Table of Contents

Introduction to Corporate Taxation in Pakistan .................................................................. 2

Corporate Entities Under the Income Tax Ordinance, 2001 ........................................... 2

Tax residency rules for companies ..................................................................................... 4

Corporate Income Tax Rates .................................................................................................. 5

Computation of Tax Liability.............................................................................................. 6

Corporate Tax Return Filing and Compliance ..................................................................... 7

Tax Return ............................................................................................................................ 7

Due Dates for Filling Tax Returns ...................................................................................... 8

Powers to Impose Filling of Return .................................................................................... 9

Methods of Filling of Tax Return ....................................................................................... 9

Tax Incentives and Exemptions ............................................................................................ 10

Special Economic Zones (SEZs): ...................................................................................... 10

Export-Oriented Units: ...................................................................................................... 10

Depreciation and Amortization: ....................................................................................... 10

Taxation of Dividends and Other Incomes .......................................................................... 11

Loss Carry-Forward and Carry-Backward ........................................................................ 11

Withholding Taxes ................................................................................................................. 11

Importance of Tax Planning for Corporations ................................................................... 12

Tax Planning ....................................................................................................................... 12

Legal Risks and Tax Avoidance vs. Tax Evasion ................................................................ 14

Legal Tax Planning/Tax Avoidance: ................................................................................ 14

Illegal Tax Evasion:............................................................................................................ 14

Potential Penalties, Fines, and Legal Consequences for Non-Compliance ................... 15

Tax Dispute Resolution.......................................................................................................... 16

Procedures for Challenging Tax Assessments ................................................................. 16

The Role of the Tax Ombudsman and Appellate Tribunals .......................................... 17

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 Legal Aspects of Corporate Taxation

Introduction to Corporate Taxation in Pakistan

Corporate tax laws in Pakistan are primarily governed by the Income Tax Ordinance, 2001
and relevant rules set by the Federal Board of Revenue (FBR). These laws outline the taxation
framework for companies operating within Pakistan, whether domestic or foreign.

Corporate Entities Under the Income Tax Ordinance, 2001

1. Companies (Section 80(2)(b))

Company means:

(i) a company as defined in the Companies Act, 2017;

(ii) a body corporate formed by or under any law in force in Pakistan;

(iii) a modaraba;

(iv) a body incorporated by or under the law of a country outside Pakistan relating to the
incorporation of companies;

(v) a co-operative society, a finance society, or any other society;

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(vi) a non-profit organization;

(vii) a trust, an entity, or a body of persons established or constituted by or under any law for
the time being in force;

(viii) a foreign association, whether incorporated or not, which the Federal Board of Revenue
(FBR) has, by general or special order, declared to be a company for the purposes of the Income
Tax Ordinance, 2001;

(ix) a Provincial Government;

(x) a Local Government in Pakistan; or

(xi) a Small Company.

2. Public Company and Private Company (Section 2(45) & 2(47))

Public Company means:

(i) A company in which not less than 50% of the shares are held by:

• the Federal Government, or

• a Provincial Government;

(ii) A company in which not less than 50% of the shares are held by:

• a Foreign Government, or
• a foreign company owned by a foreign Government;

(iii) A company:

• whose shares were traded on a registered stock exchange in Pakistan at any time during
the tax year, and
• which remained listed on that exchange at the end of that year; or

(iv) A unit trust whose units are widely available to the public, and any other trust as defined
in the Trusts Act, 1882.

Private Company means a company that is not a public company.

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3. Small Company (Section 2(59AB))
Small Company means a company registered on or after the first day of July, 2005, under
the Companies Act, 2017, which:

(i) Has paid-up capital plus undistributed reserves not exceeding 50 million rupees;

(ii) Has employees not exceeding 250 at any time during the year;

(iii) Has an annual turnover not exceeding 250 million rupees;

(iv) Is not formed by the splitting up or reconstitution of a company already in existence; and

(v) Is not a small and medium enterprise (SME).

Note: Tax rates for a Small Company are lower than the tax rates for other than Small
Companies.

