Understanding Alternative Corporate Tax (ACT) in Pakistan

If you’re a corporate body in Pakistan, then understanding Alternative Corporate Tax (ACT) is crucial. This tax regime is applicable to all corporate bodies, except for some exclusions such as insurance companies, banking companies, and companies engaged in petroleum exploration and production. In this article, we’ll explain what ACT is and how to calculate it.

Applicability and Mechanics of ACT

A. Applicability Criteria:

• Who is subject to ACT? Resident companies and permanent establishments of non-resident companies.
• When did ACT come into effect? Tax year 2014 and onwards.
• How is the payable tax determined? The higher of Corporate Tax or Alternative Corporate Tax.
• Which income is subject to ACT? Income subject to tax under Division II of Part I of the First Schedule or minimum tax under any other provisions of the Income Tax Ordinance.
• Special considerations for banking companies: From tax year 2025 onwards, their profits and gains will be subject to general company tax rates under Division II of Part I of the First Schedule, impacting ACT applicability.

B. Rate of Tax:

• What is the ACT rate? Seventeen percent (17%) of a sum equal to “Accounting Income” less specified amounts.

C. Definitions:

• Accounting Income: Accounting profit before tax for the tax year, as disclosed in financial statements or adjusted, excluding share from an associate recognized under the equity method.
• Corporate Tax: The higher of the tax payable under Division II of Part I of the First Schedule and any minimum tax payable under other provisions of the Ordinance.
• Taxable Income for ACT: Accounting income reduced by specific exclusions under sub-section (8) of section 113C.

D. Exclusions from Accounting Income for ACT Calculation:

• Income exempt from tax.
• Income subject to final tax.
• Income with reduced tax under Part II of the Second Schedule.
• Donations eligible for a tax credit under section 61.
• Gains or losses from disposal of shares and securities of listed companies.
• Income from gain on disposal of immovable property.
• Gain on the disposal of debt securities.

E. Carry Forward of Excess ACT:

• What is “excess ACT”? When ACT paid exceeds Corporate Tax payable for a tax year.
• Can excess ACT be carried forward? Yes.
• How is it adjusted? Against tax payable under Division II of Part I of the First Schedule in subsequent tax years.
• What is the carry-forward limit? Not more than ten tax years immediately following the tax year of initial computation.
• Does this affect other minimum tax carry-forward entitlements? No.
• What happens if Corporate Tax or ACT changes? The carried-forward excess amount will be adjusted accordingly.

F. Tax Credits against ACT:

• Which tax credits can be applied against ACT? Section 64B (employment generation by manufacturers) and Section 65B (investment in plant and machinery).

G. Commissioner’s Authority:

• What authority does the Commissioner have regarding ACT? To make adjustments and compute accounting income based on historical accounting patterns, after giving the taxpayer an opportunity to be heard.

H. Advance Tax:

• What is included in “tax assessed” for advance tax purposes? Tax under section 113C (ACT), super tax (section 4C), and minimum tax (section 113).

I. Other Tax Provisions:

• Do taxes under provisions other than Division II of Part I of the First Schedule remain payable? Yes, according to their respective provisions.

Frequently Asked Questions

1. To which entities does the Alternative Corporate Tax (ACT) apply, and since when has it been in effect? The Alternative Corporate Tax (ACT) applies to resident companies and permanent establishments of non-resident companies. It has been in effect for tax year 2014 and onwards.
2. How is the ultimate tax payable by a company determined when considering both Corporate Tax and Alternative Corporate Tax? The tax payable by a company is determined as the higher of its Corporate Tax (as defined) or the Alternative Corporate Tax for the relevant income. This ensures a minimum tax liability is met.
3. Define “Accounting Income” for the purpose of ACT calculation, highlighting any specific exclusions mentioned. Accounting Income refers to the accounting profit before tax for the tax year, as disclosed in financial statements or as adjusted under specific sections. Notably, it excludes any share from an associate recognized under the equity method of accounting.
4. What is the standard rate at which the Alternative Corporate Tax is levied? What is this rate applied against? The Alternative Corporate Tax is levied at a rate of seventeen percent (17%). This rate is applied to a sum equal to the “Accounting Income” less certain specified excluded amounts.
5. List three specific types of income that are explicitly excluded from “Accounting Income” when calculating ACT. Three specific types of income excluded from “Accounting Income” for ACT calculation are: income that is exempt from tax, income that is subject to final tax, and gains or losses arising from the disposal of shares and securities of listed companies.
6. Explain the concept of “excess ACT” and how it can be utilized by a company in subsequent tax years. “Excess ACT” occurs when the ACT paid exceeds the Corporate Tax payable for a given tax year. This excess amount can be carried forward and adjusted against the tax payable under Division II of Part I of the First Schedule in subsequent tax years.
7. What is the maximum period for which excess ACT can be carried forward, and against which tax liability can it be adjusted? The maximum period for which excess ACT can be carried forward is not more than ten tax years immediately following the tax year in which it was first computed. It can be adjusted against tax payable under Division II of Part I of the First Schedule.
8. Identify two specific tax credits that are allowed to be applied against the Alternative Corporate Tax. Two specific tax credits allowed to be applied against the Alternative Corporate Tax are those under section 64B (employment generation by manufacturers) and section 65B (investment in plant and machinery).
9. Under what circumstances can the Commissioner make adjustments to a company’s accounting income for ACT purposes? The Commissioner has the authority to make adjustments and compute accounting income for ACT purposes based on the historical accounting pattern of a taxpayer. This can only be done after providing the taxpayer with an opportunity to be heard.
10. How does the definition of “tax assessed” for advance tax purposes incorporate the Alternative Corporate Tax? For advance tax purposes, the “tax assessed” is a broad term that includes not only tax under section 113C (Alternative Corporate Tax) but also super tax (section 4C) and minimum tax (section 113).

