The Securities and Exchange Commission (SECP) has proposed to the Federal Board of Revenue to expand the scope of "group relief" and "group taxation" under the Income Tax Ordinance 2001 to provide a level playing field to companies, revive sick units and remove fragmentation of corporate sector.
It is learnt here on Monday that the SECP has forwarded a detailed budget proposal on the issue of "group relief", "group taxation" and "Amalgamation" of companies to the FBR. According to the SECP budget proposal, the business fragmentation at the entity level has been noticed in Pakistan, this primarily stems from taxation structure and ownership pattern. To address this issue a task Force on "Review of Tax Laws on Holding Companies" was constituted by FBR in 2006. The mandate of the TF was to look at tax law to encourage consolidation of core resources of corporate business groups through functional Holding Companies and to expand the scope of "Group Relief" under the Income Tax Ordinance, 2001. In addition to above TF also recommended introduction of the concept of "Group Taxation" in Pakistan.
The Task Force had representation from Federal Board of Revenue (FBR), Securities and Exchange Commission of Pakistan (SECP), Institute of Chartered Accountants of Pakistan (ICAP) and Pakistan Business Council (PBC). The task force gave its recommendation in 2007 which pertained to following three areas. Please note that all the recommendations were accepted and amendments in ITO 2001 were made accordingly through Finance Bill 2007.
The SECP said that response of the corporate sector to the above consolidation incentive under the tax laws has not been very encouraging. Some activity has been witnessed under Group Relief as SECP has approved formation of 17 groups under Group Company Registration Regulation 2008 but full potential has not realised. Corporate sector has often raised its concerns on the various provisions pertaining to above three areas. Based on tax proposals received and feedback in the roundtable held in Karachi following key areas/issues have been identified which need to be addressed to encourage group consolidations. The SECP has looked at these suggestions in light of TF report and overall objective of consolidation of corporate sector and propose following amendments in various sections pertaining to "Group Relief", "Group Taxation" and "Amalgamation" which are given below under each issue.
The SECP has proposed that currently the losses before the formation of group are not allowed to be surrendered to the other company within the group for adjustment. Proposal is to allow offsetting the prior period losses subject to the following conditions: Firstly, accumulated loss of preceding three tax years will be allowed subject to that the surrendering company ownership for last three tax years is as provided in respective sections (59AA and 59B) prior to formation of the group. Secondly, accumulated loss surrendered will be adjusted in next five years after formation of the group. Similarly, no assessed brought forward loss is allowed to be set-off against the income of the new amalgamated company except in case for the amalgamation of Banking Company or NBFC or Modaraba or Insurance Company (section 57A).
To provide a level playing field, revive sick companies and remove fragmentation of corporate sector, it is proposed to allow adjustment of brought forward assessed losses to be set-off against the income of the new amalgamated company, the SECP proposed.
As per proposed change in section 59AA, 59B and 57A of the Income Tax Ordinance 2001, (4) The relief under group taxation would be available to preceding three tax years' accumulated losses prior to the formation of the group. Provided that the relief for accumulated loss will only be available if the company is 100 percent owned by the group, for a continuous period of three tax years preceding the tax year in which the group is formed.
As per new Sub-section (2A) of section 59B proposed by the SECP, the accumulated loss upto a period of three tax years preceding the tax year in which the group is formed may be surrendered by the subsidiary company and claimed by the holding company or a subsidiary company for set off against its income under the head "Income from Business" in the tax year and the following four tax years subject to the following conditions, namely:
a) there is continued ownership for three years, of share capital of the subsidiary company to the extent of fifty-five per cent in the case of a listed company, or seventy-five per cent or more, in the case of other companies, before the surrender of accumulated loss;
b) there is continued ownership for five years, of share capital of the subsidiary company to the extent of fifty-five per cent in the case of a listed company, or seventy-five per cent or more, in the case of other companies, after surrender of accumulated loss; c) a company within the group engaged in the business of trading shall not be entitled to surrender its accumulated losses if the turnover of the company from trading activities had been more than 30% of the total turnover of the company in the preceding three tax years before the formation of the group;
d) holding company, being a private limited company with seventy-five per cent of ownership of share capital gets itself listed within three years from the year in which accumulated loss is claimed; e) the group companies are locally incorporated companies under the Companies Ordinance, 1984 (XLVII of 1984); f) the loss surrendered and loss claimed under this section shall have approval of the Board of Directors of the respective companies;
g) the subsidiary company continues the same business during the said period of five years; h) The unadjusted accumulated losses after following four tax years will be reverted back to the company for adjustment in accordance with the provisions of section-57;
i) Accumulated loss claiming company shall, with the approval of the Board of Directors, transfer cash to the accumulated loss surrendering company equal to the amount of tax payable on the profits to be set off against the acquired loss at the applicable tax rate. The transfer of cash would not be taken as a taxable event in the case of either of the two companies;
j) all the companies in the group shall comply with such corporate governance requirements and group designation rules or regulations as may be specified by the Securities and Exchange Commission of Pakistan from time to time, and are designated as companies entitled to avail group relief and any other condition as may be prescribed, the SECP proposal added.