ADITFinalThesis PDF

See discussions, stats, and author profiles for this publication at: https://www.researchgate.
net/publication/317998388
Taxation of Non-Residents under Income Tax Law of Pakistan
Article in SSRN Electronic Journal · January 2014

DOI: 10.2139/ssrn.2766138
CITATIONS READS
0 643
1 author:
Basil Siddique
Nottingham Trent University
5 PUBLICATIONS 0 CITATIONS
SEE PROFILE
Some of the authors of this publication are also working on these related projects:
Research Project View project
Translation View project
All content following this page was uploaded by Basil Siddique on 23 March 2018.
The user has requested enhancement of the downloaded file.

2014
An Analysis of Taxation of
Non-Residents under
Income Tax Law of Pakistan
ADIT Reg. 195510 &

Thesis Ref: T – ADIT 151
Thesis for Advanced Diploma in
International Taxation (ADIT)
1/15/2014
“ADIT” THESIS AN ANALYSIS OF TAXATION OF NON-RESIDENTS UNDER INCOME TAX LAW OF PAKISTAN
1
This
Research
Thesis is written
as a part of completion of
Advance Diploma in International
Taxation of the Chartered Institute of Taxation
o f United
Kingdom
AND the
Document
is dedicated
to the charm
and warmth
of all the disabled children
of the world, suffering from Krabbe Disease.1
1 This dedication was written almost during the middle of writing this Thesis. Yet on 2 nd December, 2013 my six years old daughter,
Zohha Basil, suffering from Karabbe Disease since last five years passed away. Without modifying a single word of the dedication, I
wish, she to equally shares the dedication with full of my zeal and enthusiasm.
2
CONTENTS
1. ABSTRACT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 5
2. INTRODUCTION _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 7
 Legislative History of Income Tax Law

 Constitutional Validity of Income Tax
3. CHARGEABILITY OF INCOME TAX (TAX ON TAXABLE INCOME) _ _ _ _ _ _ 15
 Subject to the Ordinance…

 Charge is one every ‗person‘
 Tax is specifically for a tax year
 Tax is payable on prescribed rates
 Tax is imposed on taxable income only
4. CATEGORIES OF PERSONS _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 20
 Individual
 Association of Persons
 Company
5. TEST OF RESIDENCE _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 29
 Test of Residence of an Individual

 Test of Residence of an Association of Persons
 Test of Residence of a Company
6. GEOGRAPHICAL SOURCE OF INCOME _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 33
7. TREATMENT OF CERTAIN PAYMENTS TO NON-RESIDENTS _ _ _ _ _ _ _ _ 37
 Payments on Account of ‗Royalty‘ and ‗Fee for Technical Services‘

 Tax on Shipping and Air Transport Income
8. TREATMENT OF PERMANENT ESTABLISHMENT OF NON-RESIDENTS _ _ 42
9. WITHHOLDING PROVISIONS _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 45
3
10. ADVANCE RULING _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 50
11. EXEMPTIONS AVAILABLE TO NON-RESIDENTS _ _ _ _ _ _ _ _ _ _ _ _ _ _ 57
 Exemptions under Part I of Second Schedule to the Ordinance

 Exemptions under Part II of Second Schedule to the Ordinance
 Exemptions under Part III of Second Schedule to the Ordinance
 Exemptions under Part IV of Second Schedule to the Ordinance
12. DOUBLE TAXATION AGREEMENTS _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 60
13. THIN CAPITALIZATION _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 71
14. CONCLUSIONS AND RECOMMENDATIONS: (REVAMPING THE NON-

RESIDENTS‟ TAX REGIME) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 75
BIBLIOGRAPHY _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 79
**********
4
1. ABSTRACT
Every enactment of law has some specific purpose. The present Income Tax Law of
Pakistan, i.e. Income Tax Ordinance, 2001, herein after referred as ‗Ordinance‘, was
promulgated in Pakistan in 2002 with effect from 1st day of July 2002. Earlier the Income
Tax matters, in this part of the world, were governed by the Income Tax Ordinance, 1979.
Examining the intent of the legislature for the Income Tax Law, mens or sentential legis2,
the aim of enactment was / is to charge, levy and collect tax on income of persons all over
Pakistan. Inclusively defining the terms ―Income‖, and exhaustively explaining the
meanings of ―Person‖, the Ordinance, then lays down principles of charging, levying and
collecting taxes on income of persons. These principles, through the study of the Ordinance
in general and the provision of Section 80 of the Ordinance in particular, manifest three
categories to be treated as persons under the Income Tax Law of Pakistan:
1. An Individual;
2. A Company or Association of Persons incorporated, formed, organized or
established in Pakistan or elsewhere;
3. The Federal Government, a Foreign Government, a Political Sub-Division of a
Foreign Government, or a Public International Organization.
It qualifies attention that incidence of taxation of these categories varies with the factor of
residence in Pakistan, whether the taxpayer is Resident or it is a Non-Resident. The test of
residence of an Individual, revolves around a question of his aggregate stay in Pakistan in
a Tax Year3, while for the second category listed at serial number 2 above, the test is
2SALMOND: “Jurisprudence”, 11th Edition, p. 951. “The object of interpreting a statute is to ascertain the intention of the legislature
enacting it:” South Asia Industries (Pvt) Ltd. V. S. Sarup Singh, AIR 1966 346, p. 348: 1965 (3) SCR 829.
3 For the purpose of Income Tax Law, Section 74 of the Ordinance, along with other some principles, lays down that Tax Year is a
period of twelve months ending on the 30th day of June and is denoted by the calendar year in which the said date falls; Go the page
18 of this Paper for clarification.
5
conducted on the basis of their ―control and management affairs‖ whether wholly and
exclusively situated in Pakistan or not and also on the basis of ―Permanent Establishment‖
in relation to that person. Based on the principles of residence, the chargeability of tax then,
varies under the Income Tax Law of Pakistan, with the factor of taxpayer‘s residential
status.
The present paper, An Analysis of Taxability of Non-Residents under Income Tax Law of
Pakistan‖ is a thesis towards completion of Advanced Diploma in International Taxation
(ADIT) of the Chartered Institute of Taxation, UK. It is also an attempt to add to the
academic taxation literature, exploring and analyzing the important provisions of Pakistan‘s
Income Tax Law with respect to taxability of Non-Residents, based on their residential
status, together with identifying the bottlenecks and proposing necessary amendments in
the same.
**********
6
2. INTRODUCTION
The subject of taxation is one of the cornerstones of all the political regimes. It is extremely
vast and complicated, yet it remains focus of most of the economists and tax professionals
over the decades. This discipline has risen to even further prominence in the post-cold war
era of globalization and interdependence, when the countries referred as, late-comers to
join the process of industrialization, were eager to attract foreign capital as foreign direct
investment for development of their social capital and physical infrastructure. However
these countries had to face considerable pressure to minimize taxes on the income earned
by the prospective foreign investors, even realizing that the reduction in the tax rates on the
income of the foreigners has numerous political and economic compromises. Yet it does
attract foreign investment in this way, though it may not be the only way of attracting foreign
investment.
Pakistan, a late-comer too is also an extremely eager nation to foreign direct investment. It
understands that its prime concern of economic growth and development is not achievable
without infusion of outside capital. But investment by expatriates and / or other nationals of
the world, under the prevailing law and order situation in Pakistan, is perceived as
extremely risky and insecure. This risk is further compounded by the frequent amendments
in the tax statutes of Pakistan. Accordingly a cautious investor cannot anticipate tax liability
on his investment in the country with reasonable level of certainty, even in this age of
globalization with easy flow of knowledge, capital and manpower.
The age of globalization is not new to the world. The world is not witnessing this
phenomenon for the first time. The first period of globalization, as the political scientists put-
forth, was the one from 1870 to 1914. These two ages of globalization are distinguishable
from one another in a way that in the previous age, before immigration restrictions, labor
7
was as mobile as capital. Yet under the present age of globalization, the world is witnessing
higher rate of capital flight than the labor movement. This increased rate of capital mobility
is attributable to two factors: 1) Unprecedented increase in technological innovations, and
2) Tax competition between sovereign states. In fact the states, willing to attract foreign
investment, prefer to lower their tax rates on income earned by foreigners (herein after
referred as ―non-residents‖ for the purpose of this thesis within the meanings of Income Tax
law of Pakistan) within their geographical jurisdictions and source of income. Yet this, in
turn creates, sort of disparity between taxability of the indigenous citizens of the sovereign
state (Herein after referred as residents) and the non-residents. Similar sort of dichotomy
exists under the Income Tax Law of Pakistan as well, however, this thesis is not aimed at to
make a comparison of taxability of residents and non-residents, instead it analyzes the
taxation principles of non-residents under the Income Tax Law of Pakistan.
Legislative History of Income Tax

Pakistan became a sovereign state in 1947, yet the British, of which Pakistan had been a
colony, had introduced modern income taxation in this part of the world i.e. in Indo-Pakistan
sub-continent, in 1860 by introduction of Income Tax Act, 1860, with an aim to end
budgetary deficit which immediately followed the War of Independence of 1857. As at the
very time of inception, the tax was presumed to be non-permanent, hence the same was
soon repealed in 1865. However the income taxation was re-introduced in 1886 by
promulgation of Income Tax Act, 1886 with remarkable improvements in the earlier
provisions. This law was so professionally drafted that many of its fundamental concepts
could find place even in the present income tax law of Pakistan such as the definition of
―Agricultural Income‖. The Act remained in force till 1918, when it was repealed by Income
Tax Act, 1918. Yet at that time, another parallel Act, Super Tax Act of 1917 was also in
8
force. Thus the both were consolidated in 1922 in another Act called, Income Tax Act,
1922.
India and Pakistan emerged on the map of the world as independent states on 14 th and 15th
August, 1947 respectively. Till thirty two years of independence of Pakistan, the income tax
matters were governed by the Income Tax Act of 1922 with certain amendments introduced
from time to time till 1979, when a new Income Tax Law i.e. Income Tax Ordinance, 1979
was introduced with effect from 1st day of July 1979. This law remained in force in Pakistan
for twenty three years, when the same was repealed by another Income Tax Law i.e.
Income Tax Ordinance, 2001. This Tax Statute, when introduced, was not a welcome
change in law. It fetched numerous criticisms from all over Pakistan. Huzaima Bukhari &
Dr. Ikramul Haq4, observed:
After 23 years of its (Income Tax Ordinance, 1979) existence, when substantive
amendments and judicial pronouncements made it a workable, better
understandable and acceptable piece of legislation for everybody, yet another
military dictator, on the dictates of IMF, decided to abandon the time-tested law
without any valid justification, and more painfully with something that is full of
contradictions, dichotomies and conflicts. …it contains a numerous mistakes of
drafting, concepts and what not…
[The Ordinance] with tall claims of being ―simple‖, but in practice, it proved to be
complicated and unworkable. We pointed out in the very beginning a number of
typographical errors, drafting blunders, legal lacuna, inconsistencies, conceptual
fallacies and dichotomies.
4 Huzaima and Ikram’s, Law and Practice of Income Tax, Volume I, P 2 & 3.
9
While referring to these fallacies, the Supreme Court of Pakistan also observed in one of its
landmark judgments5:
Hon'ble Chief Justice has highlighted the history of income tax laws which
explicates adoption of pre-independence Income Tax Act, 1922 through
Independence Act, 1947 which remained in the field 'till 1979, while the same was
repealed through Income Tax Ordinance, 1979 which was also repealed through
Income Tax Ordinance; 2001. Since the creation of Pakistan we have not been
able to frame any Income Tax Act duly debated in the assembly. Both the
Ordinances were promulgated during the Martial Law Regime otherwise the
Constitution has prescribed a four month life of an Ordinance in case the
Ordinance is not be placed before the Assembly and it shall be enacted as an Act
then the Ordinance will automatically cease to exist. This aspect also reveals that
the Constitution has cast duty upon the legislative body to frame the laws within the
parameters prescribed under the scheme of the Constitution.
In view of what has been discussed above I wish that the law making body shall
frame the laws after deliberations which is an additional duty cast upon the law
making body in terms of the Article 2-A of the Constitution. The same is in
accordance with the injunctions of Islam and the Doctrine of expectation of
consultations as law laid down in the following judgments:--
(i) R.V. Secretary of State for Transport's case (1985) 3 All ER 300 and
(ii) Re Liverpool Taxi Owners' Association's case (1972) 2 All ER 589.
With over ten years of existence now, the Ordinance i.e. Income Tax Ordinance, 2001
forms the basic component of income tax law in Pakistan. All the income taxation matters
including computation of taxable income, computation of tax liability, payment of tax,
recovery of tax, appeals, refund, penalties and prosecution, relating to all categories of
5
Commissioner Income Tax V Eli Lily (Pvt) Ltd 2009 PTR 23 (Supreme Court Pakistan)
10
taxpayers, including individuals (natural persons), companies and association of persons
(artificial persons) whether residents or non-residents are administered through the
provisions of this Ordinance.
The Income Tax Ordinance, 2001 has sections serial numbered up-to 240, though the total
number of sections has crossed the number 240 by insertion of additional sections. These
sections have been discussed in 13 chapters. Each chapter deals with a particular subject
and has been divided into parts. Many parts have been further subdivided into divisions.
There are also Seven Schedules to the Ordinance. Each Schedule deals with a particular
subject and has been divided into parts. Some parts are further subdivided into Divisions.
These Schedules are treated as part of the Ordinance.
To this date the Income Tax Law of Pakistan, practically and legally, comprises the Income
Tax Ordinance, 2001; Income Tax Rules, 2002; Notifications, Statutory Regulatory Orders
(SRO‘s) and Circulars issued by the Federal Board of Revenue; Annual Finance Acts; and
Judicial pronouncements by the Inland Revenue Appellate Tribunal, High Courts and
Supreme Court of Pakistan.
Constitutional Validity of Income Tax

