Accountancy Forum

I am looking at the possibility of starting a Call center in Pakistan that will primarily be getting Call center and back office business from the USA, UAE and Europe and servicing the business in Pakistan. Now i have read about some of the incentives that the Pakistan Government is extending but i want to know what they exactly mean in terms of a US company doing business in Pakistan (Or a Pakistani company owned by Pakistani and US individuals doing the work).

1) One incentive by the Pak Govt says that there is a complete Tax Holiday on Corporate profits until 2016? What does this mean in terms of paying taxes in Pakistan, and in terms of paying taxes in the US? I am assuming that there will be no double taxation due to the taxation treaty between the US and Pakistan (I dont know much about this treaty). So if there is no double taxation then does this mean that this Corporation will not be paying any Pakistani Taxes untill 2016 and not paying any US taxes until 2016?

2) Pakistan Government offers that all the IT/Call center and related equipment can be depreciated at the rate of 30% per annum. What does this mean to a company? My confusion here is that if i was paying corporate taxes then i could offset these taxes each year with 30% of the cost of the equipment. BUT if there are no Taxes until 2016 then what exactly am i ofsetting? Also if i am paying US taxes and not Pakistani Taxes then can i offset the US taxes with this 30%.

Anyway, i suppose my questions are about the above two issues intertwined with the issue of Possible double taxation (or lack there off) between Pakistan and The US or between Pakistan and the UAE. I would REALLY APPRECIATE any explanation and clarity on these questions as well as any other things that may be beneficial to a person who is looking at the possibility of starting this business.

Thanks and Best Regards,
Momin Durrani.

Well Mr. Momin it is true that ur income will be exempt from tax in Pakistan until 2016 but, there is another concept in Pakistan called minimum taxation. That is even if u r exempt from income, unless specifically mentioned in second schedule of the Income Tax Ordinance, 2001, u still have to pay minimum tax on ur gross turnover at a rate of 0.5%.
And the second thing that u asked about depreciation is a general thing. that any company using IT equipment, even the simplest hardware, will get a depreciation allowance @ 30%. it is not any thing specific to IT enabled services. and if in case u get such allowance specifically it is of no use to u until 2016, as the minimum tax is computed on gross turnover and not on the taxable income.
The use to you of this allowance is that after 2016 when u will be taxed on ur taxable income and not turnover, then u can use this allowance.
and the last question regarding the admissibility of ur allowances from Pakistan in UK totally depends upon the law of UK.
Had u been in Pakistan and doing the same thing in UK, then if u were paying tax in UK for that branch, then u would have been exempt upto the extent of the income from UK. But ur UK income would have been included in ur taxable income for rate purposes.
I know if u r not mutch fluent in tax law then u will have some queries. u r welcome to ask any.
salam

Dear Mr. Abdur Rahman,
Thank you for your reply to my queries. I think i have some clarification but not a 100%. I have some more questions, hopefully you can answer them for me. So here goes.

1) How do you define gross turnover? (is it the gross revenue or something else)

2) How do you define taxable income? (i am trying to differentiate between "gross turnover" and "taxable income")

3) How do i find out if having an IT/ITES business like a call center will be subject (or not subject) to pay the minimum tax? I think another way to ask this question may be, where do i find the "second schedule of the Income Tax Ordinance, 2001"?

4) I understand that the 30% depreciation may not be of much use until 2016. In the scenarios that we are discussing specifically, would it be possible to take a slower depreciation than 30% per year? or would this depreciation add up over the years and i will "Still" be able to use it after 2016? Pardon my lack of knowledge regarding this issue.

5) Finally about the issue of double taxation. I have been told that there is some trade treaty between the US and Pakistan that will stop double taxation. Am i correct in saying this? either way, can you advise me on the tax implications of the treaty between the US and Pakistan if possible. I am trying to understand all of this so i can leverage to take the most advantage for my organization.

Again, i thank you for your help. And yes i probably will have many more questions and will be very happy if you could clarify things for me.

Salam,

Momin Durrani.

ok here we go
1)"Gross Turnover" means "Gross receipts from sale of goods, rendering of services or execution of contracts exclusive of sales tax or any other tax or trade discount". u r going to provide services, so in ur case gross receipts exclusive of any tax or discount will be ur "Gross turnover". and it does not include other income or gain, not arising from core activities of biz.
2)Roughly u can say , Taxable income=gross receipts-cost of services-other indirect expenses+other income
and cost of services and other indirect expenses will be calculated as per tax laws.
3)Clause 133, Part 1, Second Schedule, Income Tax Ordinance, 2001
4)Well u can take a rate lower than 30% for ur own bookkeeping, but to ascertain the taxable income u must take a rate of 30%.
The issue of carrying forward this depreciation is quite complex. I know that i u were taxed on taxable income basis and u sustain a loss, then in that case u can carry forward the depreciation until the income arises and u can set it off then. but as u r going to be assessed on turnover basis, The Ordinance is not clear about it. i will try to ask someone more knowledgeable than me and let u know.
5)Yes u can find this treaty on www.cbr.gov.pk and for the purpose of ascertaining the implications of this treaty u have to go through it. but as far as my knowledge if u r going to run a permanent establishment in Pakistan, u will be taxed in Pakistan and not in US. but u shud go through the treaty. and u can also have a look at section 105 of the Income tax ordinance, 2001.