Inter-corporate dividends: PBC expresses disappointment over non-removal of double taxation

ISLAMABAD: Pakistan Business Council (PBC) has expressed its disappointment over not removing double taxation on inter-corporate dividends in the federal budget.

In a letter to Federal Minister of Finance and Revenue Shaukat Tarin, the PBC chief executive Ehsan A Malik also appreciated the government for promoting ‘Make in Pakistan’ agenda that will help create jobs, curb the shortage and rising cost of food essentials, and make the country self- sufficient.

The Council further stated that the government’s focus on promoting exports by rationalising tariff structure of inputs and providing a level playing field to the formal sector will ensure inclusive and sustainable growth of Pakistan.

“While appreciating all positive measures taken, we are disappointed that rational protection against double taxation of inter-corporate dividends, provided in many developing and developed countries, as well as in Pakistan for nine out of the last twelve years, was not restored,” Malik added.

Requesting the government to reconsider the proposal, the Ehsan Malik added that “Group formation results in scale, wider shareholding and diversification of investment as well as creation of jobs. This, therefore, needs to be encouraged by removing cascading taxes on dividends from a subsidiary to its holding company.”

According to former Federal Board of Revenue (FBR) chairman Shabbar Zaidi, the government was expected to reinstate the tax exemption on inter-corporate group dividends and this appeared to be an omission. He hoped that the exemption will be taken into consideration whilst finalizing the documents. Similarly, the post-budget analysis of A F Ferguson & Co also noted that, in line with international best practices, there is a need to reconsider the overall tax regime for dividend income especially for inter-corporate dividends which is essential to convert non-corporate businesses into documented corporate sector entities.

In pre-budget engagements with the business community, the FBR and Ministry of Finance had hinted that the inter-corporate dividend tax exemption may be restored to support the formation of business groups and add depth to the country’s capital markets.

In March this year, the federal cabinet had approved the Income Tax (Second Amendment) Ordinance, 2021, which removed a clause that prevented double taxation of inter-corporate dividends as it flows from subsidiaries to Holding Company.

The taxation regime for inter-corporate dividend was developed in 2007 based on recommendations of a Task Force comprising the private sector, FBR, SECP and ICAP. The tax credits on inter-corporate dividends were proposed after benchmarking local laws with tax regimes of global jurisdictions, including India, Vietnam, Singapore, US and China. Since the introduction of this tax exemption,

Capital markets in Pakistan witnessed significant development and wider implementation of corporate governance practices as several large business groups transformed into a holding company structure with separate listed subsidiaries.

The copies of which have also been sent to PM Advisor on Commerce and Investment, Abdul Razak Dawood, SAPM on Finance and Revenue, Chairman FBR and Member IR( FBR).

Copyright Business Recorder, 2021