ISLAMABAD   -  The Ministry of Finance (MoF) and Federal Board of Revenue (FBR)have hinted that the restoration of Inter-Corporate Dividend (ICD) tax exemption will be considered in upcoming budget to support the formation of business groups and add depth to the country’s capital markets.

Earlier this week, the FBR and MoF met representatives of the Pakistan Business Council (PBC), Overseas Investors Chamber of Commerce and Industry (OICCI) and the American Business Council (ABC) to discuss budgetary proposals. The delegation assured the government of full support to achieve its objectives of broadening the tax base, accelerating formalisation of the economy, controlling evasion and under-invoicing, promoting investment and bringing down the cost of essentials.

Appreciating the FBR and ministry of Finance for engaging with the stakeholders on this matter, a member of the delegation who requested anonymity, said that, “the reinstatement of inter-corporate dividend tax exemption will restore investor confidence and play a crucial role in fulfilling the government’s vision of achieving consistency in tax policies, promoting economic activity, attract foreign investments and generating employment across various sectors.”

Following the meeting, the Pakistan Business Council (PBC) wrote a letter to the FBR to clarify a misunderstanding on the legislative history of ICD and highlight several global precedents of tax exemption on such dividends when paid by one company to another. The letter states that, “in the Indian tax law, ICD is not subject to tax in the hands of another company provided it in turns declares a dividend of at least the same amount within the stipulated time period.”

The PBC has also provided verifiable evidence that ICD tax exemption is available in major jurisdictions, including India, Vietnam, Indonesia, Thailand, Singapore, US and China, among others. Hence, the ICD regime introduced by the Finance Act 2008, continued till 2016, then reinstated in 2019 was already less liberal than the global practice, the letter adds. The removal of tax exemption on ICD will make Pakistan uncompetitive and goes directly against the objective of the government to promote investment in Pakistan.

In March this year, the Federal Cabinet had approved the Income Tax (Second Amendment) Ordinance, 2021, to reduce income tax exemptions for the corporate sector under IMF programme requirements. The Ordinance also removed a clause that exempts dividend income of the Holding company from subsidiaries where the ownership share is more than 55 per cent.

However, the business community opposed the move, citing that this double taxation would heavily burden the corporate sector, weaken capital markets in Pakistan and make Pakistan uncompetitive for foreign investments. Further, the imminent withdrawal of incentive to list on PSX and exemption of inter-corporate dividend to WHT were regressive steps that needed reconsideration.

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. 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.