Prior to entering into the domain of the Income Tax Law for taxability of non-residents, it
merits clarification, how the income taxation seeks validity from the Constitution of the
State. In fact, Constitution6 as a well-established document of a state is known to be a
fundamental and organic law of a nation, which primarily establishes the institutions and
apparatus of the government, defines the scope of governmental sovereign powers, and
guarantees individual civil rights and civil liberties. In Pakistan, the constitution is a written
6 Definition of Constitution, inspired from the Bryan A. Garner, Black’s Law Dictionary, Eighth Edition, 2004, p. 330.
11
instrument, embodying these fundamental laws together with formal amendments made
from time to time.
The Federal Government of Pakistan is empowered by Entry 47, of Part I of Federal
Legislative List of Fourth Schedule to the Constitution of Pakistan to levy tax on income
other than agricultural income. The tax on income is levied seeking further strength from
Articles 77, 165, 165A and 279 of the Constitution. These provisions of the Constitution
state:
77. Tax to be levied by law only: No tax shall be levies for the purposes of the
Federation except by or under the authority of Act of Majlis-e-Shoora (Parliament).
165. Exemption of certain public property from taxation: 1) The Federal
Government shall not, in respect of its property or income, be liable to taxation under
any Act of Provincial Assembly and, subject to clause (2), a Provincial Government
shall not, in respect of its property or income, be liable to taxation under Act of Majlis-
e-Shoora (Parliament) or under Act of the Provincial Assembly of any other Province.
2) If a trade or business of any kind is carried on by or on behalf of the Government
of a Province outside that Province, that Government may, in respect of any property
used in connection with that trade or business or any income arising from that trade
or business, be taxed under Act of Majlis-e-Shoora (Parliament) or under Act of the
Provincial Assembly of the Province in which that trade or business is carried on.
3) Nothing in this Article shall prevent the imposition of fees for services rendered.
165A. Power of Majlis-e-Shoora (Parliament) to impose tax on income of
certain corporations etc. 1) Majlis-e-Shoora (Parliament) has, and shall be deemed
always to have had, the power to make a law to provide for the levy and recovery of
a tax on the income of a corporation, company or other body or institution
12
established by or under a Federal law or a Provincial law or an existing law or a
corporation, company or other body or institution owned or controlled, either directly
or indirectly, by the Federal Government or a Provincial Government, regardless of
the ultimate destination of such income.
2) All orders made, proceedings taken and acts done by any authority or person,
which were made, taken or done, or purported to have been made, taken or done,
before the commencement of the Constitution (Amendment) Order 1985, in exercise
of the powers derived from any law referred to in clause (1), or in execution of any
orders made by any authority in the exercise or purported exercise of powers as
aforesaid, shall, notwithstanding any judgment of any court or tribunal, including the
Supreme Court and a High Court, be deemed to be and always to have been validly
made, taken or done and-shall not be called in question in any court, including the
Supreme Court and a High Court, on any ground whatsoever.
3) Every judgment or order of any court or tribunal, including the Supreme Court and
a High Court, which is repugnant to the provisions of clause (1) or clause (2) shall
be, and shall be deemed always to have been, void and of no effect whatsoever.
279 Continuance of Taxes: Notwithstanding anything contained in the
Constitution, all taxes and fees levied under any law in force immediately before the
commencing day shall continue to be levied until they are varied or abolished by Act
of the appropriate Legislature.
The government of Pakistan, thus imposes income tax on taxable income of all persons
including individuals, association of person and companies under the aforementioned
constitutional authority. Legally speaking association of persons, then includes in it, various
categories such as Firms, Hindu Undivided Families (HUF‘s), Artificial Juridical Persons
etc. as explained later. The levy of income tax is separate on each of the persons, for each,
13
distinct and independent tax year. This levy is governed by the Income Tax statute under
the administrative authority of the Federal Board of Revenue as a part of Revenue Division,
Ministry of Finance of the Government of Pakistan.
Income Tax is a key source of funds that the government uses to fund its activities and
serve the public. The Inland Revenue Department of the Federal Board of revenue is the
biggest revenue mobilizer for the Government. The total tax revenues of the Federal
Government increased from 1558.00 Billion Pak Rupee in 2010-2011 to 1883.00 Billion in
2011-2012 and to 1939.4 in 2012-2013. During the last year i.e. 2012-2013, income tax
increased from 602.5 Billion in 2010-2011 to 738.8 Billion in 2011-2012 to 739.7 Billion in
2012-20137. The share the revenue collection is shown in Figure 1.
Federal Excise,
119.4, 6%
Direct Taxes,
Customs, 239, 739.7, 38%
12%
Sales Tax,
841.3, 44%
FIGURE – 1: CONTRIBUTION of Federal Taxes in Pakistan in 2011-20128
(Amounts in Billion Pak Rupees)
**********
7 Federal Board of Revenue, Quarterly Review, April-June 2012, also available at
http://fbr.gov.pk/ShowDocument.aspx?Actionid=3170
8 -Ibid-
14
3. CHARGEABILITY OF INCOME TAX (TAX ON TAXABLE INCOME)

As one of the forms of direct taxes, income tax, all over the world is a government levy,
charged through government legislation, levied under a fiscal statute and paid by the
taxpayers, individuals and corporations. In Pakistan, under the Ordinance, ‗income‘ is
defined under sub-section (29) of section 2 of the Ordinance. Accordingly the ‗income‘
includes any amount chargeable to tax under the Ordinance; any amount subject to
collection or deduction of tax under section 148 (Salary) , 150 (Dividends), 152(1)
(Payments received by non-residents), 153 (Payments received by residents and non-
residents for goods, services and contracts), 154 (Foreign exchange on account of export
of goods), 156 (Amount received as prizes and winnings), 156A (Amount received for
selling of petroleum products), 233 (Payment received on account of brokerage and
commission) , 233A ( and, sub-section (5) of section 234 (amount received by the members
of stock exchange on account of sale and purchase of shares in lieu of tax on the
commission), any amount treated as income under any provision of this Ordinance and any
loss of income but does not include, in case of a shareholder of a company, the amount
representing the face value of any bonus share or the amount of any bonus declared,
issued or paid by the company to the shareholders with a view to increasing its paid up
share capital. As the definition is inclusive in nature, apart from items listed in the definition,
any receipt which satisfies the basic condition of being income is also treated as income.
For the purpose of imposition of tax and the computation of total income, all income, under
the Ordinance, is classified under the following five heads:
a) Salary;
b) Income from Property;
c) Income from Business;
15
d) Capital Gains; and
e) Income from Other Sources.
Subject to the provisions of the Ordinance, the income of a person under a head of income
for a tax year is the total of the amounts derived by the person in that year that are
chargeable to tax under the head as reduced by the total deductions, if any, allowed under
the Ordinance to the person for the year under that head. Furthermore where the total
deductions allowed under the Ordinance to a person for a tax year under a head of income
exceed the total of the amounts derived by the person in that year that are chargeable to
tax under that head, the person is treated as sustaining a loss for that head for that year of
an amount equal to the excess.
Prior to classification of income into various heads, the chargeability is to be established
under the Ordinance. Section 4 is the provision of law that, in fact, imposes income tax
upon every person who has taxable income for the Tax Year, at the rates separately
specified under First Schedule to the Ordinance. Income tax is primarily an annual tax, not
only in the sense that it is imposed annually but also in a way that it is annual in its
structure and organization. It is highly imperative to understand that income tax is annual in
a sense that one has it every year, in the same way as if it is a season9.
Fundamental principles that emerge from the study of section 4, ‗Tax on Taxable Income‘
are:
“Subject to the Ordinance…”: The inaugurating phrase of the charging section i.e.
―Subject to this Ordinance…‖, means the income tax is not charged exclusively under this
section, instead the charge of income tax is made subject to the other provisions of the
9 Luipaard v IR 15 TC 573
16
Ordinance. The principle emerging from this subjectivity is that whatever is stated in this
section is subservient to all other provisions of the Ordinance, including clubbing of income
under specific heads, method of chargeability of income, test and determination of the
residential status of the taxpayers, method of computation and assessments, hierarchy of
appeals etc, all need to be determined in accordance with the provisions of the Ordinance
prior to establishing charge of tax under this section.
Tax is specifically for a „Tax Year‟: The income tax is imposed for each tax year. The
concept of tax year is separately ordained in another part of the Ordinance, i.e. Section 74.
Accordingly, a normal tax year is a period of twelve months ending on the 30 th day of June
and is denoted by the calendar year in which the said date falls. For example the tax year
for accounting year ending on 30th June 2013 would be 2013. Without going in the detail of
the concept of tax year at this stage, it merits attention here that a period of twelve months
ending on 30th June is generally a normal tax year, yet where a person‘s accounting period
is different from a normal tax year, he may opt the tax year different from the normal tax
year subject to the principles laid under section 74 of the Ordinance. For clarity, the
Ordinance identifies three types of tax year: 1) Normal Tax Year, 2) Special Tax Year; and
3) Transitional Tax Year. Here the special tax year is also a period of twelve months, yet
other than a normal tax year. As long as transitional tax year is concerned, it is a period,
generally less than a period of twelve months, when a person changes its tax year from
normal tax year to special tax year or special tax year to normal tax year, the transitional
tax year represents the period between the end of the last tax year prior to change and the
date on which the changed tax year commences.
Tax is payable on „Prescribed Rates‟: The income tax is imposed at the rate or rates
specified in the First Schedule to the Ordinance. First Schedule to the Ordinance lays down
17
the rate or rates on which income tax is imposed on persons in various capacities i.e.
individuals, companies or association of persons. The rate or rates cannot be the same for
all the tax years, instead may be revised, changed and / or amended in Finance Acts of the
year. While paying or imposing income tax, as the case may be, for a particular tax year,
the taxpayer and the tax collector both need to be vigilant and well conversant to that
specific rate or rates for that tax year.
Tax is imposed on „Taxable Income‟ only: The income tax is imposed on every person
who has a taxable income for the tax year. As the total income of a person for a tax year,
is, in fact, the sum of income classified, placed and computed under five different heads of
income, the taxable income is income evaluated under these heads as reduced by the total
of any deductible allowance prescribed under the Ordinance of the person for that specific
tax year.
Charge is on every „person‟: Fundamentally the unit of assessment of income is ‗person‘.
While defining the term ‗person‘ the Black‘s Law Dictionary refers to two categories: A
human being and living body of human beings. In the classification of human being, every
nomenclature associated with a natural person such as absent person, adult person, adult
disabled person, disabled person, person in loco parentis10, person in need of supervision,
person of inheritance, person of interest, person not deceased, private person and
protected person are included; while in the list of living body of human beings, categories
such as artificial person, controlled person, fictitious person, international person, judicial
person, juristic person legal person, moral person have been placed. As regards the
Ordinance, also laid earlier, three categories are treated as person in the light of provisions
of section 80 of the Ordinance. Under the charging section, assessment of income and
10 A person who acts in place of a parent, either temporarily or indefinitely / who has assumed the obligations of a parent without
formally adopting the child.
18
computation of tax is to be made on the right person alone. If a wrong person is taxed with
respect to a particular income, the tax authority cannot be precluded from taxing the right
person with respect to that income.
**********
19
4. CATEGORIES OF PERSON
As enumerated earlier, the unit of assessment of income is ‗person‘. And…
―So far as legal theory is concerned, a person is any being whom the law regards as
capable of rights and duties. Any being that is so capable is a person, whether a
human being or not, and not being that is not so capable is a person, even though he
be a man. Persons are the substances of which rights and duties are the attributes. It
is only in this respect that persons possess juridical significance, and this is the
exclusive point of view from which personality receives legal recognition.‖11
In a general connotation, person includes a human being, a living body of human beings
and artificial person. Section 80 of the Ordinance treats three categories as persons for the
purpose of the Ordinance, as enumerated in Figure 2.
i) An Individual: An individual is a natural human being. A a natural person in general
clauses acts of law, includes any natural person whatever names he carries. Yet the
connotation of ‗Individual‘ includes a dead man as alive for certain purposes and a human
being as dead as in case of bankruptcy or insolvency12. As an important thumb rule, in legal
connotation, every individual is a person but every person is not necessarily an individual;
Likewise, every individual may be a taxpayer but every taxpayer may not be an individual.
The Ordinance recognizes this category, ‗Individual‘ as person under clause (a) of sub-
section (1) of section 80.
11 John Salmond, Jurisprudence 318 (Glanville L. Williams ed. 10 th ed. 1947)

