The amended Finance Bill 2018 has proposed that the person acquiring the asset from non-resident person (NRP) shall deduct tax at 10 percent of fair market value of the asset. According to the comments on changes made vide amended Finance Bill 2018 issued by Tola Associates here on Friday, the bill introduced a new section 101A whereby any gain from the disposal or alienation, outside Pakistan, of an asset located in Pakistan of a non-resident company shall be Pakistan-source. The bill proposed that the person acquiring the asset from non-resident person shall deduct tax at 15 percent of fair market value of asset. The rate of 15 percent for deduction of tax has been reduced to 10 percent.
It has also been clarified that in case any gain is taxable under this section and also under any other provision of Income Tax Ordinance (ITO), the gain shall be taxable under such other provision of ITO.
Renowned tax expert Ashfaq Tola explained that the section 109 provides that commissioner shall have power to re-characterize a transaction that was entered into as part of a tax avoidance scheme; disregard a transaction that does not have substantial economic effect; or re-characterize a transaction where the form does not reflect the substance.
The bill proposes to extend the powers of commissioner under section 109 to re-characterize a transaction. The bill proposes that the commissioner shall have the power to disregard an entity or a corporate structure that does not have an economic or commercial substance or was created as part of the tax avoidance scheme.
The act has restricted the extension of powers with respect to tax year 2018 and onwards only.
Controlled Foreign Entity Section 109A:
The bill proposed to add a new concept of a controlled foreign entity by adding a new section 109A. A controlled foreign entity had been proposed to be defined as a non-resident company if more than 50 percent of the capital or voting rights of the non-resident company are held, directly or indirectly, by one or more persons resident in Pakistan or more than 40 percent of the capital or voting rights of the non-resident company are held, directly or indirectly, by a single resident person in Pakistan; tax paid, after taking into account any foreign tax credits available to the non-resident company, on the income derived or accrued, during a foreign tax year, by the non-resident company to any tax authority outside Pakistan is less than 60 percent of the 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 stock exchange recognized by law of the country or jurisdiction of which the non-resident company is resident for tax purposes.
A company shall be treated to have derived active income if more than 80 percent of the company's income does not include from dividend, interest, property, capital gains, royalty, annuity payment, supply of goods or services to an associate, sale or licensing of intangibles and management, holding or investment in securities and financial assets; and the company principally derives income under the head income from business in the country or jurisdiction of which it is a resident.
The bill proposes to tax attributable income of a foreign controlled entity as Pakistan source income.
The Act has further clarified that the attributable income of a controlled foreign entity shall be taxed at the rates applicable on dividend income as provided in Division III, Part I of First Schedule.
Moreover, in case tax has been paid by the resident person on the income attributable to controlled foreign company and in a subsequent tax year the resident person receives dividend distributed by the controlled foreign company, after deduction of tax on dividend, the resident person shall be allowed a tax credit, Tola Associates added.