ISLAMABAD (June 10 2007): The federal government on Saturday realigned its taxation rules allowing establishing of holding companies and providing tax neutrality for acquisition and mergers. Pakistan's corporate sector has been clamouring for a long time to modernise the income tax rules and allow group entities to merge.
And, thereby, provide the size needed to access international capital markets. Minister of State for Finance Omar Ayub told the National Assembly that a task force was constituted to bring improvement in the provisions of law relating to holding companies. In view of the recommendations made by the task force, amendments are proposed in legislation relating to Holding Companies; 75 percent share holding will be required if none of the companies is a listed public company; 55 percent share holding will be required if one of the group companies is listed public company; Current losses can be surrendered by Holding Company to a subsidiary or between subsidiaries which fulfil the requirements of share holding; inter-corporate dividend shall be liable to 10 percent adjustable withholding tax.
He said that the concept of group taxation is not new. It has not however prospered in Pakistan due to certain impediments in law which discourage the formation of groups. In order to implement the recommendations of the Task Force, it is proposed that for formation of group, transfer of shares between companies and the owners in one direction may not be treated as taxable event.
Further, group taxation is allowable for 100 percent owned companies as one fiscal unit and no relief will be available in respect of losses prior to formation of group. It is also proposed that group taxation will be restricted to domestic companies only and for assessment on group basis option will have to be exercised for a minimum period of 5 years.
Further, he said acquisition and merger is invariably treated as a non-tax event. The existing provisions of law do not expressly provide disposal of an asset under amalgamation/merger to be a tax neutral event. Therefore, there is a need to introduce specific provisions regarding non-taxability of capital gains in the hands of share holders.
It is proposed that transfer of shares between companies and share holders in one direction under an approved scheme, (not involving cash) may not be taken as taxable event if the purpose of such transfer is formation of a group. The incentive will be available under scheme of Merger and Acquisition, approved by High Court, SECP or SBP (as the case may be) which does not involve cash payments.
“For computation of income of the banking companies a separate schedule will be added to the Income Tax Ordinance, 2001. This measure is b taken on the recommendations of the SBP and PBA on the analogy of taxation Insurance Companies. Inter corporate dividend is proposed to be subjected to adjustable withholding tax @ 10 percent,” he added.
The minister hoped that with the introduction of this new system, the revenue generation would increase manifold. It will also provide relief to common citizens and the industrial production will accelerate in the process.
