This country-specific Q&A provides an overview of Tax laws and regulations applicable in Pakistan.
How often is tax law amended and what are the processes for such amendments?
The Government of Pakistan usually makes amendments to the Income Tax Ordinance, 2001 (ITO) once a year. Prior to the start of a fiscal year, Parliament passes a Finance Act through which amendments are introduced in the ITO.
The Government, through Parliament, can also introduce further amendments to the ITO during the course of a fiscal year, which is not uncommon.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Prescribed persons are required to furnish a return of income for a tax year annually. Persons, whose entire income is subject to final taxation, are not obliged to furnish a return for a tax year; instead, they are required to furnish a statement of income for the tax year.
Where a company’s tax year ends any time between the 1st January and 30th June, it is required to furnish a return on or before the 31st December next following the end of the tax year to which the return relates. In any other case, companies are required to furnish their return on or before 30th September next following the end of the tax year to which the return relates.
Accounts and documents are required to be maintained for six years after the end of the tax year to which they relate.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The Federal Board of Revenue (FBR) is the regulatory authority in relation taxes on income as well as most other taxes and duties in Pakistan (other than sales tax services, which falls within the domain of the Provinces and is therefore administered by the Provincial revenue authorities).
The FBR is generally open to engaging with taxpayers on policy issues however resolution of disputes can often take up considerable time and resources, primarily due to the volume of litigation before the appellate forums.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
The right of appeal is available under the ITO in relation to most tax disputes. Orders of the income tax officers can be appealed before a Commissioner (Appeals), the appellate authority within the FBR.
The next appellate forum is the Appellate Tribunal Inland Revenue. There is no right of appeal against orders of the Tribunal however a reference can be filed before the High Court for determination of questions of law arising from the Tribunal’s order. Any order passed by the High Courts is appealable before the Supreme Court of Pakistan, which is the highest appellate forum.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
The due dates for payment of the self-assessed liability of income tax are the same as the dates for filing returns. Any amount of tax that has been assessed by the tax authority against a taxpayer as short paid/ unpaid, which the taxpayer disputes, has to be unless an injunction against the recovery of the same has been granted by an appellate authority.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Taxpayer data is recognized as confidential, subject to certain exceptions for e.g. the names of offshore evaders and offshore tax enablers can be published in the print and electronic media who have evaded offshore tax or enabled offshore tax evasion; particulars and the amount of tax paid by a holder of a public office can also be published; FBR is empowered to provide data to any person approved by the Federal Government to process and analyze such data for broadening of tax base or for checking evasion, provided that such data is anonymized before transmission to the person and identifying particulars of the taxpayers are kept confidential.
In September 2016 Pakistan signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and became 104th signatory to the Convention. The Convention provides for automatic exchange of information under the State’s own systems through standardized formats under the corresponding agreements with other jurisdictions. The FBR has subsequently undertaken a Pilot Project on Automatic Exchange of Information (AEOI) in collaboration with different stakeholders. FBR has notified the Common Reporting Rules vide S.R.O. 166 (I)/2017 dated March 15, 2017, through which Pakistan has adopted the Common Reporting Standard (CRS).
A new law has been recently enacted, called the Benami Transactions (prohibition) Act, 2017, pursuant to which beneficial ownership in a movable or immovable property has been prohibited where the legal title does not vest in the beneficial owner, except in limited circumstances. Officers of FBR have been nominated as investigating authorities under the said Act.
What are the tests for residence of the main business structures (including transparent entities)?
A company is considered to be a resident company for a tax year if (i) it is incorporated or formed by or under any law in force in Pakistan; (ii) the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or (iii) it is a Provincial or Local Government in Pakistan.
An association of persons is considered to be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Cross-border transactions within an international group do catch the attention of the FBR. The tax authorities have the power in respect of a transaction between associates to distribute, apportion, or allocate income, deductions, or tax credits between such associates to reflect the income that would have been realized in an arm’s-length transaction. Companies are required to maintain specified records and documents for transactions between associates, and tax authorities can require information and documents for such transactions.