12 Begum Nusrat Bhutto Vs ITO, Circle – V, Rawalpindi (19980) 42 Tax 59 (H.C. Lah.) = PLD 1980 Lah. 449
20
Individuals A Natural Person
1. A Firm
Association of 2. A Hindu Undivided Family

Persons
3. An Artificial Juridical Person
4. Any Body of Person
1. A Company under Companies

Ordinance, 1984
2. A body corporate formed by

or under law in Pakistan
3. A modarba
PERSONS
4. A body incorporated by or
under law outside Pakistan
Under Companies 5. A trust, a cooperative society
Income Tax or finance society
Law of
Pakistan 6. A foreign association
7. A Provincial Government
8. A Local Government in
Pakistan
9. A small company
1. Federal Government
2. A Foreign Government
Others
3. A political sub-division of a
foreign government
4. A public international
organization
Figure 2: Assessable PERSONS under the Income Tax Law of Pakistan
21
ii) Association of Persons: For the purpose of the Ordinance, an association of
persons includes a firm, a Hindu undivided family, any artificial juridical person and any
body of persons formed under a foreign law, not being a company. In this inclusive
definition, the words, ‗association of persons‘ carry their general connotations and in
addition to that general implications, the above categories have been included. In the sense
of a living body of human beings, the term includes partnerships or other associations,
whether incorporated or unincorporated. The words ‗association of persons‘ are not used in
any technical sense but must be construed in their plain ordinary meanings 13. In fact an
association is a process of mentally collecting ideas, memories, or sensations, a gathering
of persons for some common purpose.
When there is a combination of persons formed for the promotion of a joint enterprise, in
other words, when co-adventures are banded together in common action, they are
assessed under the Ordinance as an, ‗association of persons‘, when they do not constitute
a partnership. Generally speaking, there can be no ‗association of persons‘, in business
unless the members of the group have joined together of their volition or free will 14. When
the income does not result from any joint venture or joint act, assessment in the status of
association of persons would not be justified.
Prior to 1979, the phrase, in the 1922 Act was used as ‗association of individuals‘. The term
was modified in the 1979 Ordinance probably because the same was changed to
‗association of persons‘ by the amending Act of the year 1939 before partition. The word
‗persons‘ has, obviously wider connotation than ‗individuals‘. The fact that some of the
members of the association are minors does not affect the question of assessability of the
association as such. Plethora of case laws are on record in favor of the fact that in order to
13 Punjab Province Vs Federation of Pakistan [(1960) 2 – Tax (Suppl.3) (S.C. Pak.) = 1960 PTD 1052 = PLD 1956 FC 72.
14 CIT Vs. Cloth Semi-Wholesalers 29 ITR 500.
22
constitute an association, persons must join a common purpose or common action and the
object of the association must be to produce income – it is not enough that the persons
receive the income jointly. However, in order to constitute an association, it is not
necessary that there should be mutual rights or obligations among the members
enforceable in the court of law. Illegality or invalidity in constitution of an association does
not affect its liability to tax. A partnership which is illegal or otherwise void may still be
assessed as ‗association of persons‘ under the Ordinance.
Co-heirs joining together in common purpose or action would be chargeable to tax as an
‗association of persons‘. If the funds of a number of beneficiaries are put together and one
business is carried on with the combined resources by the trustee, guardian or
administrator, it may be regarded as one business assessable in the hands of an
association of persons. In case of co-owners of property, if their shares are not definite and
ascertainable, they may be assessable as association of persons. Where the shares are
definite and ascertainable, mere co-ownership is not sufficient to justify an association of
persons.
In accordance with the provisions of sections 92 of the Ordinance, an association of
persons is liable to tax separately from the members of the association and where the
association of persons has paid tax, the amount received by a member of the association in
the capacity as member out of the income of the association is exempt from tax.
As regards various categories of association of persons, „Firm‟ means the relation between
persons who have agreed to share the profits of a business carried on by all or any of them
acting for all. In technical sense, ‗firm‘, ‗partner‘ and ‗partnership‘ have the same meanings
under the Law. Persons who enter into partnership with one another individually called
23
‗partners‘ and collectively called ‗firm‘ and the name under which the business is carried on
is called ‗firm name‘. In order to constitute a partnership, there must be at least two major
persons. If one of the partners dies, in case of a firm, consisting of two partners only, the
firm immediately ceases to exist.
A „Hindu Undivided Family‟ like other categories of ‗persons‘, is assessed to tax as a
distinct entity or a unit of assessment. A Hindu undivided family (HUF) or a joint family is an
extended family arrangement mostly prevalent among Hindus of this region of India and
Pakistan, consisting of many generations living under the same roof. All the male members
are blood relatives and all the women are either mothers, wives, unmarried daughters, or
widowed relatives, all bound by the common sapinda relationship. An undivided family,
which is the normal condition of a Hindu society, is ordinarily joint; not only in whatever
relates to their commensality and their religious duties and observance are regulated by the
task of regulation. The joint family status being the result of birth, possession of joint cord
that knits the members of the family together is not property but the relationship. The family
is headed by a patriarch, usually the oldest male, who makes decisions on economic and
social matters on behalf of the entire family. The patriarch's wife generally exerts control
over the kitchen, child rearing and minor religious practices. All money goes to the common
pool and all property is held jointly. A daughter cannot remain the member of her father‘s
family after her marriage and the sisters, though they were once entitled to a share in the
property, would lose their right and would be entitled to only maintenance until their
marriage and their marriage expenses. A joint family may consist of a single male member
and widows of the deceased male members and the property of the family does not cease
to belong to the joint family merely because the family is represented by a single
coparcener who possesses rights which an absolute owner of the property may possess.
24
Supreme Court of India held in Gowli Buddanna v CIT15 that there need not be more than
one male member to form an HUF along with female members; that even if the family is
reduced to a sole surviving coparcener with other female members, the property and
income belong to joint family, and in respect of that income the tax is liable on the joint
family and not on the male member as an individual.
An „Artificial Juridical Person‟ is another category assessable under the association of
person in tax law. It is understandable that not all organizations have legal personhood. For
example, the board of directors of a corporation, legislature, or governmental agency
typically are not legal persons in that they have no ability to exercise legal rights
independent of the corporation or political body which they are a part of. Under the present
law statutory corporations or an idol or deity are assessable in the status of artificial juridical
person and not as an individual or as association of persons.
iii) Company: For the purpose of the Ordinance ―Company‖ has much wider
connotation than the word bears under the Pakistani Law dealing with companies i.e.
Companies Ordinance, 1984. Here under the Ordinance, an entity may not legally be a
company but that may yet be assessed and taxed as company. Thus in the light of
provisions of section 80(1)(b), the further entities assessable and taxed as ‗Company‘ in
addition to a ‗Company‘ defined under the Companies Ordinance, 1984 are: a) a body
corporate formed by or under any law in force in Pakistan; b) a modaraba; c) a body
incorporated by or under the law of a country outside Pakistan relating to incorporation of
companies; d) a trust, a co-operative society or a finance society or any other society
established or constituted by or under any law for the time being in force; e) a foreign
association, whether incorporated or not, which the Central Board of Revenue has, by
15 Gowli Buddanna Vs. CIT 60 ITR 293
25
general or special order, declared to be a company for the purpose of the Ordinance; f) a
Provincial Government; g) a Local Authority in Pakistan; or h) a small company.
For the purpose of definition, the terms used as ‗by‘ and ‗under‘ with reference to this
provision may be explained in a case law16 quoted below:-
―We are of the view that the sub-clause (a) covers the companies registered under
the Companies Ordinance 1984, whereas the sub-clause (b) covers other institutions
i.e. corporations incorporated by or under an enactment, such as (1) National Bank
of Pakistan, (2) Pakistan Insurance Corporation, (3)Industrial Bank of Pakistan, (4)
Agricultural Development Bank of Pakistan, (5) Pakistan International Airlines.
…..The intention of the legislature is to embed only such corporate bodies into the
definition of company, which are directly established, constituted, and created by the
relevant statute itself. However, where the body has been formed by private
individual and subsequently, registered under the relevant law, it would not be a
body formed under the law, rather would be a body formed otherwise, but registered
under the law‖.
―Private‖, ―Public Company‖ and ―Small Company‖ have been defined in section 2(45) and
2(47) and 2(59A) of the Ordinance respectively. Private company is exhaustively defined
under the Ordinance as the one which is not a public company. And the Public Company
means –
i) A Company in which not less than fifty per cent of the shares are held by the Federal
Government or Provincial Government;
ii) A company in which not less than fifty per cent of the shares are held by a foreign
Government, or a foreign company owned by a foreign Government;
16 [(2003) 88 Tax 222 (H.C. Kar.)] = 2003 PTD 1264
26
iii) A company whose shares were traded on a registered stock exchange in Pakistan at
any time in the Tax Year and which remained listed on that exchange at the end of
that year; or
iv) A unit trust whose units are widely available to the public and any other trust as
defined in the Trusts Act, 1882;
The companies in which the provincial governments have more than fifty percent shares
were added in the definition of a public company through the Finance Act 2003. Previously
the scope was restricted to the Federal Government only.
In Finance Act 2005, the concept of ―Small Company‖ was introduced by inserting sub-
section (59A) in section 2 of the Ordinance. This exhaustively defined phrase means a
company registered on or after the first day of July, 2005 under the Companies Ordinance,
1984, which –
i) has paid up capital plus undistributed reserves not exceeding twenty-five million
rupees;
ii) has employees not exceeding two hundred and fifty any time during the year;
iii) has annual turnover not exceeding two hundred and fifty million rupees; and
iv) is not formed by the splitting up or the reconstitution of business already in existence.
A company may control another company or an individual, or an individual may control a
company. A company is chargeable to tax on its profits as distinct taxable entity, and it
pays tax in discharge of its own liability and not on behalf of or as agent of its
shareholder(s).
27
As regards the tax incidence of a company, it differs from other tax payers, broadly in two
respects – One that every company is required to furnish a return of income irrespective of
what it earns i.e. there is no minimum threshold for the companies; and Second that a
company is to pay tax at a flat rate on its taxable income, which varies from tax year to tax
year based on the amendments introduced through Finance Acts, whereas the other
taxpayers are taxed according to the graduated scale or slab system.
The Ordinance categorizes four different companies for the purpose of levy of income tax.
These are: Banking Company; Public Company other than a banking company; Private
Company other than banking company; and Small Company. Where the taxpayer is society
or a cooperative society, the tax is payable at the rates applicable to the public company or
an individual – whichever is beneficial to the taxpayer.
All taxpayers fall under the category of persons, one way or the other but all persons are
not necessarily taxpayers under the Ordinance. Since the incidence of taxation varies with
the factor of residence, the first investigation for the chargeability of tax is determination of
taxpayer‘s residential status in Pakistan.
**********
28
5. TEST OF RESIDENCE
The importance of residential status of a person is very critical for the incidence of taxation
in Pakistan. As a thumb rule all taxpayers, whether resident or non-resident, are
chargeable to tax in Pakistan in respect of income attributable as Pakistan - source income.
However residents alone are chargeable to tax in Pakistan in respect of income which is
attributed as foreign source of income as well. As held in a case Haji Ibrahim Ishaq Johri Vs
CIT17, the charge of tax is determined according to residential status of a person, and that
the resident of taxable territories is liable to tax for his total world income including any
income from non-taxable territories.
Fundamental principle of residence is generally explained under section 81. The Provision
explains that a resident individual, a resident company, a resident association of persons
and the federal government of Pakistan are treated as Resident for the purpose of income
taxation in Pakistan. Yet the test of their residence is based on the following principles.
Test of Residence of an Individual: In the light of provisions of section 82, an individual is
resident individual if he has been present in Pakistan for a period of, or periods amounting
in aggregate to, one hundred and eighty three days or more in a tax year. However any
employee or official of the Federal Government or a Provincial Government posted abroad
in a Tax Year, regardless of his stay in Pakistan, is taken for all practical purposes as
resident individual under the law. This provision of law manifests the residence of the
individual in the year in which his income needs to be assessed, charged and taxed. His
subsequent or earlier stay in Pakistan is immaterial ipso facto. The question of an
individual‘s residence is to be determined with reference to each year and very importantly,
17 Haji Ibrahim Ishaq Johri V CIT West Karachi (1992) 66 Tax 275 (S.C.Pak) – 1993 PTD 114.
29
finding of residence during a year does not warrant the assumption that the taxpayer is
resident for the subsequent year (s) or / and was resident for earlier year (s).
Except ‗resident‘ and ‗non-resident‘, the present Pakistan Income Tax Law does not lay
down any other nomenclature for the individuals such as ‗ordinarily resident‘, ‗citizen‘ or
‗nationals‘. Yet, if an individual is continuously out of Pakistan in a year for more than the
prescribed period, he is treated as non-resident, although he may be, in the technical
sense, a citizen or a national of Pakistan. If he stays in Pakistan for the requisite period,
whether in his home, hotel or in any dwelling place and never for long together; he is still
treated as resident. As observed by Rowlatt J. in Lavene vs Inland Revenue18,
―…a complete wonderer, an absolute tramp, or a rich person of the same type
wondering from hotel to hotel and never staying two nights in the same place, may
still be a resident, although he cannot be called as resident in any particular spot.‖
Test of Residence of a Company: As explained in section 83, the provincial governments
in Pakistan, any local authority in Pakistan, and any company which is incorporated or
formed by or under any law in force in Pakistan are resident for the purpose of Income Tax
Law. However for any other company, the same would be resident if the ‗control and
management‘ of the affairs is situated wholly in Pakistan at any time in the year. Thus two
tests may help in verifying the residential status of a company. ONE: Any Pakistani
company is resident company; and TWO any non-Pakistani company is a resident
company, if the control and management of its affairs is situated wholly in Pakistan in any
time in a Tax Year. This leads to a conclusion that every Pakistani company is resident in
Pakistan, even if its control and management is situated wholly or partly in Pakistan; non-
18 13 TC 486, 492; also Lord Hanworth MR at 496, in appeal [Indian Case Law].
30
Pakistani company is resident if its control and management affairs are situated wholly in
Pakistan.
As regards the phrase ‗control and management‘ of a company, it is important to see as a
thumb rule, where ‗the head and seat and directing power‘ of a company‘s affairs is
located. And ‗the head and seat and directing power‘ of a company is generally believed to
be situated at the place where the directors‘ meetings are held. And consequently a
company is resident in Pakistan if the meetings of directors, who manage and control the
business, are held in Pakistan. A company may be resident here in Pakistan even though
its entire trading operations are carried on abroad. If the ‗control and management‘ is
situated here in Pakistan, the company is resident here, and it matters the least where the
actual selling and buying of the goods takes place.
Explaining the ‗control and management‘ Kanga, Pakhivala and Vyas (2004), observes:
―The control and management of business is situated at the place where, as was
said in San Paulo Brazilian Rly Co. Ltd. Vs Carter19, ‗the head and the brain of the
trading adventure‘ is situated; and the place of control may be different from the
place where the corporeal subjects of trading are to be found. Control of a business
does not necessarily mean the carrying on of the business, and therefore, the place
where trading activities or physical operations are carried on is not necessarily the
place of control and management20. The control and management does not abide
where a clever manager looks after the business21.
19 3 TC 407, 410 (HL); CIT Vs Nandlal 40 ITR 1, 7 (SC) [Indian Case Law].
20 Erin Vs. CIT 34 ITR 1 (SC); Narottam Vs CIT 23 ITR 454 [Indian Case Law].
21 Noble Vs Mitchell 11 TC 372, 411. Contrast Mohammed Rowther Vs CIT 49 ITR 39 [Indian Case Law].
31
In another case law of Supreme Court of India22, very interesting point of fact was raised
and determined by the court while comparing the residential status of an individual and that
of a company. It is observed by the court:
―The words "control and management" [can be] figuratively described as "the head
and brain". In the case of an individual, the test is not necessary, because his
residence for a certain period is enough, it being clear that within the taxable
territories he would necessarily bring his "head and brain" with him. The "head and
brain" of a company is the board of directors, and if the board of directors exercises
complete local control, then the company is also deemed to be resident…‖
Test of Residence of An Association of Person: For an association of persons, too, if
the control and management of the affairs of such association is situated wholly or partly in
Pakistan at any time in the year, such association is treated as resident.
Test of residence is a fundamental question for taxability in Pakistan. Next Important
question is the geographical source of income, whether it is Pakistan-Source or not. The
income of a resident person is primarily computed by taking into account amounts that are
Pakistan-source income and amounts that are foreign-source income both. While the
income of a non-resident person under a head of income is computed by taking into
account only amounts that are Pakistan-source income only.
**********
22 [1960] 40 ITR 1 (SC) SUPREME COURT OF INDIA CIT Vs. Nandlal Gandalal
32
6. GEOGRAPHICAL SOURCE OF INCOME

