Expenses with Special Treatment (Tax vs Acc)

Question 1

What are expenses / deductions where special treatments (Other than IFRS & DNAs) provided

7

Answer 1

1. Dep/Amm - Rates and method
2. PCE - allowed with incl/excl
3. Scientific/Rsearch exp - activity & spending (both) in Pak.
4. Employee Training Facilities (Education & Hospital) - only Opex; for approved-both Pakistanis & Foreginers; for non-approved - Pakistanis only
5. Lease - all leases operating leases; PTV-NPfH 2.5M Prinicpal max
6. Interest exp (PoD) - charging from date of utilization; used For CAPEX, not allowed rather dep.;to cover islamic terminologies also
7. Bad Debts- only for P&L amounts (i.e previously income, not for advances/loans, etc); on subsequesnt recovery Amount not allowed +- with actual recovery

Question 2

Pre-commencement Expenses

How is treatment different than Accounting

Answer 2

1. Allowed as deduction - St Line 20%
2. Only when profits available
3. for business only, not for entity (like SEC registration)
4. 1+3-3 conditions

• 1- General - incurred before commencement
• 2 - 3 inclusions by name - feasibility/prototype/trial Prod
• 3 - 3 exclusions - Dep. assets/land acquisition exp/amortization

Question 3

Scientific Research

1. CAPEX?
2. Spending in Country or Activity?
3. Own spending or Contribution?

Answer 3

Only Opex

Both in Pakistan

Both allowed

Question 4

Employee Training

OPEX or CAPEX

What kind of facilities

Pakistanis or Foreigners

Answer 4

Only Opex

Education & Hospital for employees

Training Scheme exp - aapproved, for Pakistanis (whether employees/non employees)

(Ind.) Training Institution - recognised or aided or run by Govt (any person local/foreigner)

Question 5

Interest

PoD

When will start for new loans

What about CAPEX Loan

Islamic Loans

Answer 5

Expense allowed when loan utilized for business, not when credited

Interest for CWIP loan not allowed, only dep. when capitalized

Islamic profits allowed

Securitization of receivables (with SPV) allowed as Finance cost

Question 6

Lease

Tax vs Accounting

3 important points in section

How much WHT on lease payments

What happens when asset is transferred to Lessee

on maturity/on cancellatio of lease

Answer 6

All leases - Operating leases, deduction of LP no dep for lessee

3 important points

1. Lease from bank, FI, FBR approved modaraba or leasing
2. SPV charges allowed
3. SPV-NPfH - Prinicipal deduction Cap 2.5M

No WHT on lease/SPV payments

Residual value on maturity=Cost of asset for lessee (Disregard FMV), dep on that value, no IA

Residual value on cancellation=FMV of asset

Question 7

What heads of income are taxed on cash basis

Conditions for Bad debts

What happens with subsequest recovery

Answer 7

Salary & IFOS - cash

2 conditions

1. Previous part of income & taxed (advance/loan/BS items can not be)
2. Decision (by managemnet) not recoverable

Subsequent

Recovery > not allowed amount - difference add to income

Recovery < not allowed amount - difference add to expense

Question 8

Dep/Amm

Answer 8

IA-EDAs (other than F&F, used assets)

Dep-reducing balance

Ammortization - any expense with useful life more than 1 year, in case life not ascertainable 25 years