KARACHI: Finance Bill 2018 has proposed measure as part of the overall scheme to bring into tax ambit the income earned through offshore entities owned by Pakistani residents.
The income of such companies is not taxed in Pakistan if the same is retained and not repatriated to Pakistan. In order to curb this tendency of non-repatriation, there is an internationally accepted concept whereby the income of foreign controlled companies owned by residents of respective jurisdictions can be taxed even prior to distribution. No further tax is then paid at the time of actual distribution. This concept is termed as CFC regime.
The CFC regime as introduced in Pakistan provides that a company shall be considered as CFC if more than 50 percent of its capital or voting rights are directly or indirectly held by Pakistani resident persons or if more than 40 percent 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 percent of tax payable on the said income under this Ordinance; non-resident company does not derive active business income and shares of the company are not traded on any recognized stock exchange in the relevant jurisdiction.
There will be no tax incidence under these provisions, if the voting rights or capital held by the resident person is less than 10 percent or income of CFC is less than Rs10 million.
For determination of income to be taxed under this section, certain procedures have been laid down in the provisions.
This concept is prevalent in various developed economies as anti-deferral measure whereby a resident company can be taxed on its income from a foreign subsidiary irrespective of whether such income is received. In the absence of such provisions, the tax incidence is generally arisen only when the income is received by the holding company such as dividends, interest, etc. Generally such measures are applicable in respect of such foreign companies which are situated in tax haven countries.