In the light of sub-section (5) and (6) of section 11 of the Ordinance, the income of a
resident person under a head of income is computed by taking into account amounts that
are Pakistan-source income and amounts that are foreign-source income both. While the
income of a non-resident person under a head of income is computed by taking into
account only amounts that are Pakistan-source income.
Section 101 of the Ordinance, then lays down certain amounts to be treated as Pakistan-
source income. Sub-section (16) of the section stipulates that the amount which is not a
Pakistan-source income is treated as foreign-source income. All the following receipts are
placed under the Pakistan-source income:
i) Salary received from any employment exercised in Pakistan, wherever paid; OR is
paid by, or on behalf of, the Federal Government, a Provincial Government, or a
Local Government in Pakistan, wherever the employment is exercised;
ii) Business Income of a resident person to the extent to which the income is derived
from any business carried on in Pakistan;
iii) Business Income of a non-resident person to the extent to which it is directly or
indirectly attributable to –
- a permanent establishment of the non-resident person in Pakistan;
- sales in Pakistan of goods merchandise of the same or similar kind as those sold
by the person through a permanent establishment in Pakistan;
- other business activities carried on in Pakistan of the same or similar kind as
those affected by the non-resident through a permanent establishment in
Pakistan; or
33
- any business connection in Pakistan.
iv) Where the business of a non-resident person comprises the rendering of
independent services (including professional services and the services of
entertainers and sports persons), the Pakistan-source business income of the
person includes, in addition to any amounts treated as Pakistan-source income
under para (iv) above, any remuneration derived by the person where the
remuneration is paid by a resident person or borne by a permanent establishment in
Pakistan of a non-resident person;
v) Any Gain from the disposal of any asset or property used in deriving any
business income referred to in para (ii), (iii) and (iv) above;
vi) Dividend, if it is –
- paid by a resident company; or
- dividend as per provisions of sub-clause (f) of clause (19) of section 2 i.e. relating
to the remittance of after tax profit of a branch of a foreign company operating in
Pakistan, subject to the conditions mentioned therein;
vii) Profit on Debt, if it is —
- 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
- borne by a permanent establishment in Pakistan of a non-resident person;
34
viii) Royalty, if it is —
- 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
- borne by a permanent establishment in Pakistan of a non-resident person.
ix) Rental 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;
x) Any Gain from the alienation of any property or right referred to in para (ix)
above 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 above
para;
xi) A Pension or Annuity, if it is paid by a resident or borne by a permanent
establishment in Pakistan of a non-resident person;
xii) A Technical Fee, if it is –
- 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
- borne by a permanent establishment in Pakistan of a non-resident person;
xiii) Any Gain arising on the disposal of shares in a resident company;
35
xiv) Any amount paid on account of Insurance or Re-insurance Premium by an
insurance company to an overseas insurance or re-insurance company;
xv) Any Amount not mentioned in the preceding paragraphs, if it is paid by a resident
person or borne by a permanent establishment in Pakistan of a non-resident person.
Speaking on points of facts, the concept of ‗geographical source of income‘ has never been
part of Pakistan Tax Statutes till the promulgation of the present Ordinance. Earlier tax
laws, with the purpose of addressing the non-residents‘ income and / or catering the need
of geographical sources, liberally used the concept of ‗deem to accrue and / or arise in
Pakistan‘. That conceptual framework actually gave rise to notional income, creating the
legal fiction in relation to a person‘s residential status, place of accrual of income in
Pakistan and time of such accrual. With the introduction of this section, the Ordinance gave
away with the deeming provisions of law and explicitly clarified the sources of income
attributed as Pakistan-source or foreign-source.
**********
36
7. TREATMENT OF CERTAIN PAYMENTS TO NON-RESIDENTS

Pakistan Income Tax Law specifically lays principles for the treatment of following amounts
to non-residents.
Payment on account of “Royalty” and “Fee for Technical Services”: Royalty not only
for the purpose of taxation of non-residents but also for its taxability of any kinds under the
income tax law, is exhaustively defined under the Ordinance in sub-section (54) of section
2. Accordingly royalty means any amount paid or payable, however described or computed,
whether periodical or a lump sum, as consideration for:
a) the use of, or right to use any patent, invention, design or model, secret formula or
process, trademark or other like property or right;
b) the use of, or right to use any copyright of a literary, artistic or scientific work,
including films or video tapes for use in connection with television or tapes in
connection with radio broadcasting, but shall not include consideration for the sale,
distribution or exhibition of cinematograph films;
c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted
by satellite, cable, optic fibre or similar technology in connection with television, radio
or internet broadcasting;
d) the supply of any technical, industrial, commercial or scientific knowledge,
experience or skill;
e) the use of or right to use any industrial, commercial or scientific equipment;
f) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as
mentioned in 1[sub-clauses] (a) through (e); 2[and]
g) the disposal of any property or right referred to in 3[sub-clauses] (a) through (e);
37
In one of the landmark cases, the Sindh High Court23 dilated upon the concept of ‗Royalty‘
vis-a-vis Agreement for Avoidance of Double Taxation between Pakistan and United
Kingdom, holding that:
The royalty is a consideration for use and exploitation of any invention, secret
process or patent which is granted by the licensor on payment of consideration by
the licensor. The payment is thus, a matter of agreement between the parties but
the moving factor and sole consideration is the supply of specialized knowledge,
process, invention or patent of which the licensor is the proprietor. For such use
and exploitation several other allied and connected matters are referred but they
are only ancillary to the grant of permission to use the patent, secret formula or
process. The payment for such use is not based mainly on such consideration. It is
a common feature of such agreements to provide for various conditions which a
licensor considers necessary for protection of its rights and earn as much profits as
possible. It may provide services of varied nature connected with the use,
manufacture and exploitation but payments made in respect of such services which
are directly connected with use, manufacture and exploitation will be covered by
the word ‗royalty‘. Any payment made under such agreement for purposes which
are ancillary to the main purpose of the agreement will not be a royalty.
Similarly ―fee for technical services‖ is exhaustively differentiated from royalty in sub-
section (23) of section 2 of the Ordinance, which clarifies that fee for technical services
means any consideration, whether periodical or lump sum, for rendering of any managerial,
technical or consultancy services including the services of technical or other personnel.
However the following payments remain outside the ambit of fee for technical services:
23 [(1991) 63 TAX 100 (H.C. Kar.)]: Glaxo Laboratories Ltd Vs. Commissioner of Income Tax, Karachi.
38
a) consideration for services rendered in relation to a construction, assembly or like
project undertaken by the recipient; or
b) consideration which would be income of the recipient chargeable under the head
―Salary‖.
Any payment received by a non-resident on account of Pakistani source royalty or fee for
technical services is subject to tax in the light of provisions of section 6 of the Ordinance at
the rate of 15% of the gross amount of such royalty or fee for technical services as
provided under Division IV of Part I of the First Schedule of the Ordinance. However this
amount so received by the non-resident does not attract taxability in three circumstances:
a) For any royalty where the property or right giving rise to the royalty is effectively
connected with a permanent establishment in Pakistan of the non-resident person; b) any
fee for technical services where the services giving rise to the fee are rendered through a
permanent establishment in Pakistan of the non-resident person; or c) any royalty or fee for
technical services that is exempt from tax under the Ordinance. Importantly if any
Pakistani-source royalty or fee for technical services received by the non-resident person
falling in category a) to c) above, is then treated as income from business attributable to the
permanent establishment in Pakistan of the person.
Tax on shipping and air transport income: The non-resident person engaged in and
carrying on business of operating ships or aircrafts, as the owner or chartered thereof, is
subjected to tax in respect of:
(a) the gross amount received or receivable (whether in or out of Pakistan) for the
carriage of passengers, livestock, mail or goods embarked in Pakistan; and
39
(b) the gross amount received or receivable in Pakistan for the carriage of passengers,
livestock, mail or goods embarked outside Pakistan.
The rates imposed under this provision, as provided in Division V of Part I of the First
Schedule, are: 8% of the gross amount received or receivable in case of shipping income
and 3% of the gross amount received or receivable in case of air transport income.
In computing tax on account of ‗Royalty‘ and ‗Fee for technical Services‘ and ―Tax on
shipping and air transport income‘, a separate and specific provision i.e. section 8 of the
Ordinance lays down certain principles of the taxability of non-residents. These are:
(a) These amounts are not chargeable to tax under any head of income in computing
the taxable income of the person who drives it for any tax year;
(b) In deriving the said amount, no deduction is allowed to the person under the
Ordinance for any expenditure incurred thereto;
(c) The amounts so received cannot be reduced by any deductible allowance or set off
of any losses;
(d) The tax payable on these accounts cannot be reduced by any tax credit under the
Ordinance;
Without indulging into an unnecessary criticism regarding the positive and negative aspect
of non-allowability of the expenditure incurred in deriving income by a non-resident person
from air transport and shipping, fee for technical services and royalty, it is felt convenient to
reproduce comments of Huzaima Bukhari and Dr. Ikramul Haq24 on the issue:
In the case of non-residents, income derived from air transport and shipping,
fee for technical services and royalty have been made final discharge without
24 Huzaima and Ikram’s, Law and Practice of Income Tax, Volume I, P 4.
40
adjustment of any expenditure, allowance or set-off of losses. It is against the
established principles of taxation that demands due regard to real income and
as far as possible notional incomes should not be taxed, as it erodes the
capacity-to-pay canon of fiscal liability. These provisions of law expose claims
of the government that they want to promote foreign direct investment in the
country.
**********
41
8. TREATMENT OF PERMANENT ESTABLISHMENT OF NON-

