Why Group Taxation is not famous in Pakistan

Star · 10-01-2009, 09:25 PM

Dear Members,

Section 59A of Income tax Ordinance, 2001 provides an option to the Companies of a group to adopt group taxation. But we practically observe that major groups of Pakistan has not opted it.

What is difficulty / disadvantage in it and why it is not famous in Pakistan.

Tax experts are encouraged to discuss it to share their knowledge with the other members.

Regards,

*

awaisaftab · 10-02-2009, 04:11 PM

I think that the option of group taxation is being opted by some Group of Comp's but its a new concepts. But I have experienced that some group of comps due not adopting this option because some companies of some groups fall in the definition of Small Companies ( As defined in ITO). ITO does not specify what will happen if one company of a group fulfills the definition of Small company and other company is not a samll company.

faisal_desperado · 10-03-2009, 05:17 AM

Dear,

The concept of group taxation has been introduced in Pakistan by the Finance Act 2007, which is undoubtedly an effective step taken to make tax laws of Pakistan in line with international best practices.

However it has called for many implementation problems, which in turn has called for many anonymous facts to tax officials, furthermore, many issues are of such nature that if the said section is implemented then it would be difficult to tackle those problems.

Section 59B â 2 reveals that âThe loss surrendered by the subsidiary company may be claimed by the holding company or a subsidiary company for set off against its income under the head âIncome from Businessâ in the tax year and the following two tax yearsâ

Aforementioned is subject to certain conditions, one of which requires that Holding company, which is a private company with having 75% ownership will be required to get it self listed within three years from the year in which losses are claimed. If this is happened then it would create the problems of hostile takeover, no group would like to keep its investments in a listed company due to the risk of Hostile Takeovers, which may be done by using strategies of âStreet Sweepâ or âBear Hugâ. Many companies would not like to get them self taken over through any of the said means, though the targeted company may use tactics of Poison pill, Greenmail, Pac-man Defence or white knight etc., in its defence against such strategies.

Section 59B â 5 reveals that âIf there has been any disposal of shares by the holding company during the aforesaid period of five years to bring the ownership of the holding company to less than fifty-five per cent or seventy-five per cent, as the case may be, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company.

In the existence of uncertainty, Keeping the investment for the continuous period of 5 years is seems to be illogical, as no company would like to take such a risk, furthermore the said clause discourages due to the reason, which is apparent, In order to curb the potential abuse of relief contemplated by this Section, seeks to withdraw the benefit of relief, if any, availed by the holding company if its equity interest in the subsidiary company falls below 55% or 75%, being a listed company or a private limited company, respectively, as a consequence of disposal of shares. i.e. all of the benefits availed on account of group taxation would be reversed and would entail tax consequences.

Accordingly, the holding company shall be obliged to offer the amount of profit on which tax benefit was availed due to set off of losses surrendered by the subsidiary company. Surprisingly, this Sub-section omits the consequence of disposal of shares below the respective benchmark when the loss is surrendered between subsidiaries of the holding company.

Summarily, In view of the above, the suitable clarifications should be issued by the SECP to clarify that the minimum holding is required to be held post designation by SECP as a company eligible to avail group relief and should not be taken to be a condition precedent to such designation, furthermore, Tax officials i.e. FBR should provide sufficient information with regards to the said section so that the implementation would be easy and acceptable.

Best Regards,

hshamsi · 10-05-2009, 03:38 PM

@ above

in addition, if a group once adopts the group taxation cant revert their taxation method back to individual co taxation which is for sure the major obstacle for which the co's are reluctant' to adopt group taxation.

regards

Star · 10-05-2009, 06:10 PM

Dears,

Thank for comments. The main issue is to get the company listed in three years.

Regards,

*

hshamsi · 10-06-2009, 03:01 PM

@ abov

that wz a bit rude, wsnt that?! r u here to discuss things or to make ur own final decision?!

no hard feelings..

regards

faisal_desperado · 10-08-2009, 03:55 AM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by hshamsi
 @ abov

that wz a bit rude, wsnt that?! r u here to discuss things or to make ur own final decision?!

no hard feelings..

