rate or zero rated. The tax is subject to input tax adjustments. Sales tax on Services, which is a provincial levy, is also charged by each Province, under its own laws. The recently introduced law is yet in evolutionary process. A. TAXES PAYABLE COMPANY TAX The corporate tax rate for tax year 2016 has been reduced to 33%. The tax rates are summarized as follows: All other Companies 33% Small Company 25% Modaraba 25% 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 a 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 foreignexchange proceeds is treated as final tax for that income. The FTR is also applicable to non-resident taxpayers, at their option, if not having a permanent establishment in Pakistan. 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 contract 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 to or receivable from PE s head office shall not be considered in computing taxable income of PE. Filers and Non-Filers The persons, who have not filed their tax returns for the immediately preceding year, are termed as non-filers, and removed from the active taxpayers list, maintained and updated electronically. The non-filers are subjected to enhanced rates for withholding and collection of tax under the following heads: 1. Tax withholding on payment of Dividend; 2. Tax withholding on payment of Profit on Debt; 3. Tax withholding on Cash withdrawals; 4. Collection of Advance tax on registration or transfer of registration of private motor vehicles; 5. Collection of Advance tax on motor vehicles; 6. Collection of Advance tax from seller of immovable property; 7. Collection of Advance tax from purchaser of immovable property; 8. Collection of Advance tax on sale of specified products to distributors, dealers and wholesalers. PKF Worldwide Tax Guide 2016/17 5
BRANCH PROFITS TAX The rates of tax for a branch of a company incorporated outside Pakistan are the same as those applicable on resident companies. Tax at the rate of 10% is levied on the transfer of profits to the head office, with an exception for companies engaged in the oil and gas exploration and production business. Payments to a branch in Pakistan of a non-resident are subject to deduction of tax at source on the same basis as a resident in the case of sale of goods, rendering of professional services, and execution of contracts. In other circumstances, a reduced/0% withholding tax (WHT) certificate can be obtained from the Commissioner of Income Tax. Pakistan has signed agreements for avoidance of double taxation with over 60 countries. MINIMUM TAX 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 1% 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 rates of minimum tax have been revamped as under: Ref. Person(s) % 1. 2. (a) Oil marketing companies, Oil refineries, Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited ( for the cases where annual turnover exceeds rupees one billion.); (b) Pakistani Airlines; and, (c) Poultry industry including poultry breeding, broiler production, egg production and poultry feed production. (a) Distributors of pharmaceutical products, consumer goods including fast moving consumer goods, fertilizers, and cigarettes (b) Petroleum agents and distributors who are registered under the Sales Tax Act, 1990; (c) Rice mills and dealers; and, (d) Flour mills. SALES TAX / VALUE ADDED TAX VAT (locally termed as sales tax ) is ordinarily levied at 17% on the value of goods, unless specifically exempt, after allowing related input credits. Significant zero-rated goods are as follows: Supplies and repair and maintenance of certain ships and aircraft; Supplies to diplomatic missions and diplomats; Supplies of raw materials, components, and goods for export processing zones; Supplies of locally manufactured plant and machinery to export processing zones and supplies of certain specified machinery to the exploration and production sector; Supplies to exporters. Significant exemptions are as follows: Live animals and live poultry; Live plants; Vegetables, pulses, edible fruits (excluding imported fruits), certain spices, sugar cane, edible oils, etc; Milk preparations; Newsprints, newspapers, journals, periodicals, and books; 0.5% 0.2% 3. Motorcycle dealers registered under the Sales Tax Act, 1990. 0.25% 4. In all other cases. 1% PKF Worldwide Tax Guide 2016/17 6