RESIDENTS
The term, ―Permanent Establishment – PE‖ was not a part of main statute of tax laws in
Pakistan till the promulgation of the Ordinance in 2002. Earlier, whenever and wherever
required, this concept was used to be imported from double taxation agreements / tax
treaties of Pakistan with other countries. Yet by putting this definition as part of law,
numerous ambiguities have now been addressed. The term is now defined both
exhaustively and inclusively under Sub-Section (41) of Section 2 of the Ordinance.
Accordingly Permanent Establishment in relation to a person, means a fixed place of
business through which the business of the person is wholly or partly carried on, and
includes –
i) A place of management, branch, office, factory or workshop, premises for soliciting
orders, warehouse, permanent sales exhibition or sales outlet, other than a liaison
office except where the office engages in the negotiation of contracts (other than
contracts of purchase);
ii) A mine , oil or gas well, quarry or any other place of extraction of natural resources;
iii) An agricultural, pastoral or forestry property;
iv) A building site, a construction, assembly or installation project or supervisory
activities connected with such site or project but only where such site, project and its
connected supervisory activities continue for a period or periods aggregating more
than ninety days within any twelve-months period;
v) The furnishing of services, including consultancy services, by any person for such
purpose;
42
vi) Any substantial equipment installed, or other asset or property capable of activity
giving rise to income; or
vii) A person acting in Pakistan on behalf of the person referred as agent if the agent
has and habitually exercises an authority to conclude contracts on behalf of the
other person; or has no such authority, but habitually maintains a stock-in-trade or
other merchandise from which the agent regularly delivers goods or merchandise on
behalf of the other person.
The income of a non-resident person in Pakistan through its permanent establishment is
chargeable to tax under the head, ―Income from Business‖ in accordance with the following
principles as laid under section 105 of the Ordinance:-
i) The non-resident‘s profits of the PE in Pakistan are computed as a distinct and
separate person;
ii) For computing such profits, the non-resident is allowed a deduction of expenditure
incurred for the purpose of business activities to the extent of its Permanent
Establishment including executive and administrative expenses so incurred, whether
in Pakistan or elsewhere;
iii) When a PE pays amounts under the heads of royalties and fees, compensation for
services and profit on debt to its head office or to another PE of the non-resident, no
deduction is allowable for these amounts other than the reimbursements of the
actual expenses;
iv) Similarly, amounts received by the PE under the heads of royalties and fees,
compensation for services and profit on debt from its head office or another PE of
43
the non-resident is taken as income of the PE provided the same amount is a
reimbursement of actual payments;
v) A non-resident person is entitled to a deduction for its head office expenditures while
computing income from business for its PE. Provided that such head office
expenditure is not in excess of the amount as bears to the turnover of the PE in
Pakistan the same proportion as the non-resident‘s total head office expenditures
bears to its worldwide turnover;
vi) If a non-resident person pays any profit on debt to finance the operations of its PE,
such expenditure does not constitute an allowable deduction;
vii) Similarly if a non-resident person pays any insurance premium in respect of this
debt, the same is also not an allowable deduction.
**********
44
9. WITHHOLDING PROVISIONS
Under the Income Tax Law of Pakistan, the following four are the core components of
income tax:
i) Payment of tax with return;
ii) Payment of tax on demand;
iii) Payment of tax by way of advance tax; and
iv) Collection and deduction of tax at source
Without indulging into unnecessary detail of the first three components, it is mandatory for
the purpose of this Paper to explain the fourth one. In fact the fourth component – collection
and deduction of tax at source is Withholding Tax. Withholding taxes (WHT‘s) are
essentially in the nature of advance tax payments and considered to be an effective
mechanism of income tax collection all over the world. Traditionally, they represent ad-hoc
deduction at the time of accrual of income with subsequent adjustment at the time of filing
returns of income under all sources. However in certain cases, tax so deducted becomes
final tax liability under the Presumptive Tax Regime. Thus, withholding tax has the obvious
advantage of preventing leakages of income tax.
One major provision of Income Tax Law that governs the principles of withholding tax on
payments to non-residents is section 152 of the Ordinance. This section puts an obligation
on every person to deduct tax at the prescribed rate, while making payments to a non-
resident person who makes payment to him as explained in Table 1. Under this provision
of law, the following seven payments to the non-resident person are addressed i.e.
payments:
45
Payment made to a non-resident person on account of:
A B C D E
Royalty Execution of Insurance Advertiseme Any amounts

Premium nt Services other than
a) a contract or sub-contract under a for relaying mentioned in
construction, assembly or installation column A to D
the same
OR project in Pakistan, including a contract but not on
from outside account of
for the supply of supervisory activities OR Pakistan Salary,
in relation to such project; or Dividends,
Fee for Prizes &
b) any other contract for construction or Winnings and
Technical Re-insurance
services rendered relating thereto; or Brokerage &
Services Premium Commission
c) a contract for advertisement services
rendered by T.V. Satellite Channels.
The person making such payment to the non-resident person is obliged to deduct tax at the rate of:
25 26 27 28 29
15% of the 6% % of the gross amount in accordance 5% of the 10% of the 20% of the
gross with Division II of Part III of the First gross amount gross amount gross amount
amount in Schedule to the Ordinance. in in in accordance
accordance accordance accordance with Division II
with Division with Division with Division of Part III of
IV of Part I II of Part III of IIIA of Part III the First
of the First the First of the First Schedule to
Schedule to Schedule to Schedule to the Ordinance.
the the the
Ordinance. Ordinance. Ordinance.
Table 1: Tax deductible under section 152 of the Ordinance while making payments to
non-residents!
a) on account of royalty, and fee for technical services;
25 The Rate mentioned here is subject to amendment in Annual Finance Acts.

26 -Ibid-
27 -Ibid-
28 -Ibid-
29 -Ibid-
46
b) on execution of contracts or sub-contract under a construction, assembly or
installation project in Pakistan;
c) on execution of contracts for construction or services rendered relating thereto;
d) on execution of contracts for advertisement services rendered by T.V. Satellite
Channels;
e) on account of insurance premium or re-insurance premium;
f) on account of advertisement services for relaying from outside Pakistan;
g) on account of some other amounts.
Table 2 and Table 3 explain deductibility of tax while making payments to permanent
establishment in Pakistan of a non-resident person. The nature of these transactions
covered under section 152 are:
a) Payment either in full or in part including payment by way of advance for the sale of
goods;
b) Payment either in full or in part including payment by way of advance for rendering
of or providing services;
c) Payment either in full or in part including payment by way of advance on execution
of contract, other than a contract for the sale of goods or the rendering of or
providing services.
47
When every prescribed person makes Payment to a Permanent Establishment in Pakistan of a

non-resident person on account of:
i) sale of goods;
ii) rendering of or providing services; and
iii) execution of a contract, other than a contract for the sale of goods or the rendering of or
providing services,
The prescribed person making such payment to non-resident person is obliged to deduct tax at the rate of:
30
3.5% of the gross amount in accordance with Division II of Part III of the First Schedule to the Ordinance.
And the prescribed person means
(a) the Federal Government;
(b) a company;
(c) an association of persons constituted by, or under law;
(d) a non-profit organization;
(e) a foreign contractor or consultant;
(f) a consortium or joint venture;
(g) an exporter or an export house;
(h) an association of persons, having turnover of fifty million rupees or above in tax year 2007 or
in any subsequent tax year;
(i) an individual, having turnover of fifty million rupees or above in the tax year 2009 or in any
subsequent year; OR
(j) a person registered under the Sales Tax Act, 1990 of Pakistan.
Table 2: Tax deductible under section 152 of the Ordinance while making payments to
Permanent Establishment in Pakistan of a non-resident Person!
48
When an exporter or an export house makes a payment in full or part including a

payment by way of advance to a Permanent Establishment of a non-resident person for
rendering of or providing of services of:
i) stitching;
ii) dying;
iii) printing;
iv) embroidery;
v) washing;
vi) sizing and
vii) weaving.
The person making such payment to non-resident person is obliged to deduct tax at the rate of:
31
0.5% of the gross amount in accordance with Division IV of Part III of the First Schedule to the Ordinance.
Table 3 Tax deductible under section 153 of the Ordinance while making payments to
Permanent Establishment in Pakistan of a non-resident Person, on certain other amounts!
**********
49
10. ADVANCE RULING

