Tax Challenges Faced by Multinational Companies Operating in Pakistan

Introduction

Pakistan, a strategically located emerging economy, continues to attract multinational corporations (MNCs) across sectors such as energy, FMCG, telecom, pharmaceuticals, and digital services. While the country presents substantial business opportunities, operating within Pakistan’s complex tax regime can be challenging—especially for multinational companies that must navigate multiple tax layers, compliance obligations, transfer pricing rules, and regulatory scrutiny.

This article provides a comprehensive overview of the key tax challenges faced by multinational companies (MNCs) in Pakistan, the underlying legal framework, implications for compliance and operations, and strategies for mitigating tax risks.

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1. Overview of Pakistan’s Tax Environment

Pakistan’s tax system is governed by multiple authorities, primarily:

• Federal Board of Revenue (FBR) – Direct and indirect taxes

• Provincial Revenue Authorities (PRA, SRB, KPRA, BRA) – Sales tax on services

• Securities and Exchange Commission of Pakistan (SECP) – Corporate compliance

• State Bank of Pakistan (SBP) – Foreign remittance and exchange controls

MNCs are subject to:

✅ Corporate income tax
✅ Withholding taxes (WHT)
✅ Sales tax and federal excise duty (FED)
✅ Minimum tax and super tax
✅ Transfer pricing regulations
✅ Customs duties on imports
✅ Provincial sales tax on services

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2. Corporate Taxation Challenges

A. Complex and High Corporate Tax Structure

The corporate tax rate in Pakistan (2025) is:

• 29% for companies (excluding small and special sectors)

• Additional super tax for high-income sectors (gradually phased in from 2022)

• Minimum tax (1.25%) on turnover, regardless of profitability

Challenge:
Even loss-making or early-stage subsidiaries of MNCs must pay minimum tax, creating a cash flow burden.

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B. Uncertainty Around Super Tax

Introduced under the Finance Act 2022, the Super Tax (ranging up to 10%) applies to sectors like:

• Banking

• Tobacco

• Airlines

• Beverages

• Oil and gas

• Fertilizers

Challenge:
Frequent changes in rates, applicability, and retrospective enforcement of super tax create tax uncertainty and budgeting difficulties for multinationals.

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3. Withholding Tax (WHT) Regime Complications

A. WHT on Dividends, Royalty, and Technical Services

MNCs face high WHT rates, especially on cross-border payments:

Challenge:
Navigating DTA (Double Taxation Agreement) provisions with Pakistan is complex, and failure to comply with treaty disclosure requirements can lead to disallowance of expense deductions.

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B. WHT as a Collection Tool

Pakistan applies withholding tax on over 45+ transaction types, including:

• Imports and contracts

• Rent

• Services and commissions

• Dividend income

• Foreign payments

Challenge:
The deductibility and adjustability of WHT varies—leading to:

• Double taxation risks

• Refund delays

• Tax reconciliation complexity

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4. Sales Tax and Provincial Tax Complexity

A. Federal vs. Provincial Jurisdiction Conflicts

• Goods: Subject to 17% sales tax under FBR

• Services: Subject to 13%–16% provincial sales tax under PRA, SRB, KPRA, BRA

Challenge:
Multinational service providers may be taxed by multiple provinces for the same service, leading to double taxation, litigation, and input tax disputes.

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B. Digital Services and VAT on Foreign Tech Firms

• Foreign service providers (e.g., SaaS, cloud, consulting) must register for Sales Tax on Services

• Pakistan has introduced VAT-like rules for non-resident digital suppliers

Challenge:
MNCs operating without a permanent establishment are still required to:

• Register with provincial tax authorities

• Collect and remit tax from Pakistani users

• Face penalties for non-compliance, even without physical presence

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5. Transfer Pricing Compliance and Audits

Pakistan has adopted OECD-aligned Transfer Pricing Rules under Sections 108–109 of the Income Tax Ordinance.

A. Requirements for MNCs:

• Maintain contemporaneous transfer pricing documentation

• Prepare:

  • Master File

  • Local File

  • Country-by-Country Report (CbCR) (if applicable)

Challenge:
SECP and FBR have increased scrutiny, especially on:

• Intra-group loans

• Management fees

• Inter-company service agreements

Non-compliance may lead to profit adjustments, additional taxes, penalties, and double taxation.

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6. Regulatory and Compliance Burden

A. SECP Corporate Filings

MNC subsidiaries must file:

• Form A/B – Annual return

• Form 29 – Director changes

• Form C – Special resolutions

• Form 45 – UBO declarations

Challenge:
Late filings or errors lead to heavy daily penalties and legal notices.