The Commissioner is empowered to appoint, with prior approval of the FBR, a Chartered Accountant or a Cost and Management Accountant to determine the fair market value of an asset, product, expenditure, or service in respect of a transaction where the Commissioner is of the view that the same has not been undertaken on an arm’s-length basis. In case the Commissioner is satisfied with the report, the Commissioner can proceed by considering the same as definite information for amendment of assessment. In case of being dissatisfied, the Commissioner can also seek report from another accountant.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
There is a CFC regime in Pakistan whereby income attributable to a controlled foreign company is included in the taxable income of a resident person for a tax year and is taxed in the year that it is earned, not when it is actually received.
Pakistan also has a Thin capitalization regime, where a foreign-controlled resident company (other than a financial institution or a banking company) or a branch of a foreign company operating in Pakistan has a foreign-debt-to-foreign-equity ratio in excess of 3:1 at any time during a year, a deduction shall be disallowed for the profit on debt (interest) paid by the company in that year on that part of the debt that exceeds the 3:1 ratio.
A new formula (in addition to that explained above) has been introduced to restrict the deduction of foreign ‘profit on debt’ incurred by any foreign controlled resident company in Pakistan (other than banking and insurance company) during a tax year with a carry forward mechanism provided (upto a period of three years) subject to the same overall limits each year.
There also exists a transfer pricing regime in that where business transactions between a resident and a non-resident person are not on arm’s length basis and such transactions result in diversion of business profits to the nonresident, the tax authorities are empowered to re-compute the profits in a manner that these reflect the correct profits due to the resident person.
There exists a Directorate General of International Tax Operations which conducts transfer pricing audit in cases selected for such audit by the Director General of international Tax Operations.
Pakistan does not have any APA at the moment.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
There are several specific anti-avoidance provisions in the ITO directed against perceived tax avoidance in particular circumstances. There is no general requirement to disclose an avoidance scheme in advance of the filing of a tax return.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
Pakistan is a member of the Inclusive Framework of the Base Erosion and Profit Shifting (BEPS) Project of the Organization for Co-operation and Economic Development (OECD).
The Inclusive Framework currently consists of more than 135 member jurisdictions, all of which will have a chance to intervene on equal terms in all of the CFA’s meetings and its work teams on the BEPS project.
Pakistan as a member of the Inclusive Framework has committed to implementing a number of BEPS standards, namely:
Harmful tax regimes under Action 5, which is currently under review,
Prevention of treaty abuse under Action 6, which was reviewed in 2018 and 2019, with the 2020 review currently ongoing,
Country-by-country (CbC) domestic law reporting under Action 13, with a legal framework in place, and
Effective dispute resolution under Action 14 for which a review has yet to be scheduled.
Furthermore, Pakistan has signed the Multilateral Instrument under Action 15.
In your view, how has BEPS impacted on the government’s tax policies?
The Government has certainly become more aware of the lost revenue caused due to BEPS. The Government, vide Finance Bills, has introduced several anti-avoidance provisions, such as those relating to CFC, in the Income Tax law.
Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties. If so, what are the current rates and are they flat or graduated?
Pakistan’s tax regime comprises of direct and indirect taxation. Direct tax is levied by the Parliament on the income, which is categorized under separate heads and taxed accordingly. These heads consist of (i) Salary, (ii) Income from Property, (iii) Income from Business, (iv) Capital Gains, and (v) Income from other Sources.
The tax rates in Pakistan are both flat and graduated, depending on the type of income and/or taxpayer, as listed below.
