PTBA recommends retaining alternative corporate tax or minimum tax

KARACHI: Pakistan Tax Bar Association (PTBA) has recommended the tax authorities to retain either Alternative Corporate Tax (ACT) or minimum tax, as existence of both regimes is inappropriate.

In its tax proposals for budget 201.9/2020, the PTBA said that the introduction of ACT, via the Finance Act, 2014, placed an additional burden on the corporate sector.

“The accounting profits are made as benchmark for computing ACT and where such tax is determined to be higher than the tax computed under the general scheme of taxation under the Ordinance, the company is expected to pay the differential,” the PTBA said.

The said section also empowers the Commissioner Inland Revenue to re-compute the accounting income of the company.

It further said that the ACT has been introduced in the world to take care of substantial accelerated depreciation, percentage of depletion, intangible drilling costs, or non-tenable income.

However, this burdens the taxpayer and disturbs its cash-flow by paying taxes even in taxable loss situation.

Further, it also accumulates carry forwards available to company for adjustment against future tax liability which are also challenged by the tax authorities when such claim is made.

There is no concept of levy of such tax even in the big economies of the world like China, Canada, Germany, United Kingdom etc.

In fact this tax in such countries has been made redundant to gain confidence of investors with an exclusion of some countries such as Austria, India, Italy, Romania, South Korea, Switzerland and Taiwan.

Moreover, from January 01, 2016, Luxembourg has abolished the minimum corporate income tax and replaced by a minimum net worth tax and in USA, it is applicable particularly to all the taxpayers including Insurance, Banking, Exploration & Production of Petroleum and Exploration & Extraction of mineral deposits.

The PTBA pointed out that it appears that the legislature aims to recover more and more taxes from the existing documented sector instead of broadening the tax base.

“The legitimate allowances, concessions and tax credits would eventually become ineffective where tax is collected on fictional income.”

This would mean that where a taxpayer, who may otherwise not pay tax due to availability of say tax depreciation, amortization and brought forward losses, would still be subject to tax under the alternative corporate tax.

Furthermore, due to the powers given to the Commissioner, a difference of opinion may arise amongst the stakeholders in respect of the accounting income to be charged to tax.

Therefore it is recommended that the parallel application of ACT with Minimum Tax under section 113 is inappropriate.

“It is strongly recommended that only one of the two Minimum Tax Regimes should be in force.”

If, notwithstanding the above contentions, ACT is to be retained, the following practical issues relating to ACT may be taken into consideration:-

Brought forward accounting losses should be accounted for the levy of ACT; and

Sub-section (11) of section 113C should be suitably amended to the effect that accounting income, as prepared in accordance with International accounting and regulatory standards, would be acceptable for ACT, and would not be subject to any adjustment by the Tax Authorities.

Giving rationale to the proposal, the PTBA said that following the change, the existing documented sector may not be subject to increased amount of tax.

It will also reduce disagreements between the taxpayers and the authorities, which will promote taxpayers’ satisfaction.

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