Agricultural produce not subjected to any process. Highest Retail Price Presently, manufacturers of goods subject to duty on retail price basis are required to pay duty at the highest retail price where more than one retail price is fixed by the manufacturers for any particular brand or variety of such goods. Through the Finance Act, 2014, FBR has been authorised to specify zones or areas only for the purposes of determining highest retail price for any brand or variety of goods. This seems to be a positive amendment aimed at resolving the long outstanding grievance of such manufacturers with regard to payment of duty on highest retail price without taking into account geo-economic factors. LOCAL TAXES No local taxes are payable in respect of income of companies. OTHER TAXES ALTERNATE CORPORATE TAX (ACT) A new concept of ACT has been introduced. ACT is applicable from Tax Year 2014. Under the concept, the minimum tax liability in case of a company is higher of tax on accounting income or the corporate tax liability determined under the Ordinance at the rates prescribed in the law. Tax liability under the Ordinance includes minimum tax on turnover under section 113 of the Ordinance. ACT, if payable, shall be for the accounting year ended December 31, 2013, June 30, 2014, or any period relevant to tax year 2014. This concept is applicable for all companies except insurance companies, companies engaged in exploration and production of petroleum, and banking companies, as per Fourth, Fifth and Seventh Schedule to the Ordinance respectively. Under the newly inserted section 113C, the ACT, being the tax determined on accounting income, has been prescribed at 17% of such income. The ACT is not applicable to: Exempt income; Income taxable under FTR; Gain on disposal of listed securities subject to tax under the Eighth Schedule; Income entitled to 100% tax credit on account of equity investment; Income of non-profit organizations, trusts or welfare institutions to whom tax credit is available under section 100C of the Ordinance; and, Where a company sets up an industrial undertaking, between 1 July 2014 and 30 June 2017, it will be subject to a reduced rate of tax under clause (18A) of Part II of the Second Schedule. EXCISE DUTY Federal excise duty (FED) is levied at the rate of 17% on certain types of manufacturing, import of goods, and rendering of services, except telecommunications services, which are charged at the rate of 18.5% (previously it was 19.5%). FED on telecommunication services, under the constitution, is to be levied and collected by the provinces. However if it is not levied by provinces at their specified rates, FED will be charged at 18.5%. Sindh, Punjab, and Khyber Pakhtunkhwa provinces have promulgated their statute, and others are expected to follow. PROPERTY, WATER AND CONSERVANCY TAXES Above taxes levied and collected by Provincial government and cantonments annually. PKF Worldwide Tax Guide 2016/17 7
STAMP DUTY Provincial stamp duty is payable on sale or transfer of immovable property, based on the value of the property. Stamp duty is also payable on the execution of contracts and some other transactions. B. DETERMINATION OF TAXABLE INCOME DEPRECIATION Normal depreciation is allowed at the following prescribed rates by applying the reducing-balance method. Assets Depreciation (percentage) Buildings 10 Machinery, Plant and Equipment (Including ships and vehicles) 15 Furniture 15 Computer hardware 30 Aircrafts and aero engines 30 Below ground installations in mineral oil concerns 100 Offshore platform 20 All depreciable assets put into service for the first time in Pakistan during a tax year, other than road transport vehicles not plying for hire, furniture (including fixtures), plant and machinery used previously in Pakistan, or plant and machinery for which a deduction has been allowed under another section of this ordinance, for the entire cost of the asset, shall be entitled to an initial allowance at 25% of the cost of the asset, except for buildings, for which the rate is 15%. Book depreciation need not conform to tax depreciation. Unabsorbed tax depreciation not set off against the income of the year is carried forward and added to depreciation of the assets of the same business in the following year. Tax depreciation can be carried forward without limit until fully absorbed. STOCK / INVENTORY Inventories are to be stated at the lower of cost or market. The first in first out (FIFO) and average methods are accepted. Conformity of methods used for book and tax reporting is desirable, and the method used should be consistently applied. CAPITAL GAINS ON IMMOVABLE PROPERTY Capital gain on the sale of immovable property, on which depreciation is not allowed, is taxed at the rate of 10% if disposed of within one year and 5% if disposed of within two years. However, if the retention period is more than two years, the gain is not taxable. Over and above, additional 0.5% withholding tax is levied on sale of property for filers and 1% for non-filers, which is adjustable income tax. CAPITAL GAINS ON DISPOSAL OF SECURITIES The gain arising on disposal of securities with holding period of 12 to 24 months has also been taxed and as such, zero rate of tax is now applicable only where the holding period of securities exceeds 24 months. PKF Worldwide Tax Guide 2016/17 8
