KARACHI: The Finance Act 2015 has introduced a tax on undistributed profits, says Institute of Chartered Accountants of Pakistan (ICAP).
According to the new provision (5-A of the Income Tax Ordinance 2001) tax at the rate of 10% of undistributed profits has been imposed on public companies, other than a scheduled bank and modaraba, that derive profits in a tax year but do not distribute a certain amount of profit for year as cash dividend within 6 months of the end of the year.
For clarity in interpretation and disclosure The Institute of Chartered Accountants of Pakistan (ICAP) has issued guidance vide Circular 6 of 2015.
Companies at the end of their financial year are not legally obligated to tax unless the Requisite Time for payment of the Requisite Dividend has elapsed which is the key determinant for the taxation of the reserves in the given scenario; the recognition of any liability in this respect as at the financial year end is not considered necessary keeping in view the underlying substance. Accordingly, any liability in this respect should only be recognised when the Requisite Time expires without the company having distributed the Requisite Dividend.