Finance Act 2016: PBC urges Umar to do away with ''''detrimental'''' amendments

Pakistan Business Council (PBC) has urged Finance Minister Asad Umar to do away with "corporate sector''''s detrimental" amendments introduced to Finance Act 2016.
In a letter to Finance Minister, Chief Executive PBC, Ehsan Malik has stated that the concept of Group Taxation was introduced in Pakistan at the recommendation of the "Task Force for the review of Law Relating to Holding Companies," constituted by the then Central Board of Revenue in 2006, which included representatives of the Securities and Exchange Commission of Pakistan, Institute of Chartered Accountants of Pakistan, Central Board of Revenue (CBR) and the Pakistan Business Council (PBC). The recommendations of the Task Force were duly incorporated through the Finance Act 2007.
According to him, implementation of the Task Force recommendations prompted considerable structural changes as groups formed holding companies, stepped up investment in new sectors, created employment and offered investors participation in listed subsidiaries of reputable groups. Unfortunately, however, the reversal of group taxation in the Finance Act 2016 rendered the concept of holding companies superfluous and undid the reforms which had placed Pakistan at the forefront amongst developing countries.
The PBC argued that Group Taxation and Relief Reform enabled the creation of several group subsidiaries in industries beyond the core, and that formation of subsidiaries allows multiple balance sheets to be used instead of one. This has the following advantages: (i) ease of raising capital. Shareholders in listed subsidiaries could take exposure according to their risk appetite. In a single company, they would have had to take exposure to multiple industries; (ii) sector specific FDI e.g. the recent partnership of Engro Corp with Royal Friesland Campina through Engro Foods; (iii) de-risking of the banking sector. Banks could lend to segmented entities with different business risk profiles vs. one large unwieldy entity.
Additionally, listed subsidiaries result in continuous fiscal activity and contribute to the national exchequer in the shape of different taxes and a streamlined holding company structure allows for ease of group ownership, thereby freeing up capital for further investment.
The PBC claims that through the Finance Act 2016, following amendments were introduced in the Income Tax Ordinance 2001, which are detrimental for consolidation of the corporate sector: (i) exemption for inter-corporate dividends in a group structure has been abolished for entities designated under Group Relief. This resulted in incidence of double (at times, triple) taxation on inter-corporate dividend, ie, the companies first pay tax on their profits and when inter-group dividends are distributed, these are taxed again in the hands of the receiving company and are further taxed on distribution to the shareholders of the parent company when distributed as dividends; and (ii) a restriction under Group Relief has been introduced whereby the surrender of losses will be restricted to the percentage shareholding of the holding company in the entity surrendering the losses. One of the major conditions for surrender of losses under group relief is the maintenance of substantial interest or control in the subsidiary company by the holding company. It is an internationally accepted principle that with control, an entity assumes the right to govern all the assets and liabilities of another entity in their entirety, including losses. Imposing a limitation on the right of the holding company to utilize such losses (based on holding percentage) is not only economically unjust but also against the concept of group taxation under internationally accepted norms.
"We would strongly urge you to reconsider the amendments on Group Relief enacted through the Finance Act 2016 and restore the provisions of the Finance Act 2007 as this would help reverse the premature de-industrialization by allowing business to gain scale and become more competitive, which in turn would facilitate more value-added exports and import substitution," Ehsan Malik said.