Debt payable to associated enterprises: Finance Bill 2020 imposes curbs on deduction of profit

ISLAMABAD: Finance Bill 2020 has imposed restriction on deduction of profit on debt payable to associated enterprises. According to the Finance Bill 2020 issued here on Friday, a part of deduction for foreign profit on debt claimed by a foreign-controlled resident company (other than an insurance company, or a banking company) during a tax year, shall be disallowed according to the specified formula.

This section shall not apply to a foreign-controlled resident company if the total foreign profit on debt claimed as deduction is less than ten million rupees for a tax year.

Where in computing the taxable income for a tax year, full effect cannot be given to a deduction for foreign profit on debt, the excessive amount shall be added to the amount of foreign profit on debt for the following tax year and shall be treated to be part of that deduction, or if there is no such deduction for that tax year, be treated to be the deduction for that tax year and so on for three tax years. Where deduction of foreign profit on debt is disallowed under this section and also under section 106, the disallowed amount under this section and section 106. This section shall apply in respect of foreign profit on debt accrued with effect from the first day of July, 2020, even if debts were contracted before the first day of July, 2020.

In this section, "foreign-controlled resident company" means a resident company in which fifty per cent or more of the underlying ownership of the company is held by a nonresident person either alone or together with an associate or associates. The "foreign profit on debt" means interest paid or payable to a non-resident person or an associate of the foreign controlled resident company and includes- (i) interest on all forms of debt; (ii) payments made which are economically equivalent to interest; (iii) expenses incurred in connection with the raising of finance; (iv) payments under profit participating loans; (v) imputed interest on instruments such as convertible bonds and zero coupon bonds; (vi) amounts under alternative financing arrangements such as islamic finance; (vii) the finance cost element of finance lease payments; (viii) capitalized interest included in the balance sheet value of related asset, or the amortisation of capitalised interest; (ix) amounts measured by reference to a funding return under transfer pricing rules; (x) where applicable, notional interest amounts under derivative instruments or hedging arrangements related to an entity's borrowings; (xi) certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance; (xii) guarantee fees with respect to financing arrangements; and (xiii) arrangement fee and similar cost related to the borrowing funds," Finance Bill added.