Understanding AOP taxation in Pakistan is crucial for partnerships and joint ventures. Under Section 92 of the Income Tax Ordinance, 2001, the Federal Board of Revenue (FBR) outlines clear tax rules for Associations of Persons (AOPs). This article explains how income from an AOP is taxed, including exemptions, conditions, and recent legal interpretations.
What is an AOP and How is It Taxed?
AOP as a Separate Tax Entity
Section 92 treats an Association of Persons (AOP) as a separate entity for tax purposes. This means the AOP, not its individual members, is primarily responsible for paying income tax.
Example:
If an AOP earns PKR 10 million, it must pay tax on this income. Members are not individually taxed on this portion.
Distribution of AOP Income to Members
Member Income is Exempt from Further Tax
After tax is paid by the AOP, the distributed income to members is exempt from further taxation.
Example:
If an AOP distributes PKR 1 million each to its members from already taxed income, those members do not pay additional tax on that amount.
Tax Treatment When an AOP Has Corporate Members
Corporate Shares Are Taxed Separately
If the AOP includes at least one corporate member, their share is excluded from the AOP’s income and taxed under corporate tax rates.
Example:
In an AOP with two individuals and one company, the company’s income is taxed separately, reducing the AOP’s total taxable income.
Audited Financial Statements Requirement for AOPs
Turnover Threshold: PKR 300 Million
If an AOP’s turnover exceeds PKR 300 million, it must submit audited financial statements. If it fails to comply, the member’s share of income becomes taxable.
Example:
An AOP earning PKR 350 million that doesn’t submit audited accounts will result in members being taxed on their share.
Tax Exemption for Exempt Activities
Exempt Income for AOP Means Exempt Income for Members
If an AOP is involved in an exempt activity under the Ordinance, any distributed income to its members remains exempt as well.
Example:
An AOP involved in agriculture (which may be exempt) distributes profits to members—this income is not taxed.
Legal Perspective: Disallowance of Inflated Expenses
ITA No. 847/2020 – Appellate Tribunal Decision
In ITA No. 847/2020, the Appellate Tribunal ruled that inflated expenses claimed by AOPs without proper documentary evidence are inadmissible. This highlights the importance of accurate record-keeping.
Why Understanding AOP Taxation Matters
Ensures Compliance and Reduces Tax Risk
- Helps members and AOPs understand their tax liabilities.
- Ensures fairness in taxation, especially for AOPs with corporate members.
- Prevents disqualification of exemptions due to non-compliance.
Final Thoughts
Properly managing AOP income tax under Section 92 ensures you avoid penalties and audits. Always maintain audited financials if your turnover is high and avoid claiming undocumented expenses. When in doubt, consult a tax advisor to ensure compliance with Pakistan income tax laws.