Tax residency rules for companies

Residential Status of a Person

The income of a person chargeable to tax under the Income Tax Ordinance 2001 (ITO-2001)
is determined with reference to the residential status of the taxpayer as follows:

• Resident Person: A resident person is chargeable to tax in Pakistan on both Pakistan

source income and foreign source income, subject to any applicable agreement for the
avoidance of double taxation (Tax Treaty).
• Non-Resident Person: A non-resident person is chargeable to tax in Pakistan only on
Pakistan source income, subject to any applicable agreement for the avoidance of
double taxation (Tax Treaty).

Residential Status of Corporate Entities

A company shall be considered a resident company for a tax year if:

a) It is incorporated or formed by or under any law in force in Pakistan.

b) The control and management of the affairs of the company is situated in Pakistan at any
time during the year.
c) It is a Provincial Government or Local Government in Pakistan.

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Key considerations for determining where the control and management of a company are
situated:

• Where the real or principal business of the company is carried on.

• Where the Board of Directors (BOD) meetings are held.
• Where the executive directors are based.

Corporate Income Tax Rates

Type of Entity Tax Rate Details

Standard corporate tax rate for public and

Company 29%
private companies in Pakistan.

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 Defined under the Income Tax Ordinance, 2001;
Small Company 20% paid-up capital ≤ PKR 50 million and turnover ≤
PKR 250 million.

Computation of Tax Liability

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Corporate Tax Return Filing and Compliance

Tax Return

• A tax return is a document that people prepare each year to report their income and
taxes owed to the Federal Board of Revenue (FBR) in Pakistan.
• The Income Tax Rules, 2002 specify which forms to use for tax returns.
• A tax return helps taxpayers:
o Calculate how much tax they need to pay.
o Plan their tax payments.
o Request a refund if they have overpaid their taxes.
• In Pakistan, tax returns must be filed every year and include all sources of income,
such as:
o Salary
o Income from property
o Business income
o Capital gains
o Other types of income
• “IRIS” refers to a web-based program used for managing and operating taxes and laws
related to Inland Revenue as handled by the FBR.

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Due Dates for Filling Tax Returns

Section Type of Return Tax Year End Due Date for Submission

Year-end between
Return of income for On or before December 31 of the
118(2) January 1 and
a company following year
June 30

Return for all other

118(2) & On or before September 30 of the
cases of individuals All year-ends
(3) following year
filing returns

Return in response
Year-end as
114(4) & to notice from the - 30 days from the notice
specified in the
(5) Commissioner of issuance
notice
Income Tax (CIR)

• If a person needs to submit a tax return or wealth statement, they can ask the Commissioner
for more time by writing an application.
• This request for an extension must be made by the deadline for submitting the tax return or
wealth statement.
• The Commissioner may grant an extension if they believe the taxpayer couldn't submit the
return or statement due to:

• Being out of Pakistan

• Illness or other unfortunate events
• Any other reasonable reason

• The extension given by the Commissioner should not be more than 15 days from the original
deadline, unless there are special reasons for a longer extension.
• If the Commissioner doesn’t grant the extension, the Chief Commissioner can approve an
extension of up to 15 days if the taxpayer applies, unless there are special circumstances for
a longer extension.
• An extension given by either the Commissioner or the Chief Commissioner does not change
the deadline for paying income tax. If the tax is paid late, a default surcharge will apply.

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Powers to Impose Filling of Return

• The FBR (Federal Board of Revenue) can issue general orders for people who are not on the
Active Taxpayer's List (ATL) but are required to file a tax return.
• Consequences of this general order may include:

• Disabling of mobile phones or SIM cards.

• Stopping electricity and gas connections.

• The FBR or the local Commissioner can restore mobile phones, SIM cards, and utility
connections if:
• The person has filed their tax return.
• The person was not required to file a tax return.

• A person can only be included in the general order if:

• A notice has been issued by the Commissioner asking them to file a return (according
to section 114(4)).
• The deadline for responding to this notice has passed.
• The person has not filed their return.

Methods of Filling of Tax Return

• The return of income must be submitted in the required form along with necessary
attachments, statements, or documents.
• It should provide all required details, including a declaration about the taxpayer's records.
• It must be signed by the individual or their representative, if section 172 applies.
• The return should include the tax payment as per the income declaration.
• A wealth statement must be included, as required under section 116.
• A foreign income and assets statement must be provided, as required under section 116A.
• An income return filed electronically (web, magnetic media, etc.) will be considered valid.
• The FBR can issue rules for determining eligibility, handling data, and appointing
intermediaries to digitize and submit returns electronically.
• Any return that appears to be submitted or signed by a person will be assumed to be done
by that person unless proven otherwise.