The above provisions of tax law manifest the taxability of non-residents with respect to
various categories of their receipts. However sometimes a situation may emerge when a
non-resident may need clarification regarding the taxability of his particular transaction it
may enter into, sometimes in future. For the purpose, the Pakistan Income Tax Law
conceptualizes concept of ―Advance Ruling‖. The concept of advance ruling is explained in
Dictionary of Tax Terms 32 , as a letter ruling, which is a written statement, issued to a
taxpayer by a tax collecting agency or authority that interprets and applies tax law to a
specific set of facts. Advance ruling must be requested in advance of completing a
transaction.
As regards the Income Tax Law of Pakistan the concept of advance ruling has never been
a part of it till the introduction of a new section 206A through Finance Act of 2003.
Accordingly, since then this facility is available to non-resident taxpayers, who wish to seek
clarification of law on a specific point from the fiscal authority. The modus operandi of the
advance ruling is that any non-resident taxpayer who wishes to seek clarification, is obliged
to submit a prescribed application in writing along-with annexures thereto before the
Federal Board of Revenue. In the said application the taxpayer must make full and true
disclosure of the nature of all aspects of the transaction relevant to the ruling. Based on the
application the Board then issues advance ruling to the non-resident taxpayer wherein the
position of the tax authorities of Pakistan over the prospective transaction is made clear.
When such ruling is issued in its prescribed manner, it immediately becomes binding on the
tax authorities (Commissioner Inland Revenue) with respect to the transaction of the law as
it stands at the time the ruling is issued. However where there is any inconsistency
32 D. Larry Crumbley, CPA, Ph.D., Jack P. Friedman, CPA, Ph.D., Susan B. Anders, CPA, M.S., Dictionary of Tax Terms.
50
between a circular and an advance ruling, priority is given to the terms of the advance
ruling.
An important feature of this provision is that till 30 th June 2011, this facility was available to
all non-resident taxpayers, whether having Permanent Establishment in Pakistan or not.
But the Finance Act 2011 withdrew this facility in the case of a non-resident having
Permanent Establishment in Pakistan by inserting a provision to sub-section (3) of section
206A, ―Provided that this section (Facility of advance ruling) shall not apply to a non-
resident taxpayer having a Permanent Establishment in Pakistan‖.
While introducing the concept of advance ruling, the Federal Board of Revenue issued a
clarification on 12th July, 2003, stating that:
On persistent demand of the non-residents and in line with international practice
the concept of advance ruling has been introduced through insertion of new section
206A in the Income Tax Ordinance, 2001. The Object is to provide to non-resident
companies an advance ruling on disclosure of full facts in the matters on which
advance ruling is requested. Such advance ruling would be binding on the
Commissioner.
More elaborative rules have been framed and laid down under Rule 231A and 231B of the
Income Tax Rule, 2002, wherein it is explained that a committee at the Federal Board of
Revenue, comprising of the following high level authorities examines and considers the
question raised by a non-resident taxpayer:
a) Chairman, Federal Board of Revenue Chairman
b) Member (Direct Taxes), FBR Member
c) Senior Joint Secretary, Law, Justice and Human Rights Division Member
51
On the receipt of an application from a non-resident, the committee may seek comments
from the Commissioner Inland Revenue and, if it feels necessary, may also seek comments
from a legal expert. Based on its examination the committee, then issues advance ruling as
it may deem appropriate. A time limit is also manifested under these Rules limiting that the
application must be disposed of not later than ninety days of its receipt.
Many non-resident taxpayers have enjoyed the facility of advance ruling till writing of this
paper, by posing various questions regarding their taxability on a specific issue. The
Federal Board of Revenue, has issued advanced ruling 33 on the following question, till
writing of this Paper.
Whether the payment of Rs. 50 million received by a non-resident as a result of
amalgamation with resident concern is taxable in Pakistan or not?
The assessee being non-resident, the income accruing or arising on account of merger and
transfer of bank operations with the new entity is revenue receipts in the hands of the
applicant, and being Pakistan source income, is liable to tax under the Income Tax
Ordinance, 2001. (AR No.1 Dated 01.12.2004)
Whether the amount to be received by non-resident company for rendering seismic
data processing services is chargeable to tax in Pakistan or not?
The assessee being non-resident, the amount received against seismic data processing/re-
processing services as a result of contract executed in Pakistan is liable to tax in Pakistan
under the head ―business income‖ in view of the provisions of section 6 of the Income Tax
Ordinance, 2001. (AR No.2 Dated 05.01.2005)
33
http://www.fbr.gov.pk/ShowArticle.aspx?view=Article&ActionID=157&ArticleID
52
Whether the amount of Rs.373 million received from the State Bank of Pakistan by a
non-resident on conversion of excess amount of capital account to Pak rupees for
setting off against accumulated losses is chargeable to tax?
The amount received from the State Bank of Pakistan by a non-resident on conversion of
capital account (maintained in Euros) to Pakistan rupees for off setting accumulated losses
is not chargeable to tax. (AR No.3 / Dated 27.04.2005)
Whether the income of non-resident person not having any permanent establishment
in Pakistan will be taxable or not?
Income of non-resident person is taxable in Pakistan irrespective of the fact whether it is
having PE or not. Treatment of tax deducted, in both the situations, will, however, be
different accordingly to provisions of section 153 of Income Tax Ordinance, 2001.
(AR No.4 / Dated 31.05.2005)
In view of the applicant‟s statement of interpretation of law and facts of the case, is
the income of Overseas Private Investment Corporation arising from the Credit
Facility extended to Emerging Markets Consulting (Private) Limited is exempt from
Pakistan income tax and accordingly not liable to withholding tax under the Income
Tax Ordinance, 2001?
Income of OPIC under the credit facility extending to Emerging Markets Consultant (Pvt.)
Ltd. would be exempt in Pakistan from Income Tax and accordingly not liable to withholding
tax under Section 152 of the Income Tax Ordinance, 2001.
[This is a case-specific Ruling given under an existing investment treaty between Pakistan
and the USA.] (AR No.5 / Dated 23.01.2006)
53
“The income of Telcordia under the contract dated November 14, 2005 with Pakistan
MNP Database (Guarantee) Limited is liable to withholding tax at 6% under section
153(1) and further under the provisions of section 153(7) such withholding tax is the
final tax liability.”
The sub-section (7) of section 153 of the Income Tax Ordinance, 2001 has been omitted
vide Finance Act, 2006. However under sub-section (1A) [enacted vide Finance Act, 2006]
of section 152, payments received on account of execution of a contract or sub-contract
under a construction assembly or installation project in Pakistan, including a contract for
supply of supervisory activities in relation to the such project or in any other contract for
construction or services rendered relating thereto shall be liable to withholding tax @ 6% as
provided in sub-para (1) of Division II of Part II of the 1st Schedule to the Income Tax
Ordinance, 2001, and tax so deducted under sub-section (1B) of section 152, subject to the
provisions of clause (41) of Part IV, of the Second Schedule to the Income Tax Ordinance,
2001. (AR No.6 / 04.07.2007)
“Whether or not a „working interest‟ in a PCA is an „immovable property?”
The working interest in the PCA belonging to the taxpayer (OPPI) is not an ―immoveable
property‖. It is rather an ―intangible‖ asset which is covered under sub-section (11) of
section 24 read with sub-section (30) of section 2 of the Income Tax Ordinance, 2001.
(AR No.7 / Dated 03.02.2009)
54
i) Network Fee in the hands of DHL Operations BV shall not be chargeable to tax in
Pakistan;
ii) Payment of network fee by DHL Pakistan (Private) Limited to DHL Operations BV
is not liable to any income tax withholding in Pakistan.
iii) Network Fee as per computation explained in Annexure 1 shall be an allowable
cost in the hands of DHL Pakistan (Private) Limited.”
i) ―Network Fee‖ not being a cost but a Pakistan-source income shall be chargeable to tax
in Pakistan.
ii) The ―Network Fee‖ would be liable to withholding tax, subject to adjustment on
determination of final tax liability of DHL BV in Pakistan.
iii) ―Network Fee‖ not being expenditure in nature, will not be allowable expenditure in the
hands of DHLP. (AR No.8 / Dated 03.02.2009)
“Whether or not the US Corporation, would be entitled to protection (being taxable
only in the country of residence i.e. USA) under the Agreement for Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on
income between the Government of Pakistan and the United States of America in
respect of consideration received by it for providing the „Basic Television Services‟
to a Pakistani entity.”
Consideration received by Media Merchants USA for providing ―Basic television Services‖
to a Pakistani entity is not taxable in Pakistan under the provisions of Article VIII of
55
Pakistan-USA Convention for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income. (AR No.9 / Dated 03.02.2009)
**********
56
11. EXEMPTIONS AVAILABLE TO NON-RESIDENTS

Along with the ‗Advance Ruling‘, the non-residents also enjoy the facility of exemptions
under various provisions of the Ordinance. The Second Schedule to the Ordinance,
consisting of four parts exempts, lowers the tax rates, allows reduction in the tax liability
and / or exempts from the operation of a specific provision of the Ordinance respectively,
with regards to the income or classes of income or persons or classes of persons specified
therein. The non-residents enjoy exemptions under these provisions as laid in various
clauses of four parts of the Second Schedule to the Ordinance.
In PART I of the Second Schedule to the Ordinance, Clause (72) exempts any profit on
debt payable to a non-resident person –
i) in respect of such private loan to be utilized on such project in Pakistan as may be
approved by the Federal Government for the purposes of this clause, having regard
to the rate of profit and the terms of repayment of the loan and the nature of project
on which it is to be utilized;
ii) on a loan in foreign exchange against export letter of credit which is used exclusively
for export of goods manufactured or processed for exports in Pakistan;
iii) being a foreign individual, company, firm or association of persons in respect of a
foreign loan as is utilized for industrial investment in Pakistan provided that the
agreement for such loan is concluded on or after the first day of February, 1991, and
is duly registered with the State Bank of Pakistan:
Importantly this clause has retrospective effect of exemption to the agreements
entered into in the past and has not been applicable to new contracts after the 30th
day of June, 2010, prospectively.
57
According to Clause (75) of the Part I of Second Schedule to the Ordinance, any income of
an agency of a foreign Government, a foreign national (company, firm or association of
persons), or any other non-resident person approved by the Federal Government for the
purposes of this clause, from profit on moneys borrowed under a loan agreement or in
respect of foreign currency instrument approved by the Federal Government, are exempt.
Clause (117) of the same Part of Second Schedule to the Ordinance, exempts any income
derived by a person from plying of any vehicle registered in the territories of Azad Jammu
and Kashmir, excluding income arising from the operation of such vehicle in Pakistan to a
person who is resident in Pakistan and non-resident in those territories. While under
Clause (135A) of the Part I of Second Schedule to the Ordinance, any income derived by a
non-resident from investment in OGDCL (Oil and Gas Development Corporation Limited)
exchangeable bonds issued by the Federal Government, is classified as exempt.
In PART II of Second Schedule to the Ordinance, according to the provisions of Clause
(5A), the rate of tax to be deducted under sub-section (2) of section 152, in respect of
payments from profit on debt payable to a non-resident person having no Permanent
Establishment in Pakistan, is reduced to 10% of the gross amount paid instead of 20% as
laid under Division II of Part III of the First Schedule. Provided that tax deducted on profit
on debt from debt instruments, Government Securities including treasury bills and Pakistan
Investment Bonds is taken as final tax on profit on debt payable to a non-resident person
having no Permanent Establishment in Pakistan and the investments are exclusively made
through a Special Rupee Convertible Account maintained with a Bank in Pakistan.
There is no specific provision for reduction in tax liability available to non-residents under
PART III of Second Schedule to the Ordinance.
58
However certain exemptions have been allowed to non-residents under PART IV from the
operation of specific provisions of the Ordinance. Such as Clause (19) of this Part IV
stipulates that the provisions of sections 113 (Minimum Tax on Income of Certain Persons)
and 151 (Tax Deduction from Payment on Profit on Debt) does not apply to non-residents,
(excluding local branches or subsidiaries or offices of foreign banks, companies,
associations of persons or any other person operating in Pakistan), in respect of their
receipts from Pak rupees denominated Government and corporate securities and
redeemable capital, as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed
on a registered stock exchange, where the investments are made exclusively from foreign
exchange remitted into Pakistan through a Special Convertible Rupee Account maintained
with a bank in Pakistan. While Clause (41) of the Part IV exempts the operation of the
provisions of sub-section (1B) of section 152 in respect of a non-resident person unless he
opts for the presumptive tax regime. Clause (41B) exempts the provisions of sub-section
(2) of section 152 in respect of payments to foreign news agencies, syndicate services and
non-resident contributors, who have no permanent establishment in Pakistan. And Clause
(46) provides exemption of the operation of the provisions of sub-section (1) of section 153
to any payment received by an oil distribution company or an oil refinery or Permanent
Establishment of Non-resident Petroleum Exploration and Production (E&P) Companies for
supply of its petroleum products.
**********
59
12. DOUBLE TAXATION AGREEMENTS
Pakistan has comprehensive double-taxation avoidance agreements in force with several
countries. Most of such agreements allow relief from double tax by the credit method or by
a combination of the credit and exemption methods. The Federal Government of Pakistan
seeks support from the provisions of section 107 (Agreements for the avoidance of double
taxation and prevention of fiscal evasion) of the Ordinance to enter into an agreement with
the government of a foreign country with respect to taxes on income imposed under the
Ordinance and under the corresponding laws in force in that foreign country. Accordingly
where such agreement is made between the Federal Government and a foreign country,
the agreement and the other relevant provisions made for the implementation of the
agreement has effect for –
a) relief from the tax payable under this 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 this Ordinance and under the corresponding laws
in force in that other country.
60
The Government of Pakistan has so far signed agreements to avoid double taxation with 63
countries including almost all the developed countries of the world. These agreements lay
down the ceilings on tax rates applicable to different types of income arising in Pakistan.
They also lay down some basic principles of taxation which cannot be modified unilaterally.
The list of countries with which Pakistan has concluded tax treaties is given in Table 4.
Generally the purpose of bilateral tax treaties is expressed in their preambles. Most
substantially it is the avoidance of double taxation and prevention of fiscal evasion, as the
name of the agreements themselves suggest. Dilating upon the purpose of double taxation
treaties Amatucci, Gonzalez and Trzaskalik (2006)34 expalins:
In reality a treaty is more correctly described as an instrument which refines and
improves existing provisions in domestic legislation which are designated to
eliminate international juridical double taxation i.e. most countries have in their own
tax law provisions which are designated to alleviate double taxation and the treaty
serves to assist in that process and better integrate it with the corresponding
provisions in the treaty partner‘s law…Moreover tax treaties do not just indicate
international sourcing rules that determine in which Contracting States certain
income originates or capital assets are located. These rules must be read together
with other rules establishing under what conditions and in relation to which
Contracting State the income or asset concerned may be justifiably be taxed.
Therefore the tax treaties create an independent device to avoid double taxation,
through restriction of Contracting States‘ tax claims, where there could be an
overlapping of these claims. In this way States waive tax claims, and they bind
themselves not to levy taxes, or to tax only to a limited extent, in cases when the
34 Andrea Amatucci, Eusebio Gonzalez and Christoph Trzaskalik, International Tax Law, Kluwer Law International (2006) p 153
61
treaty gives the taxing right to the other Contracting State either entirely or in part.
It could be said that tax treaties in a way establish boundaries on domestic
taxation. In contrast, a tax treaty neither generates a tax claim that does not
otherwise exist under domestic law nor expands the scope or alters the type of an
existing claim.
Country Date of Country Date of Country Date of