Holding Period Tax Rate 0-12 months 15% 12-24 months 12.5% Over 24-48 months 7.5% Over 48 months 0% DIVIDENDS Dividend income is subject to WHT of 12.5% or a lower tax treaty rate. The deduction at source shall be the full and final discharge of tax liability on dividend income. STOCK DIVIDENDS A company which is quoted on the Stock Exchange: Bonus shares issued by a quoted company: Must be issued to a shareholder only after collecting tax equal to 5% of the value of the bonus shares to be issued to the shareholder (including 5% bonus shares withheld as above) within a prescribed time; For purpose of determining value of bonus shares, the day-end price on the first day of closure of books is prescribed to be used; The above referred tax is to be collected by the company within 15 days from the first day of closure of books; In case the shareholder fails to make payment of 5% tax within 15 days or the company fails to collect the tax within 15 days, the 5% bonus shares withheld by the company will be deposited by the company with the Central Depository Company of Pakistan Limited or any other entity prescribed by FBR; The bonus shares deposited with CDC or other entity, as mentioned above, will be disposed in the mode and manner to be prescribed by FBR, and the proceeds shall be paid on behalf of the shareholder by way of credit to the Federal Government. A company which is not quoted on the Stock Exchange: A company not quoted on the Stock Exchange which issues bonus shares to its shareholders will deposit tax, within 15 days of the closure of the books, at 5% of the value of the bonus shares on the first day of closure of books, whether or not tax has been collected from the shareholders by the Company. Rules are to be issued by FBR for determining the value of bonus shares of unquoted securities. Before the issuance of bonus shares, the company liable to deposit tax shall be entitled to collect and recover the amount of tax deposited from the shareholder on whose behalf the tax has been deposited; In case a shareholder neither makes payment of tax to the company nor collects his bonus shares, within 3 months of the date of issuance of bonus shares, the company may proceed to dispose bonus shares to the extent it has paid tax on shareholder s behalf. INTEREST INCOME Interest earned by a company is taxed as its income from other sources. Interest earned by a nonresident company without a PE in Pakistan attracts WHT at the rate of 10%, except where a lower rate is provided in the related DTT. The withholding tax on interest income is also the final tax on such income, except in the case of companies, where it is taxed on normal rates. LOSSES Operating losses may be carried forward and set off against the profits of the succeeding six years of the same business in which the losses were incurred. Unabsorbed depreciation can be carried PKF Worldwide Tax Guide 2016/17 9
forward indefinitely. Unabsorbed depreciation can be carried forwarded without any limitation. Carried forward losses of an entity in the case of group relief cannot be utilised if the ownership of the holding company is reduced to less than 55% and 75% if one of the companies is a listed company or none of the companies is a listed company, respectively. Business losses can be carried forward up to a period of six years in the case of the amalgamation of two companies, with the condition that the same business is continued for a minimum period of five years. The carrying back of losses is not permitted INCENTIVES Tax credits and incentives Any relief from Pakistani income tax that is provided in any other law and not provided for in the Income Tax Ordinance or a treaty is not valid. Tax exemptions There are various type of tax exemptions provided in the law, which include: a) Exemption of income from Tax b) Exemption from specific provision c) Reduction in Tax Rate, d) Reduction in Tax Liability Small companies Activities of small companies are encouraged