On 7 June 2017, the OECD announced that Pakistan signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA). About 70 countries have signed this Multilateral Instrument (MLI) agreement at the OECD Centre in the presence of Secretary-General OECD at the same time. According to the MCAA signatories, Pakistan intends to launch the first information exchange in September 2018.
The Pakistani ambassador said that Pakistan will now be part of the global effort to develop solutions to bridge gaps in the tax treaties that will allow companies to artificially shift to low or no tax havens. In addition, Pakistan will also receive consistent support and guidelines from the OECD to implement the standards of BEPS to counter harmful tax practices and tax treaty abuses.
Federal Board of Revenue (FBR) has proposed through Finance Bill 2017 to establish Directorate General of Transfer Pricing which shall consist of a Director General and as many Directors, Additional Directors, Deputy Directors, Assistant Directors and such other officers.
The primary function of the Directorate-General is to conduct transfer pricing audit. The Bill also seeks to provide an explanation regarding transfer pricing audit to mean the audit for determination of transfer price at arm’s length in transactions between associated and which would be independent of other audits of income tax affairs of the taxpayers that are conducted under sections 177, 214C and 214D.
It is further proposed that the FBR may by notification in the Official Gazette, specify the criteria for selection of taxpayer for a transfer pricing audit and may further specify functions, jurisdiction and powers of Directorate General of Transfer Pricing.
Pakistan’s Federal Board of Revenue (FBR) on 26 May 2017, presented the budget for 2017/2018 to the parliament. The following tax measures are proposed in the Budget:
Corporate income tax rate: Corporate tax rate for companies other than banking companies is further reduced from 31% to 30%, for Tax Year 2018 and onwards.
Introducing the concept of start–ups: In order to promote innovation and entrepreneurship in Information Technology the concept of start–up has been introduced. A start-up has been defined as a business set-up by an individual, AOP or a company having turnover up to Rs.100 Million, registered and certified by the Pakistan Software Export Board (PSEB) as an information technology entity engaged in offering technology-driven products or services to any sector of the economy.
Reduction of withholding tax rates for mobile phone subscribers: The number of mobile phone subscribers in Pakistan has shown a gradual and sustained increase and presently there are about 140 Million mobile telephone subscribers in Pakistan belonging to various strata of society. In order to promote mobile phone density, the rate of withholding income tax for mobile phone subscribers is being reduced from 14 percent to 12.5 percent.
Exemption on cash withdrawal by branchless banking agents: Asaan Mobile Account Scheme is to be introduced for providing withholding tax exemption on cash withdrawal of amount exceeding Rs.50,000 per day under section 231A, made through “Branchless Banking Agent Account”.
Simplification of rate structure on Capital Gains Tax: At present, there is a three-tier rate structure for capital gains tax on securities based upon the holding period of securities i.e. less than 12 months, more than 12 months but less than 24 months and more than 24 months but less than 5 years. For the purposes of simplification and promotion of stock market transactions, a flat /single rate of tax of 15 percent for filers and 20 percent for non-filers is being introduced.
Relief from Withholding tax on Life Insurance Premium: Threshold for the collection of advance tax by insurance companies on premium paid by non-filers in respect of life insurance under section 236U is being enhanced from Rs. 200,000 to Rs. 300,000 per annum.
Reduction in the threshold for paying advance tax in the case of an individual: At present, an individual is obliged to pay advance tax if his latest assessed taxable income is Rs.500, 000 or more. In order to provide relief and to facilitate small taxpayers, the threshold for payment of advance tax on the basis of latest assessed taxable income is being enhanced from Rs.500, 000/- to Rs.1, 000,000/-.
Further relief on the tax credit for education expenses: At present, individuals having taxable income of fewer than one million rupees are entitled to a deductible allowance in respect of education expenses incurred by them. In order to provide respite up to middle-income groups paying tuition fees, the threshold of taxable income for individuals entitled to a deductible allowance in respect of education expenses incurred is being increased from Rs.1,000,000/- taxable income to Rs.1,500,000/-.
Relief from Withholding tax on Life Insurance Premium: Presently, advance tax is collected by insurance companies from non–filers if life insurance premium paid by such non-filers exceeds Rs.200, 000/- per annum. In order to provide respite to taxpayers having life insurance policies the threshold for collection of advance tax from such non-filers is being enhanced from Rs.200,000/- to the aggregate amount of Rs.300,000/- per annum.
On 15 May 2017, the Senate approved the draft Companies Bill, 2017, replacing the Companies Ordinance 1984. The Bill aims to facilitate procedures for the country’s business sector and discourage fraud, money laundering and terror financing.
Previously, on February 6, 2017, the National Assembly approved the Bill and referred it to the Senate Standing Committee on Finance, Revenue, Statistics, Economic Affairs and Privatisation for consideration and report.
The major changes to the draft Companies Bill, 2016 approved by the Parliament include various measures to ensure ease of doing business for investors; exemption from various regulatory requirements for small-scale businesses; streamlining the provisions for beneficial ownership of companies; permitting a simple one-page memorandum of association while allowing all permissible business activities; and measures to improve corporate governance practices including representation of female directors on the boards of public interest companies, representation of disabled persons in such companies, measures for enhanced transparency and timely disclosures for protection of stakeholders’ interests.
Recently, the Federal Board of Revenue (FBR) has issued a guideline on the mechanism of ADR. The FBR has motivated taxpayers to resolve their issues through the Alternate Dispute Resolution (ADR) mechanism, which will help taxpayers from unnecessary litigation. This procedure will save taxpayers not only from the unnecessary litigation but help FBR to get legitimate revenue in a friendly measure thus maximising the environment of trust between tax collectors and the taxpayer.
The guideline notes that ADR is a system that operates side by side with the existing appeals system but with simpler procedures and fewer technicalities. The taxpayer could therefore refer contentious issues for consideration by independent experts and arrive at an out of court settlement with the tax administration on the basis of the expert recommendations.
This guideline explains the provisions of the Income Tax, VAT, Customs and Federal Union Taxation Laws in the context of the Alternative Dispute Resolution (ADR) mechanism in a simple and general language. It is largely intended for those who have no professional knowledge/advice in dealing with their tax affairs.
In addition, the registration form for ADR is linked to the manual.
On 26th of April 2017, Pakistan and Bulgaria signed an Agreement on Avoidance of Double Taxation (DTA) and prevention of fiscal evasion with regard to taxes on Income after the conclusion of second round of negotiations in Islamabad. It will also provide certainty of tax treatment in each country so that the investors feel free from any fear or apprehension. Moreover, through the exchange of information mechanism, information could be obtained on request basis for the administration or enforcement of the domestic laws which will help minimize the possibility of tax evasion.