Finance Act, 2022 includes measures affecting businesses and disclosure of beneficial owners
Pakistan’s Finance Act, 2022, enacted 30 June 2022, includes a number of changes to the Income Tax Ordinance, 2001 that affect both resident and nonresident businesses. This article looks at some of the most important provisions in the act, which unless otherwise noted apply as from 1 July 2022.
- Tax rates: No changes have been made to the standard corporate income tax rate, but the tax rates for banking companies are increased as follows:
- The tax rate on income will increase from the current 35% to 39% for tax year 2023 (originally proposed to increase to 45%);
- For tax year 2022, the tax rates on taxable income attributable to investment in federal government securities increase to 55%, 49% and 35% if gross advances to the deposit ratio on the last day of the tax year is 40%, 41%-50% or above 50%, respectively. As from tax year 2023, the tax rates will be 55%, 49% and 39% if gross advances to deposit ratio are 40%, 41%-50% or above 50%, respectively; and
- As from tax year 2023, a 10% tax on high earning persons for the alleviation of poverty will apply to banks whose annual income exceeds PKR 300 million.
- Capital gains tax: Changes are made to the tax treatment of capital gains on the disposal of Pakistan-situs immovable property. The previous rules exempted such gains from tax if the property had been held for at least four years. The Finance Act sets the holding period at six years for open plots, four years for constructed property and two years for flats, with the entire gain taxable at graduated rates. The concessional regime for capital gains does not apply to gains from the disposal of immovable property located outside the country, which continue to be taxed at the normal rate, regardless of how long the property has been held.
- The 12.5% capital gains tax rate on the disposal of securities is removed, with such gains now taxed at graduated rates ranging from 0% to 15% for securities acquired on or after 30 June 2022; gains on the disposal of securities acquired before that date continue to be charged at the 12.5% rate, irrespective of the length of the holding period.
- Deductions: The following changes are made to the deduction of business expenses:
- Only 50% of contributions made by an employer to an approved gratuity fund may be deducted; previously, these amounts could be deducted in full.
- Restrictions on the depreciation of business assets have been lifted; previously, only a 50% depreciation allowance was granted for business assets used for the first time after 1 July 2020 and on disposal, but now full depreciation is possible.
- If a taxpayer fails to integrate its business using approved electronic devices and software requested by the Federal Board of Revenue, the board can disallow the deduction of sales expenses, up to 8% of allowable deductions.
- Tax incentives for the film industry: Several tax incentives have been introduced to promote the local film industry, including (i) a five-year tax exemption for a person that derives income from cinema operations, starting from the date operations commence; (ii) a tax exemption for profits and gains derived by a resident producer or resident production house from the production of feature films during the period 1 July 2022 through 30 June 2027; and (iii) a customs duty exemption on the import of specific machinery and equipment.
- Disclosure of beneficial ownership: To enhance transparency and bring Pakistan’s law in line with international best practices, companies and Associations of Persons (AOPs) are required to disclose details of their beneficial owners who are individuals, with penalties applying for noncompliance. Previously companies and AOPs were not required to make such disclosures, with the result that beneficial ownership could be hidden through intervening companies and trusts. In addition, the term “beneficial owner” is now defined in the ordinance to mean an individual who ultimately controls a company or AOP (directly or indirectly) by holding at least 10% of the shares or voting rights or who otherwise exercises ultimate direct or indirect control, including control over the finances, decisions or other affairs of the company or AOP.
- Minimum tax on turnover: The carryforward period for the minimum tax on turnover is shortened. Resident companies, permanent establishments of nonresident companies, individuals and AOPs with turnover of PKR 100 million and above must pay a 0.75% minimum tax on turnover. Previously, the turnover tax generally could be carried forward for set off against the tax liability of the following five years, but the Finance Act, 2022 reduced this to three years. In addition, the tax rate on the turnover of oil marketing companies is reduced to 0.5%.
- Taxation of certain payments to nonresidents: Nonresidents that do not have a permanent establishment in Pakistan but that derive income in the form of fees for money transfer operations, card network services, payment gateway services and interbank financial telecommunications services are subject to a 10% withholding tax (unless the rate is reduced under an applicable tax treaty). The finance act introduces new rules for exchange companies licensed by the State Bank of Pakistan and banks by requiring that such entities deduct the tax on the payments.