Profit on Debt

Star · 07-04-2011, 06:43 PM

Dear All,

What would be the tax rate on profit on debt received by an individual from a foreign company?

Regards,

*

student_of_law · 07-06-2011, 11:46 PM

First question to be determined in your case is whether the profit on debt received by foreign company would be taxable in Pakistan. S.101(7) helps in this regard. In two cases only profit on debt by foregin company would be taxable; (i) If the foreign company has a resident status under the income tax ordinance (see s.83) or (ii)foregin company has permanent establishment in Pakistan which bears the burden of payment of profit on debt.

Provided tax is payable then

If the foreign company is a financial institution then it will deduct tax at the rate of 10% under s.151 and you donot need to pay any other tax [see Div I of Part III of First Schedule and s.151(3)]

If it is not a financial institution and does not deduct tax then just add the income from profit on debt with your other incomes and pay tax according to the rates mentioned in Table 1 of Part 1 of First Schedule.

If your salary income is more than 50% of your total income then add income from profit on debt to your salary income and other incomes and pay tax at the rate mentioned in Table 1A of First Schedule

Star · 07-08-2011, 08:06 PM

Foreign company has no place of business nor any PE in Pakistan instead it only has equity stake in some of unlisted companies.

student_of_law · 07-09-2011, 04:22 PM

Then it is certainly a foreign source income u/s 101(16) read with 101(7).

Foreign source salary is exempt from tax while for other heads of income I could not find exemption.

However,s.103 allows tax credit to resident taxpayer for foreign source income, PROVIDED THAT the taxpayer has already paid foreign income tax.

So by reading these sections, we may infer, that if you have already paid foreign income tax on this income you may claim tax credit in accordance with s.103.

If you have not paid that, then this income will be added to your other Pakistani income and you will pay tax accordingly.
Suppose

Your business income in Pakistan is 5 lac
While you derive profit on debt from foreign company, 2 lac, upon which no tax has been paid in the foreign country

Then your total income will be 7 lac and you will pay tax at the rate of 10% according to first schedule.

IN MY EARLIER REPLY I ASSUMED THAT EVERY NON-PAKISTANI SOURCE OF INCOME IS EXEMPT FROM TAX - I APPOLOGIZE FOR THAT ERROR

Still the above is my opinion, I invite other experts to comment. If any case law could be cited, it will help us more

Star · 07-09-2011, 08:54 PM

many thanks.

Just want to know the case where the loan is disbursed to foreign company in Pakistan in Pak Rupees and foreign company commits to repay it Pak Rupees alongwith markup?

*

student_of_law · 07-09-2011, 10:13 PM

I think profit on debt in this case will simply be added to the income of recepient and taxed at the prescribed rates just as it would have been added and taxed if the loan was advanced to resident person.

I could not find any specific provision on receipt of profit on debt from foreign company, except that of foreign source income (s.101) In the said case no foreign income tax is to be deducted hence that section will not benefit us.

Star · 07-14-2011, 02:24 PM

We may request to the Foreign Company to deduct income tax at source and to deposit it foreign country. In this case, FC may provide us the evidence of income tax deduction at source & deposit in foreign courntry and such profit on debt received will be tax free.

What you say?

*

student_of_law · 07-14-2011, 04:11 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 We may request to the Foreign Company to deduct income tax at source and to deposit it foreign country. In this case, FC may provide us the evidence of income tax deduction at source & deposit in foreign courntry and such profit on debt received will be tax free.

What you say?

*
<hr height="1" noshade id="quote"></blockquote id="quote">

s.103 of ITO 2001 and Rules 15 & 16 of IT Rules 2002 will help you in this regard.

According to sub-rule 3 of Rule 15 payment is recognized as tax if it must be a compulsory payment under the authority of foreign government.

So you must make sure that the company paying you the tax is required by law to deduct tax.

Now coming to section 103, foreign tax credit allowable is the lesser of
i. tax paid to foreign authority
ii. tax payable in Pakistan on such income

tax payable in Pakistan is calculated by applying person's average rate of Pakistani income tax for that year

It is further provided in Rule 16, that application for allowance of foreign tax credit shall be made with the return in the prescribed form (Part I of First Schedule to the Rules). It is to be supported by evidence as mentioned in Rule 16.

I am also not clear on calculation of tax payable in Pakistan. Normally, if one has paid tax on foreign income, he will add foreign income to local income, work out the tax rate, apply that tax rate on foreign income to check the tax payable on that income in Pakistan. thereafter he will claim credit lesser of tax payable in Pakistan or paid in foreign country.

But a complex question is that suppose on dividend income tax deducted by foreign company is 10%.

Should we take this income as separate block of income and 10% deduction as final tax or should we add dividend income to local income and work out the rate of tax for that year, then to claim tax credit equivalent to actually paid or equivalent toour rate of tax on dividend income, whichever is less. Apparently, s.103 supports the latter. However, further opinion is invited in this regard.

