FBR urged to restore tax exemption for inter corporate dividends

FBR urged to restore tax exemption for inter corporate dividends

KARACHI: Federal Board of Revenue (FBR) has been urged to restore tax exemption for inter corporate dividends, which has been abolished through Tax Laws (Second Amendment) Ordinance, 2021.

PwC A. F. Ferguson & Co. Chartered Accountants in its commentary on the Tax Laws (Second Amendment) Ordinance, 2021, said that at present, inter corporate dividends are exempt from tax under the following group structure:

(i) Holding company and 100 percent owned subsidiaries entitled to group taxation and filing group return ; and

(ii) Holding company and subsidiary companies eligible for group relief.

Through the Amendment Ordinance, the exemption for inter corporate dividends stated in (ii) above has been withdrawn.

The withdrawal of exemption needs reconsideration as it would affect the groups already formed following the Government’s policy of encouraging group / holding structure of which exemption for inter corporate dividends was an essential part.

The framework for facilitating formation of group / holding company structure was introduced in Income Tax Law in 2007.

The said framework was introduced after extensive research of international best practices and with consultation / consensus of all the stakeholders. The framework catered to the following three independent aspects for promoting group (holding) company structure:

– Elimination of tax on inter-corporate dividends;

– Availability of right to offset losses, generally termed as ‘Group Relief’; and

– Right to tax on group basis, termed as Group Taxation.

It was unanimously settled that promotion of group company structure necessarily requires elimination of multiple tax on dividends flowing within the group.

From 2007 till 2016, there was no change made in the framework. In 2016, the framework was unnecessarily disturbed when exemption for inter corporate dividend was partially withdrawn.

Thereafter, certain other amendments were made which significantly destroyed the framework.

However, after deliberations, the Government realised the mistake and made appropriate corrections in 2019 and 2020 to restore the framework in its original position to a significant extent.

Now again in 2021, exemption for inter corporate dividend has been withdrawn which reflects that the earlier mistake has been repeated and no consideration has been given to the deliberations made, based on which the earlier withdrawal of exemption was reversed.

The chartered accountant firm said that exemption for inter corporate dividend may be restored in due course.

The question of vested rights of the groups formed prior to this amendment would be examined if the amendment made is not reconsidered.