Corporate - Tax administration

Taxable period
The tax year is 1 July through 30 June. However, tax authorities are empowered to approve a
special year-end.

Tax returns
All companies are required to file an income tax return each year by 31 December for the
preceding financial year (1 July through 30 June) by accounting for business income on an accrual
basis. If the special year granted by the tax authorities ends between 1 July and 31 December,
then the tax return is required to be filed by 30 September following the year-end.

An across-the-board self-assessment scheme is in place whereby assessment is taken to be

finalized upon filing of the return. The Commissioner, however, has powers to amend the
assessment if it is believed that the assessment made is prejudicial to the interest of revenue or
on the basis of audit or definite information that any income chargeable to tax has escaped
assessment/has been under assessed/has been assessed at a lower rate or there is any
misclassification between various heads of income. These powers are to be exercised within a
prescribed time frame. In the case of transactions between associates, the Commissioner can
substitute the transaction value with the fair market consideration. The Commissioner is also
empowered to determine tax liability according to the substance of the transaction, disregarding
formal arrangements between the parties.

Persons subject to final tax regime were required to file a statement prescribed in the law in lieu
of return of income. The concept of statement in lieu of return has now been omitted with such
persons now required to file a return income. The FBR is to prescribe returns for different classes
of income or persons, including those covered by final tax regime.

Tax authorities can require a person whose name is not appearing in the ATL to file an income
tax return.

Filing of a revised return requires prior approval of the Commissioner unless it is revised within
sixty days, which has certain limitations and conditions. The Commissioner is also empowered to
grant approval for revision of return for bona fide omission or wrong statement.

A time limit for notifying an annual income tax return form under the Ordinance has been
introduced.
Payment of tax
Companies are required to pay advance tax on the basis of tax liability of the immediately
preceding tax year in respect of their income (excluding capital gains and presumptive income).
The advance tax is to be paid after adjusting the taxes withheld at source.

Advance tax is required to be paid in four quarterly instalments on or before 25 September, 25

December, 25 March, and 15 June in each financial year. Credit for tax paid in a tax year shall be
allowed against tax liability of that year. However, in case of banking companies, such advance
tax is payable on a monthly basis.

The total tax liability is to be discharged at the time of filing the return of income. However, penal
action are prescribed in the law where tax payable at the time of filing of return is in excess of
10% of the total tax liability.

Advance taxes and taxes withheld are adjustable against the tax payable with the return of
income.

Tax audit process

The FBR is authorised to prescribe criteria for selection of audit of taxpayers who have filed their
returns for a tax year. Based on such criteria, cases are selected through computer ballot
separately for income tax, sales tax, and federal excise duty. The returns are examined by tax
authorities, and related documents and information are requisitioned. Show-cause notices are
then raised and, on receipt of explanations from taxpayers, income or loss is assessed. In case of
disagreement with assessments, the taxpayer has the right to agitate the issues before appellate
forums.

A procedure has been proposed by the tax authorities, whereby the FBR's system would
automatically scrutinize a tax return within six months of its filing in order to identify and adjust
(after affording an opportunity of a hearing) any arithmetical and clerical errors, incorrect claims,
and disallowance of tax credits, deductions, and losses, etc. in the declared version of the
taxpayer's return.

The concept of an ‘agreed assessment’ has been introduced. A taxpayer intending to settle a case
may file an offer of settlement in the prescribed form before the ‘assessment oversight
committee’, in addition to filing a reply to the notice of amendment proceedings. The Committee
shall decide its position on the said offer and communicate to the taxpayer. In case of agreement,
the taxpayer can deposit the tax due, with the Commissioner passing an amendment order to
this effect (in which event the taxpayer shall lose the right to appeal); otherwise, the matter
would again be referred back to the Commissioner for continuation of the amendment
proceedings in the routine manner. This option is, however, not available in cases involving
concealment of income or where the interpretation of question of law is involved and having an
effect on other cases.

The taxation authorities can apply generic sectoral benchmarks and ratios, etc. for determination
of taxable income disregarding the results furnished by a taxpayer. This provision will only apply
where a case is selected for tax audit and the taxpayer fails to provide the
information/documents/explanations required during such audit.

The Commissioner, in addition to being authorized for having access to taxpayers’ premises,
place, accounts, documents, or computer, if required, in pursuance of any audit or other
proceedings initiated under the Ordinance, is also allowed real-time electronic access to such
records of the taxpayer. The Commissioner is also permitted to conduct audit proceedings
electronically through video links or any other prescribed facility.

