Simple Tax Guide for Americans in Pakistan
US Expat Taxes - Pakistan
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Pakistan for over 3 years. Our clients hail from various cities - Karachi, Lahore, Faisalabad and Islamabad.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Pakistan for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Pakistani Tax System for the American Expatriates.
As per Federal Budget 2019-2020 presented by Government of Pakistan, following slabs and income tax rates will be applicable for salaried persons for the year 2019-2020:
- Where the taxable salary income does not exceed Rs. 600,000 the rate of income tax is 0%.
- Where the taxable salary income exceeds Rs. 600,000 but does not exceed Rs. 1,200,000 the rate of income tax is 5% of the amount exceeding Rs. 600,000.
- Where the taxable salary income exceeds Rs. 1,200,000 but does not exceed Rs. 1,800,000 the rate of income tax is Rs. 30,000 + 10% of the amount exceeding Rs. 1,200,000.
- Where the taxable salary income exceeds Rs. 1,800,000 but does not exceed Rs. 2,500,000 the rate of income tax is Rs. 90,000 + 15% of the amount exceeding Rs. 1,800,000.
- Where the taxable salary income exceeds Rs. 2,500,000 but does not exceed Rs. 3,500,000 the rate of income tax is Rs. 195,000 + 17.5% of the amount exceeding Rs. 2,500,000.
- Where the taxable salary income exceeds Rs. 3,500,000 but does not exceed Rs. 5,000,000 the rate of income tax is Rs. 370,000 + 20% of the amount exceeding Rs. 3,500,000.
- Where the taxable salary income exceeds Rs. 5,000,000 but does not exceed Rs. 8,000,000 the rate of income tax is Rs. 670,000 + 22.5% of the amount exceeding Rs. 5,000,000.
- Where the taxable salary income exceeds Rs. 8,000,000 but does not exceed Rs. 12,000,000 the rate of income tax is Rs. 1,345,000 + 25% of the amount exceeding Rs. 8,000,000.
- Where the taxable salary income exceeds Rs. 12,000,000 but does not exceed Rs. 30,000,000 the rate of income tax is Rs. 2,345,000 + 27.5% of the amount exceeding Rs. 12,000,000.
- Where the taxable salary income exceeds Rs. 30,000,000 but does not exceed Rs. 50,000,000 the rate of income tax is Rs. 7,295,000 + 30% of the amount exceeding Rs. 30,000,000.
- Where the taxable salary income exceeds Rs. 50,000,000 but does not exceed Rs. 75,000,000 the rate of income tax is Rs. 13,295,000 + 32.5% of the amount exceeding Rs. 50,000,000.
- Where the taxable salary income exceeds Rs. 75,000,000 the rate of income tax is Rs. 21,420,000 + 35% of the amount exceeding Rs. 75,000,000.
Basis - Income tax is payable by salaried male individuals if taxable income exceeds PKR 200,000 and by female individuals if taxable income exceeds PKR 260,000. Income tax is payable by non-salaried individuals if taxable income exceeds PKR 100,000. These thresholds are effective from 1 July 2009.
Residence - An individual is considered resident for a tax year if he/she is in Pakistan for more than 182 days in that tax year.
Tax Filing status - Joint tax returns are not permitted; each individual must file a separate tax return.
Taxable income - As with corporations, taxable income is divided into "heads of income," which include income from employment, income from the exercise of a profession, income from property, capital gains and other income.
Capital gains - Capital gains are taxed as a head of income at the applicable personal income tax rate.
Tax Deductions and tax allowances - Deductions and allowances are available for the nonsalaried class, but not for the salaried class.
Social security - The employer must contribute to the Social Security Institution on behalf of the employee up to 6% of wages. No contribution is due on wages in excess of PKR 400 per day or PKR 10,000 per month.
Real property tax - A 6% tax is imposed on the value of real property.
Pakistan Tax year - Pakistan tax year is the financial year
Tax Filing and payment of tax - The tax return must be filed by 30 September.
Penalties - The penalty for failure to file a tax return is 0.1% of the amount of the tax payable for each day of default. The minimum penalty is PKR 500 and the maximum is 25% of the amount of tax payable.
Pakistan Corporate Tax Rates
Pakistan corporate tax rate is 29% of net taxable income of a company.
Residence - An entity is resident if it is registered under the law of Pakistan or its management and control is situated wholly in Pakistan.
Basis - Resident entities are taxed on worldwide business income; nonresidents pay tax only on Pakistan-source income.
Taxable income - Business income is taxed under the following "heads" of income: business income, capital gains and other income. The business income of resident entities and nonresident entities with a permanent establishment (PE) in Pakistan are taxed on a presumptive or a net taxable income basis. The normal mode of taxation is based on net taxable income basis. However, for nonresidents without a PE, the presumptive tax regime applies, which is final tax liability. Under the presumptive tax regime, gross income is charged to tax at a flat rate without any deductions for expenditure or allowances. Net taxable income is computed on the basis of specific rules and principles, and expenses are deducted from gross income. Resident taxpayers are taxed under the presumptive regime on income from dividends; property rentals; construction contracts; trading; commercial imports/exports; and brokerage and commissions.
