LAHORE: For the first time, the government has started taxing the income of offshore companies owned by Pakistanis, beginning the journey towards collecting taxes from the wealthiest families that route their local income through foreign channels to avoid paying taxes.
The step, taken last week by the Automatic Exchange of Information (AEOI) Zone of the Federal Board of Revenue (FBR), may eventually cause a crack in the web of domestic and offshore companies that have been created by at least 39 wealthiest Pakistanis to legally avoid taxes, sources told The Express Tribune.
They said that the FBR had passed at least two orders last week to recover Rs287 million in taxes on foreign income that the taxpayers had claimed to be exempted in the income tax returns.
The FBR has now imposed tax at the rate of 15% under Section 109A of the Income Tax Ordinance that deals with the Controlled Foreign Companies, said the sources.
A controlled foreign company is one that is directly or indirectly owned by a resident Pakistani.
The income had been earned in Pakistan and transferred abroad legally by paying 15% dividend tax in the country. However, the FBR decided to amend the law so that the taxpayer was also forced to pay another 15% dividend tax on its foreign income under Section 109A of the law.
Around 387 members of the 39 wealthiest families have disclosed in the Securities and Exchange Commission of Pakistan (SECP) that they have stakes in offshore companies, according to the sources.
A legal amendment had been introduced in 2018 to tax the passive income of offshore companies owned by Pakistani residents in Pakistan.
Before 2018, the income of foreign company was taxable only if the dividend was paid to the person who directly or indirectly owns the firm. Usually, these foreign companies do not pay dividends to the people residing in Pakistan.
Now, the tax is payable on the attributable income before it is paid by the foreign company to the resident persons, according to the tax authorities.
The first two orders by the FBR in case of controlled foreign companies may eventually lead to correcting the wrongdoings committed 30 years ago when former prime minister Nawaz Sharif had enacted the Protection of Economic Reforms Act 1992 in the name of “creating a liberal environment for savings and investments in Pakistan.”
