ISLAMABAD: Federal Board of Revenue (FBR) has imposed restriction on deduction of profit on debt payable to associated enterprise in order to comply with OECD action on profit shifting.
The restriction has been imposed through introduction of Section 106A of Income Tax Ordinance, 2001 through Finance Act, 2020, recently passed by the National Assembly of Pakistan.
Tax experts at EY Ford Rhodes Chartered Accountants said that in line with Action Plan 4 of the OECD’s recommendations on Base Erosion and Profit Shifting (BEPS), the new section has been introduced which imposes a restriction on deduction of profit on debt payable to associated enterprise.
The salient features of the new section are:
— Deduction of foreign profit on debt in excess of fifteen percent of taxable income before depreciation, amortization and foreign profit on debt shall be disallowed to a foreign controlled resident company (other than an insurance or banking company);
— The section shall not apply if the total foreign profit on debt claimed as a deduction is less than Rs10 million for a tax year;
— Where the foreign profit on debt cannot be fully adjusted against the taxable income for a tax year, the excess amount shall be added to the amount of foreign profit on debt for the following tax year and shall be treated to be part of that deduction, or if there is no such deduction for that tax year, be treated as the deduction for that tax year and so on for three tax years following the year in which the foreign profit on debt was claimed as an expense;
According to FBR sources this section shall apply in respect of foreign profit on debt accrued with effect from the first day of July, 2020, even if debts were contracted before the first day of July, 2020;