Type of Income
Rate of tax
29% in the case of companies
Up to 35% in the case of Individuals and AOPs
Up to 35%
Super tax on banking companies
4% in tax years 2020 and 2021
Profit on debt
Up to 20%
Income from property in the case of individuals and AOPs
Up to 35%
Up to 20%
Up to 1.5% of turnover
Payment of royalty or fee for technical services to non-residents
Payment of fee for offshore digital services
Indirect taxes (VAT) are levied by the Federal Government on goods and by the Provincial Governments on services. The rates of tax vary from 13% to 17%. Stamp duties are charged by the Provincial Governments and the rates vary on the basis of the instrument on which duty is attracted.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Broadly, yes. Generally business profits are taxable. In computing the income of a person chargeable to tax under the head “Income from Business” for a tax year, a deduction is allowed for any expenditure incurred by the person in the year wholly and exclusively for the purposes of business. However, there is a concept of minimum tax under the ITO which levies tax on the aggregate of turnover instead of profits in situations where no tax is payable or paid by the person for a tax year or the tax paid or payable is below a certain threshold. In such cases, the excess amount of tax paid is carried forward for adjustment against tax liability for five tax years immediately succeeding the tax year for which the amount was paid.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Yes, there are multiple recognized form in which business can be conducted, including companies, partnerships, trusts etc. All limited liability companies, either public or private, are transparent for tax purposes and hence are most widely used.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Liability to business taxation is based upon the concept of fiscal residence. The tests are as follows:
Business income of a resident person is the Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan.
Subject to Double Tax Avoidance Agreements, business income of a non-resident person which is generally taxable is the Pakistan-source income to the extent to which it is directly or indirectly attributable to; (i) a permanent establishment in Pakistan, (2) sale of goods of the same or similar kind as those sold by the person through its permanent establishment in Pakistan, any business connection in Pakistan.
Where the business of a non-resident person comprises the rendering of independent services (including professional services and the services of entertainers and sports persons), the Pakistan-source business income of the person includes, in addition to any amounts treated as Pakistan-source income, any remuneration derived by the person where the remuneration is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Yes. Enterprise zones are created pursuant to Special Economic Zones Act, 2012 and Export Processing Zone Authority Ordinance, 1980. Certain exemptions are available to such zones under the income tax law as well.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Holding companies and subsidiary companies of a 100% owned group can opt to be taxed as one fiscal unit. In such cases, besides consolidated group accounts, computation of income and tax payable is made for tax purposes. In order to avail this option, the companies in the group give irrevocable option for taxation as one fiscal unit.
Group taxation is restricted to companies locally incorporated under the Companies Law of Pakistan.
The relief under group taxation is not available to losses prior to the formation of the group.
Are there any withholding taxes?
Yes. Tax is withheld from Salary, Dividends, Return on Investment in Sukuks, Profit on debt, Payments to non-residents, Payment for foreign produced commercials, Payments for goods, services and contracts, Exports, Income from property, Prizes and winnings, Prizes and winnings and Withdrawal of balance under pension fund.
Are there any recognised environmental taxes payable by businesses?
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Where tax has been paid by the resident person on the income attributable to controlled foreign company and in a subsequent tax year the resident person receives dividend distributed by the controlled foreign company, after deduction of tax on dividend, the resident person is allowed a tax credit equal to the lesser of, —
(i) foreign tax paid on dividends; and
(ii) Pakistan tax payable for the tax year in which the dividend is received by the resident taxpayer.
Certain Dividend Income (for e.g. inter-corporate dividend) and dividend income of certain persons (for e.g. dividend of the Pak-Libya Holding Company derived by the Libyan Arab Foreign Investment Company), received from a resident company, are exempt from tax as mentioned in the Second Schedule of the ITO.
Where the dividend income is not exempt from tax, the rate of tax is as follows:
(a) 7.5% in the case of dividends paid by Independent Power Purchasers where such dividend is a pass through item under an Implementation Agreement or Power Purchase Agreement or Energy Purchase Agreement and is required to be reimbursed by Central Power Purchasing (CPPA-G) or its predecessor or successor entity.
(b) 15% in mutual funds and cases other than those mentioned in clauses (a) and (c).
(c) 25% in case of a person receiving dividend from a company where no tax payable by such company, due to (i) exemption of income; (ii) carry forward of business losses; or (iii) claim of tax credits.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by your jurisdiction?
Multiple special economic zones offering various incentives
Relatively low cost of conducting business
Strategic location with access to Central Asian markets
Growing opportunities arising from projects connected to the China Pakistan Economic Corridor
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