May 28, 2021: Industries and business groups across the country have demanded the government to restore exemption on inter-corporate dividends as it is leading to double taxation, discouraging companies to freely go for expansion or setting up other units, said industry sources.
Inter-Corporate Dividend (“ICD”) means the dividend income derived by a company because of having shareholding in another corporate company. Exemption of inter corporate is important for holding company structures which would otherwise become inefficient as there will be multiple tax incidences on the same income flowing as dividend through each layer until it reaches the ultimate shareholder.
The industry sources while explaining the burden of the additional tax, they explained that if in a typical group, where multiple companies are created for different business, there has been one textile unit, after earning profit it has to pay 29 percent tax and after declaring dividend it has to pay 15 percent tax to its parent company say it is cement company.
The trail of taxes do not end here when the same cement company paying dividend has to pay another tax of 15 percent to its holding company until it reaches individual shareholder.
In Pakistan, the framework of taxation of holding company structure was introduced in the Income Tax Ordinance, 2001 through Finance Act 2007 and 2008 including exemption on ICD.
This was based on the recommendation of a Task Force formed by the Federal Government comprising of members from the then CBR, SECP, Pakistan Business Council (“PBC”), ICAP and senior tax professionals.
The Task Force was assigned the objective to give recommendations with the aim to consolidate fragmented corporate ownership that will promote corporate governance & good corporate practices as well as enhance capital formation within the country which would attract investments, specially providing opportunities to small investors to take equity interest in large businesses.
In 2016 during the previous government’s tenure, clause 103A of Part I of Second Schedule of ITO, 2001 which provided exemption to ICD income among group companies was abruptly removed without any consultation with stakeholders, said the industry sources.
This amendment had severely impacted the corporate sector, which had transformed themselves into holding company structures, while also resulting in unnecessary litigations for the businesses.
In 2019, after constant representations by business community, PBC and OICCI for more than 3 years with FBR and Finance Ministry, the present government reinstated the tax exemption for ICD. But this reinstatement was short lived as again in March 2021, the ICD tax exemption was removed as part of IMF program negotiations.
In the current global perspective, developing nations including our regional peers, such as India, Thailand, Sri Lanka, Azerbaijan, Vietnam, Turkey, Brazil, Argentina etc. and developed countries such as USA, UK, Germany, China, France, Australia, Japan etc. have allowed tax exemption on inter corporate dividends.
The recent representations by the business community via PBC, OICCI and other forums to restore ICD exemption in the upcoming Federal Budget 2021 has received positive response from the FBR and Finance Ministry.
The reinstatement of ICD exemption will restore investor confidence and will play a crucial role in ensuring government’s vision of consistent tax policies, promote economic activity and employment generation, said industry sources.
The industry sources while explaining the burden of the additional tax, they explained that if in group there has been one textile unit, after earning profit it has to pay 29 percent tax and after declaring dividend it has to pay 15 percent tax to its subsidiary say it is power company. The trail of taxes do not end here when the same power company paying dividend has to pay another tax of 15 percent to its food unit.
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