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

Dear,

Every person has its own discretion which may bound him/her to act accordingly, likewise,every entity has a distinct preference among the aforesaid issues, You might have considered some other aspects more important than others could have thought so.

Besides the above mentioned pitfalls, there are many others too, which were not explained due to assumptions that "it would be sufficient".

Regards,

hshamsi · 10-08-2009, 06:57 PM

@ abv

thats y i worte 'in addition' anyways..

regards

Star · 10-08-2009, 08:32 PM

Dear,

Listing requirement is one which do not attract groups to opt group taxation because some ppl do not want to go on listing on stock exchange.

For a group, which can easily avail credit line with banks and banks are ready to give, listing is not attractive.

Futher, the period of utilization of subsidiary's loss is also not attractable for the groups. On other side, after opting group taxation, revenue collection become easy for tax authorities. I understand that some more attraction / sweatner should be added through tax reforms to encourage the groups to opt group taxation.

If the parent company is engaged in trading business, then, whether group taxation can be opted and allowed under tax laws??

hshamshi,

May be wording of my post, as u felt,rude but no such intention was there to make my own decision. I think to come on forum and share my problems and knowledge on this forum is evident that i respect the opinions of others too.

Anyway, such would be avoided in future, if you felt like.

Regards,

*

faisal_desperado · 10-14-2009, 05:35 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 Dear,

Listing requirement is one which do not attract groups to opt group taxation because some ppl do not want to go on listing on stock exchange.

For a group, which can easily avail credit line with banks and banks are ready to give, listing is not attractive.

Futher, the period of utilization of subsidiary's loss is also not attractable for the groups. On other side, after opting group taxation, revenue collection become easy for tax authorities. I understand that some more attraction / sweatner should be added through tax reforms to encourage the groups to opt group taxation.

If the parent company is engaged in trading business, then, whether group taxation can be opted and allowed under tax laws??

hshamshi,

May be wording of my post, as u felt,rude but no such intention was there to make my own decision. I think to come on forum and share my problems and knowledge on this forum is evident that i respect the opinions of others too.

Anyway, such would be avoided in future, if you felt like.

Regards,

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

Dear,

As per Section 59B, subsection 2B "a company within the group engaged in the business of trading shall not be entitled to avail group relief.

Regards,

Star · 10-15-2009, 03:25 PM

Ok.

If the parent company is not engaged in trading, one of the subdidiaries is engaged in trading. Can that parent company opt group taxation without the subsidaiary enagaged in trading?

Regards,

*

faisal_desperado · 10-20-2009, 02:22 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Star
 Ok.

If the parent company is not engaged in trading, one of the subdidiaries is engaged in trading. Can that parent company opt group taxation without the subsidaiary enagaged in trading?

Regards,

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

Dear,
Exhibit the last post again, i.e."As per Section 59B, subsection 2B "a company within the group engaged in the business of trading shall not be entitled to avail group relief".

In case, any of the subsidiaries in engaged in the business of trading, the said option shall not be available to that subsidiary, however, it (subsidiary, not opting for) shall have to file his retrun, on the other hand, holding company forthwith subsidiaries, other than subsidiary who has not opted for, will be taxed as one fiscal unit.

Regards,

sirajmaari · 02-18-2010, 04:11 PM

dear i want to know what are the importnat points to have in mind for deciding whether to go for group taxation. i would be thakful to you for the positive response

faisal_desperado · 02-25-2010, 06:00 PM

Dear,
Your query has already been answered in detail, please read the aforementioned comments again so that you will be able to jot down sufficiently.

Let me know, if you are still unable to do so.

Regards,

Major · 09-15-2010, 05:30 PM

Sir Faisal, you have replied in excellent manner, i used your above article regarding group taxation in my presentation and i got very good marks.

Thanks for sharing such a valuable info.
please keep posting.