Karachi, September 27, 2024 – The Federal Board of Revenue (FBR) has recently provided detailed guidelines regarding the imposition of Capital Gain Tax (CGT) on the disposal of assets located outside Pakistan during the tax year 2024-25.
This move is part of the government’s efforts to enhance transparency in taxation and ensure proper tax compliance, particularly when it comes to transactions involving non-resident entities.
The FBR elaborated on the relevant legal provisions governing the disposal of assets by non-residents under Section 101A of the Income Tax Ordinance, 2001. This section outlines the tax treatment for capital gains arising from the disposal of assets outside Pakistan, particularly when the assets are located within the country or derive their value from Pakistani assets.
Key Provisions of Section 101A
According to the FBR, under Section 101A(1), any gain realized from the disposal or alienation of assets located in Pakistan by a non-resident company is considered Pakistan-source income. This means that even if the transaction takes place outside the country, if the assets in question are located in Pakistan or derive value from Pakistani assets, the gain is subject to taxation in Pakistan.
The tax on such gains is charged at the rates and in the manner specified in Section 101A(10), which outlines a higher tax calculation mechanism to ensure compliance and revenue generation.
Applicability to Non-Resident Companies
Section 101A(3) stipulates that the tax also applies when a non-resident company disposes of shares or interest in another non-resident company, provided that these shares or interests derive their value primarily from assets located in Pakistan. The FBR further clarified that if the value of these Pakistani assets exceeds PKR 100 million and constitutes at least 50% of the non-resident company’s total assets, the disposal would be subject to CGT in Pakistan.
Moreover, Section 101A(5) emphasizes that the fair market value of the assets will be determined as prescribed, without considering any liabilities, to ensure accurate taxation of capital gains.
Tax Deduction and Advance Payment
The FBR also highlighted the responsibilities of parties involved in such transactions. Under Section 101A(8), any person acquiring an asset from a non-resident company is required to deduct tax from the gross consideration paid. This tax deduction, set at 10% of the asset’s fair market value, must be remitted to the Commissioner of the Federal Government within 15 days of the payment.
Additionally, if the transaction involves a non-resident company holding assets through a resident company, Section 101A(9) requires the resident company to collect advance tax from the non-resident company. This tax must be collected within 30 days of the transaction and remitted accordingly. The FBR clarified that any tax already deducted by the acquiring party under Section 101A(8) would be credited toward this tax obligation, avoiding double taxation.
Tax Rate Calculation
For calculating the tax liability on the capital gain, Section 101A(10) provides two methods. The higher of the following will be used:
1. 20% of the difference between the fair market value and the cost of acquisition of the asset.
2. 10% of the asset’s fair market value.
This dual method ensures that both the asset’s market value and acquisition cost are taken into consideration for fair taxation.
Exemptions and Overlapping Provisions
Finally, the FBR clarified that if tax is paid under Section 101A(8) or (9), no additional tax is required under Section 22(8) or Sections 37 and 37A of the Income Tax Ordinance. However, if the gain is taxable under other provisions of the Ordinance, Section 101A(12) provides that those provisions will take precedence.
Conclusion
The FBR’s elaboration on CGT for the disposal of assets outside Pakistan is a critical step toward regulating international financial transactions involving Pakistani assets. By clearly defining the tax obligations of non-resident companies and those acquiring assets, the government aims to prevent tax evasion and boost revenue collection from cross-border transactions. This is expected to have a significant impact on non-resident companies and investors who hold assets with significant ties to Pakistan.