Last of all,I could not understand, what benefit you will get if the foreign company starts deducting tax. Your foreign tax credit cannot exceed the tax payable in Pakistan. Then, whether you pay that amount here or in the foreign country, according to me, it does not make any difference

Star · 07-14-2011, 04:59 PM

In that foreign country, rated of income tax at source on profit on debt is 10% while if i receive profit on debt without deducting income tax at source in foreign country, the whole profit on debt will be added in my personal income due to which applicable slab on my personal income will be higher than 10% say 15% resulting into saving of 5% tax in the instant case.

Thus it makes a difference and provides me benefit.

*

student_of_law · 07-14-2011, 05:50 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 In that foreign country, rated of income tax at source on profit on debt is 10% while if i receive profit on debt without deducting income tax at source in foreign country, the whole profit on debt will be added in my personal income due to which applicable slab on my personal income will be higher than 10% say 15% resulting into saving of 5% tax in the instant case.

Thus it makes a difference and provides me benefit.

*
<hr height="1" noshade id="quote"></blockquote id="quote">

Probably you have ignored the following part of my answer,

"I am also not clear on calculation of tax payable in Pakistan. Normally, if one has paid tax on foreign income, he will add foreign income to local income, work out the tax rate, apply that tax rate on foreign income to check the tax payable on that income in Pakistan. thereafter he will claim credit lesser of tax payable in Pakistan or paid in foreign country.

But a complex question is that suppose on dividend income tax deducted by foreign company is 10%.

Should we take this income as separate block of income and 10% deduction as final tax or should we add dividend income to local income and work out the rate of tax for that year, then to claim tax credit equivalent to actually paid or equivalent toour rate of tax on dividend income, whichever is less. Apparently, s.103 supports the latter. However, further opinion is invited in this regard."

S.103(2) and 103(8) clearly provides how to work out tax payable in Pakistan. According to s.103, I think deduction of tax by foreign country will not help you. In both the cases you have to work out your tax rate by adding foreign income to local income.

Star · 07-15-2011, 03:23 PM

I have only dividend income & profit on bank deposit other than this profit on debt. You know tax deducted on dividend & profit on bank deposit is final when reciepent is an individual.

Third source of income is the profit on debt. If income tax is not deducted by foreign company then it will be treated my "income from other sources" and applicable slab comes as 15%.

As i said my ealier thread, if tax is deducted & deposited in foreign country it will be 10%. In this case profit on debt received (net of tax) will not be taxed in Pakistan. Am I right?

*

student_of_law · 07-15-2011, 04:04 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 I have only dividend income & profit on bank deposit other than this profit on debt. You know tax deducted on dividend & profit on bank deposit is final when reciepent is an individual.

Third source of income is the profit on debt. If income tax is not deducted by foreign company then it will be treated my "income from other sources" and applicable slab comes as 15%.

As i said my ealier thread, if tax is deducted & deposited in foreign country it will be 10%. In this case profit on debt received (net of tax) will not be taxed in Pakistan. Am I right?

*
<hr height="1" noshade id="quote"></blockquote id="quote">

I think I could not explain it properly. I try to elaborate it with example. You understand that credit is given after tax liability calculation. So first we calculate your tax liability.

Assume that your foreing source profit on debt income is Rs.100 and slab applicable to it is 15%

So in Pakistan your TAX LIABILITY will be Rs.15

Now if foreign tax at source @10% i.e Rs.10 has been paid then you are entitled to foreign tax credit. Entitlement to foreign tax credit means that the amount of tax credit shall be deducted from your tax liability i.e. Rs.15.

Now the question is how to work out amount of foreign tax crdit. S.103 guides us in this regard. It says that foreign tax credit will be equal to

i tax actually paid in foreign country (Rs.10) or
ii. tax payable in Pakistan (Rs.15)

WHICHEVER IS LESS

It is clear that lesser amount is Rs.10.

So from your tax liability of Rs.15 you may deduct Rs.10 as foreign tax credit and remaining you have to pay.

So in aggregate you have to pay Rs.15 in any case.

I hope I would have been succeeded in communicating my point of view.

hassan22 · 07-17-2011, 09:41 PM

i think that the addition is only for calculation of rate and when foreign tax comes out as lesser of the two, then that shall be the only tax.

student_of_law · 07-18-2011, 01:31 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by hassan22
 i think that the addition is only for calculation of rate and when foreign tax comes out as lesser of the two, then that shall be the only tax.
<hr height="1" noshade id="quote"></blockquote id="quote">

Please explain your point of view with example and also refer to the words of s.103 that supports your interpretation.

As far as I have read it, s.103 no where says that tax payable is lesser of the two. It says foreign tax credit allowed is lesser of two (foreign tax paid & tax payable). And we all know that tax credit is the amount that we subtract from tax liability to ascertain net tax payable.

hassan22 · 07-18-2011, 04:57 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by hassan22
 i think that the addition is only for calculation of rate and when foreign tax comes out as lesser of the two, then that shall be the only tax.
<hr height="1" noshade id="quote"></blockquote id="quote">

Please explain your point of view with example and also refer to the words of s.103 that supports your interpretation.

As far as I have read it, s.103 no where says that tax payable is lesser of the two. It says foreign tax credit allowed is lesser of two (foreign tax paid & tax payable). And we all know that tax credit is the amount that we subtract from tax liability to ascertain net tax payable.
<hr height="1" noshade id="quote"></blockquote id="quote">
sorry for that i got it totally wrong