with a reduced income tax rate of 25%. A small company has been defined to mean a company that: Is registered on or after 1 July 2005 under the Companies Ordinance, 1984; Has a paid-up capital plus undistributed reserves not exceeding 25 million Pakistani rupees (PKR); Has an annual turnover not exceeding PKR 250 million; and, Is not formed by splitting up or the reconstitution of business already in existence. Charitable donations credit Companies are allowed a tax credit equivalent to 20% of their taxable income in respect of donations to: Any board of education or university in Pakistan, established by or under federal or provincial law; Any educational institution, hospital, or relief fund established or run in Pakistan by federal government, provincial government, or local government; and, Any non-profit organisation. C. FOREIGN TAX CREDIT Where a resident taxpayer derives foreign-source income on which foreign income tax is paid within two years from the year in which it is derived, the taxpayer is allowed a tax credit equal to the lower of: (i) The foreign income tax paid; or, (ii) The Pakistan tax payable in respect of that income. However, foreign tax paid is not refundable. D. CORPORATE GROUPS 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. The relief is not available for losses prior to formation of the group. The group is available if the companies are designated as entitled to avail group relief by the Securities and Exchange Commission of Pakistan. Any company that is the subsidiary of a holding company may surrender its loss for the year to its holding company or its 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 PKF Worldwide Tax Guide 2016/17 10
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. E. 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 realized in an arm s-length transaction. F. PERSONAL INCOME TAX The tax rates listed below are applicable from 1 st July 2014. If more than 50% of an individual s income is derived from employment, the following tax rates apply to income other than certain investment income Exceeding PKR Not Exceeding PKR Amount 0 400,000 0 400,000 500,000 2% of amount exceeding 400,000 500,000 750,000 PKR 2,000 + 5% of the amount exceeding PKR 500,000 750,000 1,400,000 PKR 14,500 + 10% of the amount exceeding PKR 750,000 1,400,000 1,500,000 PKR 79,500 + 12.5% of the amount exceeding PKR 1,400,000 1,500,000 1,800,000 PKR 92,000 + 15% of the amount exceeding PKR 1,500,000 1,800,000 2,500,000 PKR 137,000 + 17.5% of the amount exceeding PKR 1,800,000 2,500,000 3,000,000 PKR 259,500 + 20% of the amount exceeding PKR 2,500,000 3,000,000 3,500,000 PKR 359,500 + 22.5% of the amount exceeding PKR 3,000,000 3,500,000 4,000,000 PKR 472,000 + 25% of the amount exceeding PKR 3,500,000 4,000,000 7,000,000 PKR 597,000 + 27.5% of the amount exceeding PKR 4,000,000 7,000,000 - PKR 1,422,000 + 30% of the amount exceeding PKR 7,000,000 For other individuals, including self-employed individuals, the following tax rates are applicable to their income other than certain investment income Exceeding PKR Not Exceeding PKR Amount 0 400,000 0 400,000 500,000 7% of amount exceeding 400,000 500,000 750,000 PKR 7,000 + 10% of the amount exceeding PKR 500,000 750,000 1,500,000 PKR 32,000 + 15% of the amount exceeding PKR 750,000 1,500,000 2,500,000 PKR144,500 + 20% of the amount exceeding PKR 1,500,000 2,500,000 4,000,000 PKR 344,500 + 25% of the amount exceeding PKR 2,500,000 4,000,000 6,000,000 PKR 719,500 + 30% of the amount exceeding PKR 4,000,000 6,000,000 - PKR 1,319,500 + 35% of the amount exceeding PKR 6,000,000 G. TREATY AND NON-TREATY WITHHOLDING TAX RATES Pakistan has signed bilateral tax treaties with about 60 countries. The law provides overriding effect to the treaty provisions over the domestic law. There are no separate withholding tax rates provided under the law, except as specified in the text of the respective treaty. PKF Worldwide Tax Guide 2016/17 11
Pakistan has signed a tax treaty with the following countries: Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Bosnia and Herzegovina, Brunei, Canada, China, Denmark, Egypt, Finland, France, Germany, Hungary, Indonesia, Iran, Ireland, Italy, Japan, Jordan, Kazakhstan, Korea (Republic of), Kuwait, Kyrgyzstan, Lebanon, Libya, Malaysia, Malta, Mauritius, Morocco, Nepal, Netherlands, Nigeria, Norway, Oman, Philippines, Poland, Portugal, Qatar, Romania, Saudi Arabia, Serbia, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uzbekistan, Vietnam, Yemen, PKF Worldwide Tax Guide 2016/17 12