10-03-2009, 05:17 AM
Dear,
The concept of group taxation has been introduced in Pakistan by the Finance Act 2007, which is undoubtedly an effective step taken to make tax laws of Pakistan in line with international best practices.
However it has called for many implementation problems, which in turn has called for many anonymous facts to tax officials, furthermore, many issues are of such nature that if the said section is implemented then it would be difficult to tackle those problems.
Section 59B â 2 reveals that âThe loss surrendered by the subsidiary company may be claimed by the holding company or a subsidiary company for set off against its income under the head âIncome from Businessâ in the tax year and the following two tax yearsâ
Aforementioned is subject to certain conditions, one of which requires that Holding company, which is a private company with having 75% ownership will be required to get it self listed within three years from the year in which losses are claimed. If this is happened then it would create the problems of hostile takeover, no group would like to keep its investments in a listed company due to the risk of Hostile Takeovers, which may be done by using strategies of âStreet Sweepâ or âBear Hugâ. Many companies would not like to get them self taken over through any of the said means, though the targeted company may use tactics of Poison pill, Greenmail, Pac-man Defence or white knight etc., in its defence against such strategies.
Section 59B â 5 reveals that âIf there has been any disposal of shares by the holding company during the aforesaid period of five years to bring the ownership of the holding company to less than fifty-five per cent or seventy-five per cent, as the case may be, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company.
In the existence of uncertainty, Keeping the investment for the continuous period of 5 years is seems to be illogical, as no company would like to take such a risk, furthermore the said clause discourages due to the reason, which is apparent, In order to curb the potential abuse of relief contemplated by this Section, seeks to withdraw the benefit of relief, if any, availed by the holding company if its equity interest in the subsidiary company falls below 55% or 75%, being a listed company or a private limited company, respectively, as a consequence of disposal of shares. i.e. all of the benefits availed on account of group taxation would be reversed and would entail tax consequences.
Accordingly, the holding company shall be obliged to offer the amount of profit on which tax benefit was availed due to set off of losses surrendered by the subsidiary company. Surprisingly, this Sub-section omits the consequence of disposal of shares below the respective benchmark when the loss is surrendered between subsidiaries of the holding company.
Summarily, In view of the above, the suitable clarifications should be issued by the SECP to clarify that the minimum holding is required to be held post designation by SECP as a company eligible to avail group relief and should not be taken to be a condition precedent to such designation, furthermore, Tax officials i.e. FBR should provide sufficient information with regards to the said section so that the implementation would be easy and acceptable.
Best Regards,
The concept of group taxation has been introduced in Pakistan by the Finance Act 2007, which is undoubtedly an effective step taken to make tax laws of Pakistan in line with international best practices.
However it has called for many implementation problems, which in turn has called for many anonymous facts to tax officials, furthermore, many issues are of such nature that if the said section is implemented then it would be difficult to tackle those problems.
Section 59B â 2 reveals that âThe loss surrendered by the subsidiary company may be claimed by the holding company or a subsidiary company for set off against its income under the head âIncome from Businessâ in the tax year and the following two tax yearsâ
Aforementioned is subject to certain conditions, one of which requires that Holding company, which is a private company with having 75% ownership will be required to get it self listed within three years from the year in which losses are claimed. If this is happened then it would create the problems of hostile takeover, no group would like to keep its investments in a listed company due to the risk of Hostile Takeovers, which may be done by using strategies of âStreet Sweepâ or âBear Hugâ. Many companies would not like to get them self taken over through any of the said means, though the targeted company may use tactics of Poison pill, Greenmail, Pac-man Defence or white knight etc., in its defence against such strategies.
Section 59B â 5 reveals that âIf there has been any disposal of shares by the holding company during the aforesaid period of five years to bring the ownership of the holding company to less than fifty-five per cent or seventy-five per cent, as the case may be, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company.
In the existence of uncertainty, Keeping the investment for the continuous period of 5 years is seems to be illogical, as no company would like to take such a risk, furthermore the said clause discourages due to the reason, which is apparent, In order to curb the potential abuse of relief contemplated by this Section, seeks to withdraw the benefit of relief, if any, availed by the holding company if its equity interest in the subsidiary company falls below 55% or 75%, being a listed company or a private limited company, respectively, as a consequence of disposal of shares. i.e. all of the benefits availed on account of group taxation would be reversed and would entail tax consequences.
Accordingly, the holding company shall be obliged to offer the amount of profit on which tax benefit was availed due to set off of losses surrendered by the subsidiary company. Surprisingly, this Sub-section omits the consequence of disposal of shares below the respective benchmark when the loss is surrendered between subsidiaries of the holding company.
Summarily, In view of the above, the suitable clarifications should be issued by the SECP to clarify that the minimum holding is required to be held post designation by SECP as a company eligible to avail group relief and should not be taken to be a condition precedent to such designation, furthermore, Tax officials i.e. FBR should provide sufficient information with regards to the said section so that the implementation would be easy and acceptable.
Best Regards,