Agreement Agreement Agreement
Austria 5th May 1972 Azerbaijan 24th July 1999 Bahrain 25th Sep. 2009
Bangladesh 8th July 1987 Belarus 30th Aug. 2006 Belgium 28th Feb. 1984
Bosnia and 7th Feb. 2007 Canada 14 Jan. 1978 China 26th Aug. 2000
Herzegovina
(Updated)
Denmark 21st Dec. 2002 Egypt 29th Jan. 2001 Finland 18th Jan. 1996
(Updated)
France 2nd Sep. 1996 Germany 8th Jan. 1996 Hungry 27th Sep.1993
(Updated)
Indonesia 3rd April 1991 Iran 24th April 2004 Ireland 18th Aug. 1973
Italy 20th April 1992 Japan 1st Nov. 2008 Jordan 31st July 2007
Kazakhstan 1st March 1997 Kuwait 28th May 2002 Kyrgyz -

Republic
Lebanon 26th June 2008 Libya 1st March 1976 Malaysia 12th April 1983
Malta 20th Dec. 1975 Mauritius 8th Feb. 1995 Morocco 28th Oct. 2009
Nepal - Netherlands 5th July 1979 Nigeria 10th Jan. 1990
Norway 8th July 1987 Oman 28th Sep. 2002 Philippines 24th June 1981
Poland 6th May 1976 Portugal 24th July 2007 Qatar 29th April 2000
Romania 23rd Feb. 2001 Saudi Arabia 15th Nov. 2006 Serbia 19th July 2011
(Updated) (Updated)
62
Singapore 8th Sep.1993 South Africa 2nd Sep. 2003 South Korea 23rd Dec.1987
Spain 26th Oct. 2011 Sri Lanka 27th Nov.1983 Sweden 25th Aug.1986
(Updated) (Updated)
Switzerland 20th Dec. 2008 Syria 18th Dec. 2002 Tajikistan 30th July 2005
(Updated)
Thailand 12th Jan. 1981 Tunisia 16th Jan. 1998 Turkey 15th Oct. 1988
Turkmenistan 9th Jan. 1998 Ukraine - UAE 26th April 2001
(Updated)
UK 8th Feb.1988 USA 3rd Dec. 1989 Uzbekistan 22nd Aug.1995
(Updated) (Updated)
Vietnam 13th June 2005 Yemen 16th Jan. 2006
And
Greece 22nd May 1998 India 18th Feb 1989 Kenya 13th Aug. 1994
(Updated) (Updated)
SAARC 20th Dec. 2006
Table 4: List of countries with which Pakistan has concluded tax treaties
The Income Tax Appellate Tribunal of Pakistan explained the scope of these Conventions,
while referring to the double taxation treaty of Pakistan with Poland35 as:
As is evident from above provision, the Conventions are made in suppression to
the normal provisions and to provide relief from the taxable income under this
Ordinance or from the method for determination of the income that may accrue or
arise to the said non-residents in Pakistan. Since the Convention is not
withstanding the provisions of Income Tax Ordinance, hence is governed under its
35 2006 PTD 1962, appeal ITA N0 713/LB of 2004 decided on 21-05-2005
63
own Articles. Under Article 3(7) of the said Convention deduction of expenses
which are incurred for the purpose of permanent establishment, are to be allowed
as a whole. It says that such expenses may have been incurred in the state of
permanent establishment or elsewhere in respect of said permanent
establishment. The language used is very wide and reading the same through
section 163(2) above clearly gives the impression that only such expenses which
are incurred for the purposes of permanent establishment are allowable. There is
an exception to the rule. However, said exception is not with regard to the section
24(i). It has also not been mentioned anywhere that the provisions of the Income
Tax Ordinance shall apply with regard to the determination of expenses under the
said Convention. Such Convention as already mentioned are drawn under the
delegated power through the above section i.e., section 163. It is as good a law as
Income Tax Ordinance itself is. The rules of interpretation applicable on
interpretation of statutes are fully applicable for interpreting the Articles of the
Convention. In this regard the golden principle of not to exceed beyond intentments
applies on all fours. Section 163 is a non obtante clause. It supersedes everything
contained in I.T. Ordinance, 1979. Once all the provisions are substituted by a
separate convention it cannot be said that provisions of Income Tax of Pakistan
are still applicable...
The language used in the double taxation treaties always remain of profound importance
and subject to strict interpretation in accordance with the words and phrases of the treaty.
The Income Tax Appellate Tribunal of Pakistan 36 , while commenting and interpretting
Articles III(3) of the Convention between Pakistan and UK executed on 9 th January 1962
and Article III(4) of Pakistan and Federal Republic of Germany notified on 5 th October,
1960, as reproduced below, compared and held:
36 1996 PTD 244, ITA No. 1601/KB of 1985-86decided 31/03/1994.
64
III(3): In the determination of the profits of a permanent establishment, there shall
be allowed as a deduction expenses which are reasonably allocable to the
permanent establishment including executive and general administration
expenses so allocable, whether incurred in the State in which the
permanent establishment is situated or elsewhere.''
[Excerpts from Pak-UK Double Taxation Treaty]
III(4): In determining industrial or commercial profits of a permanent
establishment there shall be allowed as deductions all expenses
reasonably allocable to the permanent establishment, including executive
and general administration expenses so allocated.
[Excerpts from Pak-Germany Double Taxation Treaty]
A comparison of the above provisions shows that both the Articles provided for
allowing the expenses which are reasonably allocable to the permanent
establishment including executive and general administration expenses so
allocable. However, there is one important difference in the contents of Treaty
between Pakistan and U.K. and between the Pakistan and Federal Republic of
Germany. In Pak U.K. treaty it is specifically provided that the expenses whether
incurred in the state in which permanent establishment is situated or elsewhere
shall be allowed if reasonably allocable to the permanent establishment while in
Pakistan and Federal Republic of Germany treaty the expression, ``whether
incurred in the state in which the permanent establishment is situated or
elsewhere'' is missing. Thus, in the case of Pak U.K. treaty all the expenses
reasonably allocable to the permanent establishment wherever incurred is to be
allowed while in the case of Pak F.R. Germany Treaty the expenses incurred
elsewhere are not to be allowed. Only those expenses are to be allowed which are
65
reasonably allocable to the permanent establishment including executive and
general administration expenses.
Factually and legally Pakistan‘s Avoidance of Double Taxation Agreements with other
nations find the basis of following model agreements:
- OECD Model
- ANDEAN Model
- UN Model, and
- US Model
Primarily the difference between ANDEAN and OECD Model is that the ANDEAN Model is
based on the source country principal while the OECD Model recognizes the priority of the
country to tax income. The basic concept of the OECD Model is opposite to the principle of
source and recognizes the right to tax income and gain to the country where the taxpayer is
resident. The ANDEAN Model therefore, seeks to resolve the basic cause of international
double taxation while locating the source in one country to the other but never in both the
countries, where the OECD Models resolve by dividing the tax take between the two
countries.
While the UN model is intended to serve the developing countries and was published by
UN in 1980. This model has greater tax rights to the country where the income arises by
providing the higher rates of withholding taxes on various heads of income and by allowing
countries to retain most of the taxing powers available under the domestic tax laws for
foreign businesses operating in the country. All the double taxation agreements entered
into by Pakistan and other countries consist of around 7 chapters and 29 to 30 articles. A
model agreement is detailed below:
66
Article I: General scope
Article 2: Taxes covered
Article 3: General definitions
Article 4: Resident
Article 5: Permanent Establishment
Article 6: Income of immovable property
Article 7: Business profits
Article 8: Shipping and Transport
Article 9: Associated Enterprises
Article 10: Dividends
Article 11: Interest
Article 12: Royalties
Article 13: Capital gains
Article 14: Independent Personal Services
Article 15: Dependent Personal Services
Article 16: Directors' Fees and remuneration on top levels managerial officials
Article 17: Income earned by artistes and athletes
Article 18: Pension and Social Security Payments
Article 19: Remuneration and pension of government functions
Article 20: Payments received by students
Article 21: Professors, teachers and research scholars
Article 22: Other income
Article 23: Methods of elimination of double taxation
Article 24: Non-discrimination
67
Article 25: Mutual agreement procedure for resolving uncertainties and difference of
opinion
Article 26: Exchange of information
Article 27: Diplomatic and consular activities
Article 28: Entry into force
Article 29: Termination
These double taxation treaties have a dual nature. On one hand they are international
agreements entered into between Pakistan and other states to regulate the exercise of their
fiscal jurisdiction; on the other hand they become part of the domestic law of each of the
states.
The problem of the correct approach to interpreting tax treaties is discussed by Dr. Raoul
Lens, the General Reporter in the International Fiscal Association's 1960 Report on the
interpretation of double taxation Convention.
"International agreements for the avoidance of double taxation are bilateral
treaties and thus belong to the law of nations in the same way as any other
political or economic treaty. If the meaning of a treaty provision is not clear then
the problem will be solved in the first place by applying the usual public law.
However, double taxation agreements have a purpose substantially different from
that of normal fiscal legislation and to avoid the simultaneous taxation in both
countries."
In IRC vs. Exxen Corporation (56 T.C. 237), Gouldng J. departed from the plain meaning of
words as specifically defined in the convention in order to give effect to terms used. He
explained his approach as follows:
68
"In coming to this conclusion I bear in mind that the words of the convention are
not those of a regular parliamentary draughtsman but a text agreed on by
negotiation between the two contracting governments. Although I am thus
constrained to be violence to the language of the convention, I see no reason to
inflict a deeper would than necessary. In other words, I prefer to depart from the
plain meaning of language only in the second sentence of article XV and I accept
the consequence (strange though it is) that similar words mean different things in
the sentences."
In another case of Union Taxes Petroleum Corp. vs/ Critchly (1988 STC 691) Harman J.
affirmed the words of Coulding J. and added:
"I consider that I should bear in mind that this double tax agreement is an
agreement. It is not a taxing statute, although is an agreement about how taxes
should be imposed. On that basis, in my judgment this agreement should be
constructed as ut re magis valeat quam pereat, as should all agreements. The fact
that the parties are high contracting parties to use an old description, does not
change the way in which the courts should approach the construction of any
agreement."
While studying these Conventions and the principles of interpreting the treaties, I came
across a conventional wisdom that maintains that the emergence of the international tax
regime is a miracle. I believe so. This is so, the argument goes, because taxes are the last
topic on which a Hobbesian observer would have predicted sovereign nations to reach a
consensus given the zero-sum nature of the game: one country‘s gain in revenue is
another‘s loss. Although another author argues, however, that the emergence of a core part
of the international tax regime is not a miracle, but rather an intelligible, sometimes failed,
attempt to solve the problems arising from the strategic interaction among nations for the
69
division of the international tax base. The debate goes on. But I feel that taxing people is
the most difficult and intelligible task. The two nations entering into such Conventions must
make careful yet professional choice of the words and phrases with an aim to guard their
own revenues first.
**********
70
13. THIN CAPITALIZATION