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Tax Incentives and Exemptions

Special Economic Zones (SEZs):

o Companies operating in SEZs enjoy 10 years of tax exemption.

o Tax holidays and other incentives are offered for companies engaged in
sectors like information technology, agriculture, and renewable energy.

Export-Oriented Units:

o Exemptions or reduced tax rates may apply to companies involved in exports,

as the government aims to encourage foreign exchange earnings.

Depreciation and Amortization:

o Companies can claim depreciation and amortization on fixed assets used in the
business, reducing taxable income.

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Taxation of Dividends and Other Incomes

• Dividends paid to shareholders are taxed at a 15% withholding tax rate for resident
companies.
• Interest, royalties, and other incomes sourced from Pakistan and paid to foreign entities
are also subject to withholding tax, usually between 10% and 20%.

Loss Carry-Forward and Carry-Backward

• Business losses can be carried forward for up to six years to offset future profits.
• Loss carry-back is generally not allowed, except for specific industries like insurance.

Withholding Taxes

• Companies must deduct withholding taxes on payments like salaries, dividends,

services, and supply of goods.
• These withheld taxes are typically adjustable against the final tax liability of the
recipient.

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Importance of Tax Planning for Corporations

Tax Planning

Tax Planning means organizing a company's finances to pay the least amount of tax legally.
It involves making smart choices about spending and income to take advantage of tax benefits
and avoid penalties. The main goals of tax planning are:

1. Reducing Taxes: Finding ways to lower the total tax a business has to pay.
2. Increasing Cash Flow: Paying less tax means more money is available for the business
to use or invest.
3. Staying Compliant: Making sure the business follows all tax laws to avoid fines or
legal problems.
4. Smart Investment Choices: Helping businesses make good decisions about where to
invest, considering the tax effects.
5. Supporting Growth: Efficient tax management allows businesses to invest more in
their growth and future plans.

Short-Term Tax Strategies

Short-term tax strategies focus on saving money in taxes for the current year. Here are some
examples:

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 1. Speeding Up Expenses: Businesses might pay for things now to reduce their taxable
income for this year.
2. Delaying Income: Companies can wait to receive income until the next year to lower
this year’s tax bill.
3. Using Tax Credits and Deductions: Taking advantage of available tax breaks, like
credits for research or deductions for certain expenses.
4. Year-End Tax Checks: Reviewing finances at the end of the year to find ways to save
on taxes.

Long-Term Tax Strategies

Long-term tax strategies are about planning for several years ahead. These strategies include:

1. Choosing the Right Business Structure: Deciding on the best type of company (like
an LLC or corporation) for tax benefits and future goals.
2. Investing Wisely: Putting money into investments that offer tax benefits, like
retirement accounts.
3. Planning for International Taxes: For companies that operate in different countries,
arranging their business to lower global tax bills.
4. Estate Planning: Preparing for how to pass on business ownership while considering
taxes.
5. Regular Reviews: Continuously checking and adjusting tax plans based on changes in
laws or business needs.

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Legal Risks and Tax Avoidance vs. Tax Evasion

Legal Tax Planning/Tax Avoidance:

o Definition: Legal tax planning involves using legitimate strategies to minimize

tax liabilities within the framework of the law. It includes activities such as
taking advantage of tax deductions, credits, exemptions, and structuring
transactions in a way that is tax-efficient.
o Example: A business might invest in assets that qualify for tax deductions or
utilize tax incentives provided by the government for certain industries.
o Legality: Legal tax planning is compliant with the tax laws of Pakistan and aims
to optimize tax liability without violating any regulations.

Illegal Tax Evasion:

o Definition: Tax evasion is the illegal practice of not paying taxes owed by
deliberately misrepresenting or concealing information from tax authorities. It
involves activities that violate tax laws and regulations.
o Example: A company might underreport its income, inflate expenses, or hide
assets in offshore accounts to evade tax liabilities.
o Legality: Tax evasion is a criminal offense in Pakistan and can lead to serious
legal repercussions.