Alternate Dispute Resolution (ADR)

An aggrieved person may apply for resolution of a dispute pending before any court of law or
appellate forum, through ADR mechanism in following cases:-

a) Where the liability of tax is PKR 100 million or above or admissibility of refund;

b) The extent of waiver of default surcharge & penalty; or

c) Any other specific relief required to resolve the dispute.

However, any case where criminal proceedings have been initiated fall outside the purview of
ADR mechanism. Previously, in case of a dispute where a mixed question of law and fact was
involved, the FBR was empowered to examine as to whether ADR Committee should be
constituted or not. This hindrance has been removed.

Under the new mechanism, the taxpayer has a right to nominate a person from the panel notified
by the FBR except where the relevant Chartered Accountant or an Advocate has been an
authorized representative of the taxpayer. Furthermore, the taxpayer will have to withdraw his
appeal for seeking relief under ADR.
Statute of limitations
An audit of the tax return filed by a taxpayer can be conducted by the tax authorities within five
years of the end of the financial year in which the return is filed. A person, whose income tax
affairs have been audited in any preceding four tax years, he shall have immunity from selection
of audit.

Tax authorities can probe into the source of unexplained offshore assets and foreign source
income irrespective of any time limitation.

The time period to pass an amendment order is 180 days from the issuance of show cause notice.

Nevertheless, FBR is empowered to extend the time limitation for any application to be made or
any act or thing to be done subject to certain conditions.

Advance rulings
A non-resident not operating in Pakistan through a PE can apply to the FBR to issue an advance
ruling setting out the Board’s position regarding application of the provisions of the Income Tax
Ordinance to a transaction proposed or entered into by the taxpayer. The tax ruling, once issued,
is binding on tax authorities.

Topics of focus of tax authorities

Tax authorities focus on the following issues:

 WHT.
 Transfer pricing.
 Relationship of expenditure with the business of the taxpayer.
 Advance tax.
 Payment of tax due within the time prescribed.
 Audit of returns filed.
 Compliance by taxpayers.
 Collection of arrears.
Special rules
Special rules are applicable for computation of income from exploration and production of
petroleum, mineral deposits, insurance, builders and land developers, SMEs, and banking
business.

United States (US) Foreign Account Tax Compliance Act (FATCA)

Pakistan is under active negotiation with the United States for executing an agreement for
compliance with FATCA; however, banks and other entities affected by FATCA are required to
register with the US Internal Revenue Service (IRS).

Base Erosion and Profit Shifting (BEPS)

On 12 September 2016, Pakistan signed the Multilateral Convention on Mutual Administrative
Assistance in Tax Matters (‘Convention’) under the aegis of the Organization for Economic Co-
operation and Development (OECD), as part of prevention of BEPS. BEPS refers to tax planning
strategies that exploit gaps and mismatches in national tax laws to shift profits to low or no tax
locations. Accordingly, on the recommendations of the BEPS Action Plan, amendments have also
been incorporated in the relevant fiscal laws in order to fulfil its obligations under the
Convention.

Pursuant to the above Convention, the following agreements were signed by Pakistan:

 Automatic Exchange of Tax Related Information (dated 7 June 2017).

 Multilateral Competent Authorities Agreement (dated 21 June 2017).

Keeping in view these Conventions/Agreements, relevant fiscal laws have been

amended/enacted to provide for the following:

 Transfer pricing documentation and country-by-country (CbC) reporting (see Transfer

pricing in the Group taxation section for more information).
 Controlled foreign companies (see Controlled foreign companies [CFCs] in Group
taxation section for more information).
 Treaty abuse/shopping (see below).
 Common Reporting Standard (see below).
Treaty abuse/shopping
Tax authorities are empowered to disregard an entity or a corporate structure not having any
economic substance or that entered into such as a part of a ‘tax avoidance scheme’, such
expression being defined to mean a transaction entered into with the primary purposes of tax
avoidance or ‘reduction in tax liability’. ‘Reduction in tax liability’, inter alia, includes within its
scope that achieved as a result of availing benefit under a DTT.

Further, provisions of law granting an overriding status to treatment provided for in DTTs have
also been qualified to the effect that any re-characterization of income/transactions would not
be ineffective on account of such provisions so that substance of the transaction forms the basis
of taxation and no rescue is available on the basis of structure designed to avail treaty benefits.

