Amendment made in Finance Act to expedite recovery of taxes from undiscovered offshore assets

KARACHI: PTI government has made an amendment in the Finance Act through supplementary bill to avoid unnecessary delay in the recovery of taxes due from the offshore assets which have been discovered by government of Pakistan.

The process of provisional assessment which was earlier limited to assets which could have been impounded has been extended to undeclared offshore assets of any person.

This extension has been made in order to encompass the right of provisional assessment on assets which could not have been impounded by the Government of Pakistan on account of being held outside Pakistan.

This amendment has been apparently made to avoid unnecessary delay in the recovery of taxes due from the offshore assets which have been discovered by government of Pakistan

Undistributed reserves were taxed in tax years 2015 and 2016. This was replaced by a tax on undistributed profits in the tax year 2017. Presently, such tax is payable for tax year 2017 and onwards at the rate of 5% of the whole profits, if distribution (including by way of bonus shares) is less than 20% of after tax profits.

This tax has now been abolished from tax year 2020 and onwards as the Finance Supplementary (Second Amendment) Bill, 2019 now proposes to restrict this levy up to tax year 2019.

The Finance Minister in his speech stated the desire of the Government to promote holding company and group structures. One of the major impediment in the creation of such group structure is dual taxation of inter corporate dividends within the group. In 2016, a regressive step was undertaken by way of elimination of exemption from tax on inter corporate dividend. In this Supplementary Bill, the concept of group relief has been re-introduced however that does not fulfill what has been stated in the speech.

In the Finance Bill, a new regime has been introduced to exempt inter corporate dividend in case of companies availing group relief. Resultantly, this exemption will be available only where there is a surrender of losses in that tax tear, and to the extent of percentage holding of parent company in the subsidiary company.

“We consider that the term ‘to the extent of the percentage holding’ requires explanation as the same can be misinterpreted. The aforesaid amendment needs to be re-examined and it is suggested that the original position prior to 2016 be reinstated as the purpose of exemption on inter-corporate dividend was to promote formation of group companies and not limited to the cases where group were formed merely for loss utilization,” a report issued by A.F Ferguson & Co said.

Under  the  present  regime,  loss  on  disposal  of  listed  and  other  securities  (covered  under  section 37A of the Income Tax Ordinance, 2001) which is not fully set-off against capital gains is not  allowed  to  be  carried  forward  to  subsequent  tax  year.  It  is  proposed  that  any  unadjusted  capital losses for tax year 2019 and onwards can be carried forward for set-off against capital gains on such securities up to a maximum of three tax years.

Under  the  provisions  of  section  233A,  advance  tax  is  collected  by  Stock  Exchange  from  its  members  on  purchase  and  sale  of  shares  in  lieu  of  tax  on  commission  income  earned  by  such  members. The said withholding tax was adjustable against their income.

It is now proposed that such advance tax collection will not be made from February 1, 2019 and onwards.  As a consequence of the above amendment, the general provisions applicable on brokerage and commission  income  under  section  233  will  become  applicable  whereby  the  tax  is  collected  on  brokerage and commission amount as against the existing manner of collecting the tax on whole transaction value. The tax now deductible on brokerage and commission income will be final tax.

There was a dire need to address the concerns of Sports league franchisees in relation to advance tax collection on auction of franchise rights especially when there is no or low profitability from such  activities  in  initial  years.  The  amendment  has  therefore  been  proposed  to  exempt  from  advance tax collection primarily in respect of PSL.

However, the same will also apply in respect of auction of franchise rights in participating teams in a national or international league organized by any board or other organization established by the Government in Pakistan for the purposes of  controlling,  regulating  or  encouraging  major  games  and  sports  recognized  by  government.  This exemption will apply from July 1, 2019.


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