Taxation of dividends - A resident entity pays tax at a rate of 10% on dividend income regardless of whether the dividends are Pakistan or foreign source. A nonresident pays tax at a rate of 10% on Pakistan source dividends.
Taxation of Capital gains - Capital gains are one of the heads of income and are taxed at the normal corporate rate. Gains derived from the sale of shares in publicly listed companies and listed instruments of redeemable capital are exempt from tax until 30 June 2010. Gains derived from the sale of capital assets held for more than 1 year are reduced by 25% for tax purposes and, therefore, 75% of the net gain is taxable at a rate of 35%.
Losses - Business losses (excluding losses from a speculative business) are allowed to be set off against taxable income earned during the same tax year under any head of income. Any excess losses may be carried forward for up to 6 years following the tax year. Losses from speculative businesses may be carried forward separately to the following tax year for set off against speculative business income for that year. Losses incurred by industrial undertakings set up in export processing zones may be carried forward indefinitely. A business loss may not be offset against income that is taxed under the presumptive tax regime.
Alternative minimum tax - The minimum turnover tax of 0.5% on the declared turnover by companies was reintroduced in the Finance Act, 2009, but loss-making resident entities are exempt under certain conditions.
Foreign tax credit - A resident entity may credit income tax paid outside Pakistan on its foreign-source income against its tax liability in Pakistan. The amount of the credit is the lesser of income tax paid abroad or the Pakistan tax payable on the foreign-source income.
Surtax - No
Participation exemption - No
Holding company regime -No, but see under "Consolidated tax returns".
Tax Incentives - To encourage investment in alternative energy power generation, a first year allowance of 90% of the cost of plant, machinery and equipment is available to residents and nonresidents.
Withholding tax:
Dividends - A withholding tax of 10% is levied on dividends paid to nonresidents unless the rate is reduced under a tax treaty.
Interest - A 30% withholding tax is levied on interest paid to nonresidents unless the rate is reduced under a tax treaty. The rate is 10% for residents.
Royalties - Royalties paid to nonresidents are subject to a 15% withholding tax unless the rate is reduced under an applicable tax treaty.
Branch remittance tax - A 10% tax is withheld on the remittance of profits abroad.
Other taxes on corporations:
Capital duty - Capital duty is levied at varying rates depending on the authorised capital.
Payroll tax - Payroll tax is imposed on slabs of income at rates ranging from 0.5% to 20%. The employer deducts tax from the payment of salary and remits that amount to the government on behalf of the employee. To support internally displaced individuals, a one-time tax of 30% is imposed on bonuses paid to corporate employees receiving salary income of PKR 1 million or more (for tax year 2010 only).
Real property tax - A 6% tax is imposed on the value of real property.
Social security contributions - Employers contribute to the Social Security Institution on behalf of employees up to 6% of wages. No contribution is due on wages in excess of PKR 400 per day or PKR 10,000 per month.
Stamp duty - Stamp duty equal to 1.5% of the nominal value of share transfers is levied.
Transfer tax - Subject to certain conditions, there is 5% tax on the on the gross sales price on any property or goods sold by auction.
Anti-avoidance rules:
Transfer pricing - While Pakistan does not have a specific transfer pricing regime, under the anti-avoidance rules, the tax authorities are authorised to distribute, apportion or allocate income, deductions or tax credits between associated companies to reflect income that would have been realised in accordance with the arm's length principle.
Thin capitalisation - The thin capitalisation rules provide that, where a foreign controlled resident company, other than a bank or financial institution, has a foreign debt-toequity ratio exceeding 3:1 at any time during a tax year, no deduction will be allowed on the part of the debt that exceeds the 3:1 ratio.
Other - The tax authorities may recharacterise a transaction that was entered into to avoid tax or where the transaction does not have substance, or the authorities may disregard a transaction that has no economic substance.
Controlled foreign companies - No
Disclosure requirements - No
Pakistan Tax year - The law provides for 2 types of tax years in Pakistan: a normal tax year (for the period ending 30 June) and a special tax year (i.e. a tax year approved by the tax authorities).
Consolidated tax returns - Holding companies and subsidiaries of a wholly owned group may opt to be taxed as a single fiscal unit.
Tax Filing requirements - For tax years ending between 1 January and 30 June, the tax return is due by 31 December. In other cases, the return is due by 30 September following the end of the tax year.
Penalties - The penalty for failure to file a tax return is 0.1% of the amount of the tax payable for each day of default. The minimum penalty is PKR 500 and the maximum is 25% of the amount of tax payable.
Rulings - A nonresident may obtain an advance ruling on the tax implications of any transaction or contract.
Pakistan sales Tax
The standard rate of Sales Tax in Pakistan is 17%.
Taxable transactions - Sales Tax is levied on the supply of goods and services, and the import of goods.
Sales Tax Registration - Registration is mandatory for manufacturers if turnover exceeds PKR 5 million; for retailers, if the value of supplies exceeds PKR 5 million; and for importers and other persons if required by another federal or provincial law.
Filing and sales tax payment - Sales Tax returns and payments must be made on a monthly basis.