Earlier, the FBR had issued a notification S.R.O 405(I)/2021 dated 1 April 2021 for enforcing
the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
BEPS (MLI). With this development, certain DTTs entered into by Pakistan were expected to be
amended, subject to certain reciprocal actions by the respective treaty partners.

Consequent to above, FBR has released revised version of certain DTTs as well.

The multilateral conventions are expected to bring about important changes to the DTTs covered
by the MLI, including a new preamble, anti-treaty abuse measures, and more stringent rules on
dividends, capital gains, and the definition of a PE. On the other hand, the MLI seeks to improve
the dispute resolution process and provide for corresponding adjustments in case of transfer
pricing primary adjustments, therefore easing the compliance burden.

Common Reporting Standard (CRS)

In order to implement the directives contained in the Convention, the FBR was earlier
empowered to obtain information from banks/financial institutions regarding non-resident
persons for the purposes of automatic exchange of information under bilateral agreements. In
exercise of these provisions, the CRS has already been made part of the income tax law, by way
of insertion in the relevant Income Tax Rules.

Under the CRS, tax authorities of countries that are signatory to the Convention/Information
Exchange Agreements can share information with the FBR with respect to financial accounts
(broadly meaning accounts maintained by banks/financial institutions, including custodial and
depository accounts) in their jurisdiction held by Pakistani residents. Pakistan will also be able to
provide corresponding information to the foreign tax authorities on accounts held by residents
of jurisdiction in Pakistan.
The CRS requires the banks and other financial institutions to provide certain information or to
undertake certain due diligence with respect to certain financial accounts. The CRS is aimed to
reduce tax evasion by taxpayers using offshore financial accounts held both directly and indirectly
through enhanced information sharing and collaboration.

The FBR has introduced compulsory enrolment of financial institutions. Furthermore, time
lines have been specified for filing of CRS reports by the financial institutions with the FBR.
Tax administration
Taxable period
The tax year is 1 July through 30 June.

Tax returns and statements

An individual is required to file a return of income with the tax authorities on a fiscal year basis
(1 July through 30 June). Filing of a revised return requires prior approval of the Commissioner,
subject to certain limitations and conditions. The Commissioner is now also empowered to grant
approval for revision of a return for a bona fide omission or wrong statement.

Every resident taxpayer filing a return of income is required to file a wealth statement (in the
prescribed format) along with the return of income. The Commissioner can also require any
person to furnish the said statement. For revision of a wealth statement, an intimation has to be
filed with the Commissioner, who is empowered to disallow/disregard such revision in case
he/she is of the view that the same has not been made for correction of bona fide errors or
omissions. A taxpayer has been allowed to make revision of a wealth statement up to a period of
five years.

Every resident taxpayer being an individual and having foreign income equal to or in excess of
10,000 United States dollars (USD) or having foreign assets with a value of USD 100,000 or more
is now also required to file a separate statement of foreign income and foreign assets in a
prescribed format. The Commissioner can also require any person to furnish such statement.

All individuals (including salaried persons) are required to file their return/wealth statement for
the year ended 30 June by 30 September. Late filing shall be liable to penalty proceedings.

Persons whose income was subject to the final tax regime were previously required to file a
statement prescribed in the law in lieu of a return of income; however, such requirement has
now been omitted. The FBR is to prescribe returns for different classes of income or persons,
including those covered by the final tax regime.

Payment of tax
Income tax is withheld from salaries by the employer. The amount to be withheld is determined
by applying to the salary the average rate of tax on the estimated income of the employee for
the fiscal year.
Advance tax is payable by an individual (other than a salaried individual) in four instalments if the
latest assessed taxable income is in excess of PKR 1 million.

Statute of limitations
An audit of the tax return filed by a taxpayer can be conducted by the tax authorities within five
years of the end of the financial year in which the return is filed. A person, whose income tax
affairs have been audited in any preceding four tax years, he shall have immunity from selection
of audit. However, amendment proceedings may be initiated other than by way of selection of
audit.

Tax authorities can probe into the source of unexplained offshore assets and foreign source
income irrespective of any time limitation.

The time period to pass an amendment order is 180 days from the issuance of show cause notice.

Topics of focus for tax authorities

The tax authorities mainly focus their attention on taxpayers other than salaried individuals