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Potential Penalties, Fines, and Legal Consequences for Non-Compliance

In Pakistan, the consequences for non-compliance with tax laws can be severe, including:

1. Penalties and Fines:

o Monetary Penalties: The Federal Board of Revenue (FBR) may impose
penalties on individuals and businesses for failing to file tax returns,
underreporting income, or failing to pay taxes owed. These penalties can range
from a percentage of the tax due to fixed amounts.
o Late Fees: Additional charges may be applied for late filing or payment of
taxes.
2. Legal Consequences:
o Audit and Investigation: The FBR has the authority to audit taxpayers
suspected of tax evasion, leading to detailed investigations that can result in
additional taxes owed and penalties.
o Criminal Charges: In cases of severe tax evasion, individuals can face criminal
charges, which may lead to imprisonment. The severity of the punishment
depends on the amount of tax evaded and the nature of the evasion.
o Seizure of Assets: The FBR may also seize assets or freeze bank accounts of
individuals or businesses found guilty of tax evasion to recover unpaid taxes.
o Reputational Damage: Legal issues related to tax evasion can harm a
business’s reputation, impacting its relationships with stakeholders, customers,
and potential investors.

Type of Non-Compliance Penalty/Fine/Surcharge Reference

0.1% of tax payable for each day of default,

Failure to file an income subject to a minimum penalty of PKR Section
tax return 50,000 and a maximum penalty of PKR 182(1)
2,000,000

Failure to file a return by PKR 5,000 for salaried persons having Section
a salaried person taxable income up to PKR 5 million 182(1)

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 Failure to file a return
PKR 100,000 for taxpayers with taxable Section
for other than a salaried
income exceeding PKR 5 million 182(1)
person

The higher of:

Failure to file income tax - 0.1% of tax payable per day, or Section
return (Tax Year 2020 - PKR 1,000 per day of default, 182(1)
onwards) subject to a minimum penalty of PKR (Amended)
10,000

Tax Dispute Resolution

Procedures for Challenging Tax Assessments

If a taxpayer disagrees with a tax assessment made by the tax authorities, they can challenge
the decision using the following steps:

1. Filing an Objection (Appeal to the Commissioner Appeals):

o The taxpayer can file an appeal against the tax assessment to the Commissioner
(Appeals) within 30 days from the date of the tax assessment notice.
o The appeal should include grounds for objection and supporting evidence.

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 o The Commissioner (Appeals) will review the case, considering both the
taxpayer’s submissions and the tax authority’s assessment.
2. Appeal to the Appellate Tribunal:
o If unsatisfied with the decision of the Commissioner (Appeals), the taxpayer
can file a further appeal to the Appellate Tribunal.
o The taxpayer must file this appeal within 60 days from the decision of the
Commissioner (Appeals).
o The Appellate Tribunal will hear the case and give its decision, which is
binding unless appealed further in the higher courts.
3. Appeal to the High Court:
o If either party (taxpayer or tax authorities) is dissatisfied with the Tribunal’s
decision, they can appeal to the High Court on points of law.
o The High Court’s decision is final unless appealed to the Supreme Court.
4. Alternative Dispute Resolution (ADR):
o Taxpayers can opt for ADR to settle disputes outside of the regular appeal
process.
o A committee is formed to resolve the issue through negotiation and
compromise.

The Role of the Tax Ombudsman and Appellate Tribunals

1. Tax Ombudsman:
o The Federal Tax Ombudsman (FTO) plays a vital role in addressing
complaints regarding maladministration or unfair treatment by the tax
authorities.
o Taxpayers can file complaints with the FTO if they believe they have been
wronged by the actions of the tax department, including delays, harassment, or
misuse of authority.
o The FTO investigates complaints independently and can recommend corrective
actions to the tax authorities.
o The FTO's recommendations are not binding but are generally implemented by
the tax authorities.

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2. Appellate Tribunal:
o The Income Tax Appellate Tribunal is the highest fact-finding authority in
tax disputes.
o It hears appeals from decisions made by the Commissioner (Appeals).
o The Tribunal can review both factual and legal aspects of the case.
o Its decisions can be challenged only on points of law before the High Court.

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