I would like to thank the organizing
committee of the AOTCA Conference for inviting me to present
my paper on Non-Resident Taxation with reference to the
Double Taxation Agreement entered between Pakistan and the
AOTCA Countries. It is indeed a great privilege for me to
be a co-speaker with Dr. Ishrat Hussain, the Honorable Governor
of State Bank of Pakistan and to be addressing the top tax
consultants of the Asia Pacific countries. In this presentation
I have made an attempt to highlight the Taxation of the
non-citizens of Pakistan and the non-residents in the light
of the provisions of the Income Tax Ordinance, 2001 and
also compare the provisions of avoidance of double taxation.
Pakistan has entered with the member countries of AOTCA
and their impact in the light of the case laws decided by
the Pakistani Courts.
The Income Tax Ordinance, 2001 has basically changed
the concept of International Taxation keeping in view
the Pakistan's basic goal to attract foreign investment.
An effort has been made to design the provisions of the
new Income Tax Ordinance, 2001 in such a manner that they
attract foreign investment and provide hassle free flow
of international trade. Although, in the first part of
my paper I shall be discussing the provisions, which provide
for taxation of foreign entities in Pakistan but at this
juncture I feel that it is appropriate to point out that
the under section 107 of the new Income Tax Ordinance,
the Federal Government has been empowered to enter into
an agreement with the Government of Foreign Countries
for avoidance of double taxation and prevention of fiscal
evasion with respect of taxes, on income, imposed under
this ordinance.
The Federal Government has also been authorized to notify
such agreements for their implementation. It has been
categorically affirmed that the agreement and the provisions
made by such notification for implementing the agreement
shall override, the provisions contained in any law for
the time being in force. These provisions for the following
situations:
(a) Relief from the tax payable under the Ordinance.
(b) The determination of the Pakistan-source income
of non-resident persons :
(c) Where all the operations of a business are
not carried on within Pakistan, the determination of the
income attributable to operations carried on within and
outside Pakistan, or the income chargeable to tax in Pakistan
in the hands of non-resident persons, including their
agents, branches, and permanent establishments in Pakistan.
(d) The determination of the income to be attributed
to any resident person having a special relationship with
a non-resident person ; and
(e) The exchange of information for the prevention
of fiscal evasion or avoidance of taxes on income chargeable
under the Ordinance and under the corresponding laws in
force in that other country.
It may be noted that Superior Courts of various countries
in numerous cases have approved the view that provisions
of agreement overrides the general provisions of law on
the basis of maxim "Special laws override General
laws" .
With this background I would now like to outline the
concept of taxation of foreign entities including foreign
individuals who have become residents for the purpose
of Pakistani Tax Laws. Sub-sections (5) & (6) of section
11, which is titled Heads of Income defines as to which
income of residents and non-residents are taxable in Pakistan.
These sub-sections are reproduced as under:
"Section 11: (5) The income of a resident
person under a head of income shall be computed by taking
into account amounts that are Pakistan-source income and
amounts that are foreign-source income.
(6) The income of a non-resident person under
a head of income shall be computed by taking into account
only amounts that are Pakistan-source income."
This is a new concept as far as the Pakistani Tax Code
is concerned and by this concept the Pakistan has adopted
the Source Principle while legislating the fiscal statutory
provisions of International Taxation. As a consequence
of the adoption of the above principle, the Pakistani
source income and the foreign source income have been
defined in sections 101, 102, 103, 104 and taxation of
non-resident is dealt with section 105 to understand the
implications of the above provisions, it will be appropriate
to reproduce the above provisions of law:
101- Geographical source of income:
(1) Salary shall be Pakistani source of income
to the extent to which the salary-
(a) is received from an employment exercised in Pakistan,
wherever paid; or
(b) is paid by or on behalf of the Federal Government,
a Provincial Government, or a local authority in Pakistan
wherever the employment is exercised.
(2) Business income of a resident person shall
be Pakistan source income to the extent to which the income
is derived from any business carried on in Pakistan.
(3) Business income of non-resident person shall
be Pakistan source income to the extent to which it is
directly or indirectly attributable to-
(a) a permanent establishment of the non-resident person
in Pakistan
(b) sales in Pakistan of goods or merchandise of the
same or similar kind as those sold by the person through
a permanent establishment in Pakistan or
(c) other business activities carried on in Pakistan
of the same or similar kind as those effected by the non-resident
through a permanent establishment in Pakistan.
(4) Where the business of a non-resident person
comprises the rendering of independent services (including
professional services and the services of entertainers
and sports person) the Pakistan source business income
of the person shall include (in addition to any amounts
treated as Pakistan source income under sub-section 3
any remuneration derived by the person where -
a) the remuneration is paid by the resident person or
borne by a permanent establishment in Pakistan of a non-resident
person and
b) the aggregate gross amount (before deduction of expenses)
of the remuneration is sixty thousand rupees or more.
(5) Any gain from the disposal of any asset or
property used in deriving any business income referred
to in sub-sections (2), (3) or (4) shall be Pakistan source
income.
(6) A dividend shall be Pakistan source income
if it is paid by a resident company.
(7) Profit on debt shall be Pakistan source income
if it is-
a) paid by a resident person, except where the profit
is payable in respect of any debt used for the purposes
of a business carried on by the resident outside Pakistan
through a permanent establishment; or
b) borne by a permanent establishment in Pakistan of
a non-resident person.
(8) A royalty shall be Pakistan source income if
it is-
a) paid by a resident person, except where the royalty
is payable in respect of any right, property, or information
used, or services utilized for the purposes of a business
carried on by the resident outside Pakistan through a
permanent establishment; or
b) borne by a permanent establishment in Pakistan of
a non-resident person.
(9) Rental income shall be Pakistan source income
if it is derived from the lease of immovable property
in Pakistan whether improved or not, or from any other
interest in or over immovable property, including a right
to explore for, or exploit, natural resources in Pakistan.
(10) Any gain from the alienation of any property
or right referred to in sub-section (9) or from the alienation
of any share in a company the assets of which consist
wholly or principally, directly or indirectly, of property
or rights referred to in sub-section (9) shall be Pakistan
source income.
(11) A pension or annuity shall be Pakistan source
income if it is paid by a resident or borne by a permanent
establishment in Pakistani of a non-resident person.
(12) A technical fee shall be Pakistan source
income if it is-
a) paid by a resident person, except where the fee is
payable in respect of services utilized in a business
carried on by the resident outside Pakistan through a
permanent establishment; or
b) borne by a permanent establishment in Pakistan of
a non-resident person.
(13) Any gain arising on the disposal of shares
in a resident company shall be Pakistan source income.
(14) Any amount not mentioned in the preceding
sub-sections shall be Pakistan source income if it is
paid by a resident person or borne by a permanent establishment
in Pakistan of a non-resident person.
(15) Where an amount may be dealt with under sub-section
(3) and under another sub-section (other than sub-section
(14), this section shall apply-
a) by first determining whether the amount is Pakistan
source income under that other sub-section; and
b) if the amount is not Pakistan source income under
that sub-section, then determining whether it is Pakistan
source income under sub-section (3).
(16) An amount shall be foreign source income
to the extent to which it is not Pakistan source income.