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B. Documentation Overload

MNCs must maintain:

• Audited accounts

• Tax filings

• Withholding certificates

• Import/export records

• Bank reconciliations

• SECP statutory registers

• Foreign remittance approvals (SBP)

Challenge:
Poor integration between financial, tax, and legal teams leads to compliance gaps.

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7. Customs and Import Duties

MNCs engaged in manufacturing or retail must deal with:

• High import duties

• Additional customs duty (ACD)

• Regulatory duty (RD)

• Valuation challenges by Pakistan Customs

Challenge:
Frequent policy changes and valuation rulings often conflict with transfer pricing and global pricing structures, causing:

• Import delays

• Higher working capital lock-in

• Disputed assessments

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8. Tax Refund Delays and Dispute Resolution

A. Income Tax Refunds

WHT overpayment or minimum tax scenarios result in huge refund claims, but:

• Refund processing is delayed

• FBR requires extensive scrutiny

• Businesses suffer from cash flow stress

B. Lack of Efficient Dispute Resolution

• Tax appeals take 2–3 years or more

• Advance ruling mechanism under-utilized

• ADR (Alternate Dispute Resolution) lacks clear timeline and enforceability

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9. Permanent Establishment (PE) Exposure

MNCs operating without a local subsidiary (e.g., via distributors, agents, or digital presence) may be deemed to have a PE in Pakistan under tax treaties or domestic law.

Challenge:
This leads to:

• Unexpected tax liabilities

• Requirement to file income tax returns

• Sales tax on services registration

• Interest and penalties for past non-compliance

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10. Common Tax Challenges for MNCs: At a Glance

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11. Strategies to Navigate Tax Challenges in Pakistan

✅ Conduct Regular Tax Health Checks

• Assess exposures in income tax, GST, payroll, WHT

• Benchmark transfer pricing with OECD and local comparables

✅ Maintain Centralized Documentation

• Build a tax compliance calendar

• Create an integrated system for invoices, challans, contracts, and filings

✅ Leverage Double Taxation Treaties

• Claim reduced WHT rates via DTAs

• Ensure treaty documentation is filed with each remittance

✅ Automate Tax Calculations and Reporting

• Use ERP systems (SAP, Oracle, QuickBooks) for real-time compliance

• Link POS to provincial sales tax portals

✅ Work With Local Tax Experts

• Engage FBR-approved tax advisors

• Use legal representation in audits or appeals

• Consult transfer pricing professionals for group transactions

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12. Role of Technology in Tax Compliance

Modern tax tools help multinationals:

• Generate electronic tax invoices

• Integrate ERP with IRIS and PRA/SRB portals

• Reconcile withholding taxes with vendor payments

• Generate automated transfer pricing reports

• Monitor filing status across multi-entity structures

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13. Frequently Asked Questions (FAQs)

Q1: Do MNCs have to register with multiple provincial tax bodies?
Yes, if they render services in more than one province, they must register separately with PRA, SRB, KPRA, and BRA.

Q2: Can a foreign company without a local office be taxed in Pakistan?
Yes, under PE rules or Sales Tax on Services, foreign digital service providers are taxable.

Q3: Are all payments to foreign parent companies subject to WHT?
Yes, unless covered by a DTA and properly documented with Form 107/108 under SBP rules.

Q4: Is transfer pricing documentation mandatory every year?
Yes. All MNCs must maintain local file, master file, and file CbCR if applicable.

Q5: How can MNCs manage tax refunds better?
By regularly filing accurate reconciliations, using FBR’s online refund modules, and following up with a dedicated tax representative.

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14. How Sterling.pk Can Help Multinational Companies

At Sterling.pk, we offer tailored tax advisory and compliance solutions for MNCs:

✅ Corporate tax planning and filing
✅ Transfer pricing documentation and audit defense
✅ WHT and DTA advisory
✅ Sales tax registration and return filing across provinces
✅ Tax due diligence for cross-border transactions
✅ SECP filings and corporate secretarial services
✅ Handling audits, notices, and appeals with FBR or SECP

With our deep understanding of Pakistan’s regulatory framework and global tax experience, we help your company stay compliant, efficient, and protected.

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Conclusion

Operating in Pakistan as a multinational company offers immense potential—but it also comes with a multi-layered tax regime that requires proactive management. From withholding taxes and sales tax on services to transfer pricing and SECP filings, compliance must be strategic and continuous.

By understanding the challenges and obligations outlined above—and partnering with tax professionals like Sterling.pk—MNCs can successfully navigate Pakistan’s tax landscape and focus on sustainable growth.