Glossary of Key Terms

• Alternative Corporate Tax (ACT): A component of the tax regime for companies that applies in specific scenarios to ensure a minimum tax liability, calculated at a rate of 17% of adjusted Accounting Income.
• Resident Company: A company that is considered a tax resident in the jurisdiction, subject to its full tax laws.
• Permanent Establishment of a Non-Resident Company: A fixed place of business through which the business of a non-resident company is wholly or partly carried on in a jurisdiction, making it subject to local taxation.
• Tax Year: The annual accounting period for which taxes are calculated, typically a calendar year or a fiscal year.
• Corporate Tax: The higher of the tax payable by a company under Division II of Part I of the First Schedule and any minimum tax payable under other provisions of the Ordinance.
• Division II of Part I of the First Schedule: A specific section of the tax law that outlines the general corporate tax rates and provisions applicable to companies.
• Minimum Tax: A tax liability imposed to ensure that certain taxpayers, even with deductions or credits, pay a basic level of tax.
• Accounting Income: The accounting profit before tax for the tax year, as disclosed in a company’s financial statements or as adjusted under specific tax code sections, excluding certain items like share from an associate under equity method.
• Equity Method of Accounting: An accounting method used by a company to report its investment in another company, where the investor records its share of the investee’s income or loss.
• Taxable Income for ACT: The specific amount of accounting income, reduced by certain statutory exclusions, that is used as the base for calculating the Alternative Corporate Tax.
• Exempt Income: Income that is not subject to tax under the provisions of the tax law.
• Final Tax: A tax regime where the tax deducted or paid on certain income is considered the final tax liability, and no further assessment is made on that income.
• Tax Credit: A direct reduction in the amount of tax owed, as opposed to a deduction which reduces taxable income.
• Section 61 (Donations): A specific provision in the tax law allowing for a tax credit for eligible donations.
• Shares and Securities of Listed Companies: Financial instruments representing ownership stakes or debt obligations in companies whose shares are traded on a stock exchange.
• Immovable Property: Real estate, land, and anything permanently attached to it.
• Debt Securities: Financial instruments representing a loan made by an investor to a borrower, such as bonds or debentures.
• Excess ACT: The amount by which the Alternative Corporate Tax paid by a company exceeds its Corporate Tax payable for a given tax year.
• Carry Forward: The process of taking a tax attribute (like excess ACT or losses) from the current tax year and applying it to future tax years.
• Section 113C: The specific section of the Income Tax Ordinance that details the provisions for the Alternative Corporate Tax.
• Section 64B (Employment Generation by Manufacturers): A provision allowing a tax credit for manufacturers that meet certain criteria related to employment generation.
• Section 65B (Investment in Plant and Machinery): A provision allowing a tax credit for companies making investments in specific plant and machinery.
• Commissioner: A high-ranking tax official responsible for the administration and enforcement of tax laws.
• Advance Tax: Provisional tax payments made periodically throughout the tax year, based on estimated income, to avoid a large tax bill at year-end.
• Super Tax (Section 4C): An additional tax sometimes levied on certain categories of income or companies, as specified in the tax law.
• Section 113 (Minimum Tax): A general provision in the Income Tax Ordinance for minimum tax liability.

Conclusion

In summary, ACT is a tax regime that is applicable to all corporate bodies in Pakistan, except for some exclusions. To calculate ACT, you need to subtract exempt income, income other than NTR or minimum tax, capital gain, and income subject to tax credit u/s 100C from accounting income. If ACT is higher than CT, then the amount is carried forward to the next tax year and subsequently adjusted against the CT. Always ensure that you comply with the regulations and exclusions of ACT to avoid any legal issues.