Karachi, May 6, 2024 – The Pakistan Business Council (PBC), a leading advocacy group representing major businesses in the country, has submitted proposals for the upcoming budget 2024-25. A key area of focus for the PBC is seeking amendments to the existing group taxation regulations to provide clarity and relief regarding inter-corporate dividends (ICD).
The current system has created confusion due to multiple amendments and subsequent reversals. The PBC’s proposals aim to streamline the process and ensure the intended benefits of group taxation are realized.
Under Pakistan’s tax laws, group taxation allows companies under a common ownership structure to be treated as a single entity for tax purposes. This offers advantages such as the ability to surrender losses incurred by one company within the group to offset profits made by another. Additionally, it facilitates exemption from tax on inter-corporate dividends, promoting efficient cash flow management within the group.
Historically, these benefits were provided through separate provisions. The right to surrender losses was enshrined in section 59B(1) of the Income Tax Ordinance, 2001. Meanwhile, relief from double taxation on ICD was initially available under Clause 103A of Part I of the Second Schedule.
However, the Finance Act 2016 introduced ambiguity by removing the ICD exemption for companies eligible under section 59B. This move contradicted the original intent of group taxation. Fortunately, the exemption was reinstated in 2019 with the introduction of Clause 103C. Unfortunately, this positive step was reversed again in 2021 due to a misinterpretation of the clause as offering an undue exemption.
Furthermore, the Finance Act 2016 also imposed a restriction on the ability to surrender losses within a group. This restriction, outlined in Clause 1A of section 59B, limited the surrender of losses based on the holding company’s ownership percentage in the subsidiary. The PBC argues that this limitation undermines the core principle of group taxation, as section 59B already specifies a minimum ownership threshold (55% or more) for companies to qualify under the group structure.
To address these inconsistencies, the PBC proposes amendments to achieve greater clarity and consistency in group taxation rules. Their primary recommendation involves inserting a new subsection within section 59B that explicitly states that dividends distributed within companies designated as a group for tax relief purposes shall not be considered a taxable event. Additionally, they propose the deletion of Clause 1A of section 59B to remove the unnecessary restriction on surrendering losses within the group.
The PBC’s proposals aim to simplify the group taxation framework and ensure companies can leverage the intended benefits. This, in turn, could incentivize further corporatization and promote efficient financial management within business groups in Pakistan. As the government finalizes the budget for the upcoming fiscal year, the PBC’s recommendations offer a valuable perspective for consideration, potentially leading to a more streamlined and business-friendly approach to group taxation.