It is felt imperative to explain the concept of Thin Capitalization before concluding this
paper. Thin Capitalization is yet another very vital concept introduced in the Income Tax
Code of Pakistan for an effective control of tax avoidance by the companies. Primarily
capitalization is an act or process of capitalizing or converting something into capital; to
compute the present value of income extended over a period of time and Thin
Capitalization is a financial condition of a business that has a high ratio of liabilities to
capital. When debt owed by a business is large in relation to its capital structure, it is
generally stated that the business is thinly capitalized.
Under the Ordinance, this concept has been introduced mainly to encourage the foreign
companies to invest in the equity of a company instead of advancing its loans. In the light of
provisions of section 106, the principles of thin capitalization are applicable to a foreign
controlled resident company (other than a financial institution or a banking company) which
has foreign debt to foreign equity ratio more than three to one during a Tax Year. For this
company, any deduction claimed for a profit on debt in excess of three to one ratio is
disallowed. These were just a few of the incentives and provisions which have been
provided in the Ordinance which is based on Federal Government's commitment of
"voluntary compliance backed by strong audit". In the Tax Code it has further been
provided that all returns filed u/s 114, including returns filed by the non-residents are
converted into assessment order on the date of their filing and only a certain percentage of
the cases are selected for total audit.
71
While referring to the concept of This Capitalization, Huzaima Bukhari & Dr. Ikramul Haq37,
observed:
This section is very vital for the effective control of tax avoidance by companies
resorting to this capitalization. A company may be financed in two ways: (i) by
equity capital or (ii) by debt capital, and generally it will be financed by a
combination of debt and equity. A company is sadi to be ‗thinly capitalized‘ when
its equity capital is small compared to its debt capital.
Because a company and its investors may be treated differently for tax purposes,
depending on whether the return to the investor derives from the debt or equity
financing, thin capitalization may be used as an effective tax avoidance device.
On the company side, payments of interests are generally deductible in arriving
at taxable income while dividends are not, giving a company financed with loan,
taxation advantage over a company financed with equity capital.
On the investor‘s side, interest paid to non-resident contributor of capital may
under a tax treaty be subject to a lower rate of withholding tax in a country of
source rather than dividend. The use of loan capital rather than equity can
therefore result in a considerable reduction of tax payable...
While explaining the application of thin capitalization rule to the branch operation of non-
resident companies, the Federal Board of revenue issued Circular 5 of 2008 dated July 5,
2008, para 9 of the said Circular states:
Profit on foreign debt payable by a foreign controlled resident company in excess
of three to one foreign debt equity ratio is not an admissible expense under
section 106 of the Ordinance. However, there was no such restriction on
branches of foreign companies not incorporated under Companies Ordinance,
37 Huzaima and Ikram’s, Law and Practice of Income Tax, Volume I, P 605, on the Comments under section 106.
72
1984. To provide level playing field to all operations of foreign companies ―Thin
Capitalization‖ rule has been made applicable to the branches of foreign
companies operating in Pakistan.
The section 106, dealing with thin capitalization also clarifies the meanings of various
concepts exclusively used in the section.
Foreign-Controlled Resident Company means a resident company in which fifty percent
or more of the underlying ownership of the company is held by a non-resident person either
alone or together with an associate or associates;
Foreign Debt in relation to a foreign-controlled resident company, means the greatest
amount, at any time in a tax year, of the sum of the following amounts, namely: —
a) The balance outstanding at that time on any debt obligation owed by the
foreign-controlled resident company to a foreign controller or non-resident
associate of the foreign controller on which profit on debt is payable which
profit on debt is deductible to the foreign-controlled resident company and is
not taxed under the Ordinance or is taxable at a rate lower than the corporate
rate of tax applicable on assessment to the foreign controller or associate;
and
b) the balance outstanding at that time on any debt obligation owed by the
foreign-controlled resident company to a person other than the foreign
controller or an associate of the foreign controller where that person has a
balance outstanding of a similar amount on a debt obligation owed by the
person to the foreign controller or a non-resident associate of the foreign
controller.
73
Foreign Equity in relation to a foreign-controlled resident company and for a tax year,
means the sum of the following amounts, namely: —
a) the paid-up value of all shares in the company owned by the foreign controller
or a non-resident associate of the foreign controller at the beginning of the tax
year;
b) so much of the amount standing to the credit of the share premium account of
the company at the beginning of the tax year as the foreign controller or a
non-resident associate would be entitled to if the company were wound up at
that time; and
c) so much of the accumulated profits and asset revaluation reserves of the
company at the beginning of the tax year as the foreign controller or a non-
resident associate of the foreign controller would be entitled to if the company
were wound up at that time;
reduced by the sum of the following amounts, namely: —
(i) the balance outstanding at the beginning of the tax year on any debt
obligation owed to the foreign-controlled resident company by the
foreign controller or a non-resident associate of the foreign controller;
and
(ii) where the foreign-controlled resident company has accumulated
losses at the beginning of the tax year, the amount by which the return
of capital to the foreign controller or non-resident associate of the
foreign controller would be reduced by virtue of the losses if the
company were wound up at that time.
**********
74
14. CONCLUSION AND RECOMMENDATIONS (REVAMPING THE NON-

RESIDENTS‟ TAXATION REGIME)
Primarily the Income Tax Ordinance, 2001 changed the concept of international taxation
with an overall objective of attracting foreign investment. The income tax provisions are so
designed to provide hassle free flow of international trade. For that matter the Federal
Government has been empowered to enter into an agreement with the Governments of
foreign countries for avoidance of double taxation and prevention of fiscal evasion with
respect of taxes, on income, imposed under the 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, override the provisions contained in any law for the time
being in force. It may be noted that Superior Courts, not only of Pakistan but of various
other countries as well, 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".
In furtherance of attracting the foreign investment, the Government of Pakistan is keen to
enter into double taxation agreements with other countries, aiming at to eliminate or
mitigate the instance of double taxation. Pakistan‘s keenness can be seen in terms of the
double taxation treaties, it entered into with other countries during the last fifteen years,
more than twenty five in number, in comparison with only fifty agreement signed during the
earlier fifty years of Pakistan‘s existence.
In practice, it is really a good trend as Pakistan joins the comity of international tax regime.
Yet the nation needs to address multifaceted problems issues facing the taxation of non-
residents. Most importantly the present tax law specifically addresses the tax regimes of
75
non-residents to the extent of payments received by the non-residents against the 1)
Pakistan-sourced royalty or fee for technical services; and 2) Income received from
shipping and air transport business. The other amounts are mostly covered under the
withholding tax regimes as explained in the earlier section of this paper. It may be a better
course if other category and class of payments, such as payments to teachers and
researchers; students and apprentices; entertainers, sportsmen and sportswomen and
income from real estate etc. may also be placed under distinct sections of the ordinance, so
that the issues instead of, inclusively placing under the withholding tax provisions, be dealt
with more elaborately and exhaustively.
It is also an important manifestation that the double taxation treaties are essentially
bilateral, not for Pakistan alone but for the entire world. It is primarily because of the fact
that the models were initially developed before the World war II, when bilateral treaties
were normal practice. But it is a right time to try and negotiate multilateral double taxation
treaties especially when the nations face ‗triangular cases‘ involving third country. Taken
Kashmir, as one of the regions of Pakistan, which under the Constitution of Pakistan is not
part of it, instead, it is considered as a disputed territory, the accession of which is to be
determined on the basis of the will of the people of its region. Any investment made in this
part of Pakistan, the region generally is known as Azad Jammu and Kashmir, requires
multilateral agreements on tax issues involving three governments to sign the agreement
i.e. the Government of Pakistan, Government of Azad Jammu and Kashmir and the
Government of contracting states. Similar situation may arise at other part of the world too,
necessitating the multilateral agreements of avoidance of double taxation.
76
Finally, I feel it appropriate to conclude the entire Paper with writing few words on a fresh
issue that cropped up in Pakistan, recently relating to the taxation of non-residents under
the Ordinance and the Avoidance of Double Taxation Agreements. It is a scenario of
taxation of non-resident companies carrying out business in Pakistan under the joint
venture with some local taxpayers. According to the tax officials the taxation of this
category of non-residents is processed under the relevant provisions of the Income Tax
Ordinance, 2001, and the Avoidance of Double Taxation Agreements. And as such the
non-resident companies cannot be taxed under the Presumptive Tax Regime and denied
exemption certificates/refunds on the basis that the person was doing business under
arrangement of Joint Venture. Apparently, this opinion is based on the interpretation of
Circular 4 of 1964 and Circular 8 of 1986 and all relevant provisions of the Income Tax
Ordinance 2001. The issue mainly related to the issuance of exemption certificates and
taxation of non-resident companies having some joint ventures with local resident
taxpayers. The dispute is that whether such joint ventures are entitled to exemption
certificates/refunds or not. Promptly intervening into this unnecessary legal debate, the
Federal Board of Revenue of Pakistan issued a Circular on 18th January, 2013 clarifying
that:
The matter has been reconsidered at the Board and it has been decided that
the JVs (Joint Ventures) under all circumstances is to be assessed in tha
capacity of an AOP as per clear provisions of Section 92 of te Income Tax
Ordinance, 2001, and the income of the AOP is final discharge of tax liability as
per Section 169 of the Ordinance. Therefore, no exemption certificate u/s 153
of the Ordinance should be issued on the plea that the income of JV / AOP is
either exempt from tax or tax is ‗adjustable‘.
77
Putting this specific situation in the section of ‗Conclusion and Recommendations‘ of the
thesis, has only one objective. It relates to the prompt intervention of the Federal Board of
Revenue, quickly resolving an unnecessary legal debate. Though it did not end in favor of
the non-residents but one thing is for sure and that is that the Federal Board of Revenue
ceased an uncertain situation the moment its cropped up. Not putting the non-residents into
an ambiguous legal fiasco, clarifying the issue there and then, is a very healthy sign, that
must be encouraged and continued in future as well.
**********
78
BIBLIOGRAPHY
Andrea Amatucci, Eusebio Gonzalez and Christoph Trzaskalik, International Tax Law,
Kluwer Law International, 2006.
Basil Siddique, Dictionary of Income Tax Ordinance – 2001, Suhail Academy, Lahore,
2008.
Bryan A. Garner, Black’s Law Dictionary, Eighth Edition, West Publishing Company, 2004.
Dinesh Vyas, Kanga, Palkhivala and Vyas’ The Law and Practice of Income Tax, Volume I
and II, Ninth Edition, LexisNexis, New Delhi, 2004.
Dr. Ikramul Haq, LL.D., Practical handbook of Income Tax, Twentieth Edition, AA
Publishers Lahore, 2010.
Eduardo Baistrocchi, The Use and Interpretation of Tax Treaties in the Emerging World:
Theory and Implications, Reprinted from British Tax Review, Issue 4, 2008.
Eric Neumayer, ―Do double taxation treaties increase foreign direct investment to
developing countries,‖ Journal of Development Studies, 43 (8), 2007, pp. 1501-1519.
Government of Pakistan, Ministry of Finance, 2012-13, Year Book, Federal Board of
Revenue.
Herbert Broom. LL.D., A Selection of Legal Maxims: Classified and Illustrated, 10th Edition,
Pakistan Law House, Karachi, 2008.
Huzaima Bukhari and Dr. Ikramul Kaq, Huzaima and Ikram’s law and Practice of Income
Tax Volume I, II and III, AA Consultants & Publishers, Lahore, 2013.
79
Justice (R) Fazal Karim, Access to Justice in Pakistan, Pakistan Law House, 2003,
N.A. Palkhivala and B.N. Palkhivala, Kanga and Palkhivala’s The Law and Practice of
Income Tax, Volume I and II, Seventh Edition, Bombay, 1976.
O‘ Haver, ‘Transfer Pricing: A Critical Issue for Multinational Corporations’, Tax Analysts
Doc. No. 2006-5915 (4 May, 2006).
Reuven S. Avi-Yonah, Globalization, Tax Competition and the Fiscal Crisis of the Welfare
State, Harvard Law School, Public Law and Legal Theory Working Paper Series, Working
Paper No. 004, Spring 2000.
Sheikh Asif Salam C.A., S.A.Salam’s Complete Income Tax Law, 8th Edition, Salam
Chambers, Lahore, 2006.
**********
80
View publication stats

ADITFinalThesis PDF

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

ADITFinalThesis PDF

Загружено:

Авторское право:

Доступные форматы

See discussions, stats, and author profiles for this publication at: https://www.researchgate.

Taxation of Non-Residents under Income Tax Law of Pakistan

Article in SSRN Electronic Journal · January 2014

Research Project View project

Translation View project

The user has requested enhancement of the downloaded file.

ADIT Reg. 195510 &

Advance Diploma in International

Taxation of the Chartered Institute of Taxation

of all the disabled children

of the world, suffering from Krabbe Disease.1

 Legislative History of Income Tax Law

3. CHARGEABILITY OF INCOME TAX (TAX ON TAXABLE INCOME) _ _ _ _ _ _ 15

 Subject to the Ordinance…

 Test of Residence of an Individual

6. GEOGRAPHICAL SOURCE OF INCOME _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 33

7. TREATMENT OF CERTAIN PAYMENTS TO NON-RESIDENTS _ _ _ _ _ _ _ _ 37

 Payments on Account of ‗Royalty‘ and ‗Fee for Technical Services‘

8. TREATMENT OF PERMANENT ESTABLISHMENT OF NON-RESIDENTS _ _ 42

10. ADVANCE RULING _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 50

11. EXEMPTIONS AVAILABLE TO NON-RESIDENTS _ _ _ _ _ _ _ _ _ _ _ _ _ _ 57

 Exemptions under Part I of Second Schedule to the Ordinance

12. DOUBLE TAXATION AGREEMENTS _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 60

13. THIN CAPITALIZATION _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 71

14. CONCLUSIONS AND RECOMMENDATIONS: (REVAMPING THE NON-

categories to be treated as persons under the Income Tax Law of Pakistan:

2. A Company or Association of Persons incorporated, formed, organized or

established in Pakistan or elsewhere;

3. The Federal Government, a Foreign Government, a Political Sub-Division of a

Foreign Government, or a Public International Organization.

residence in Pakistan, whether the taxpayer is Resident or it is a Non-Resident. The test of

residence of an Individual, revolves around a question of his aggregate stay in Pakistan in

Pakistan‖ is a thesis towards completion of Advanced Diploma in International Taxation

globalization with easy flow of knowledge, capital and manpower.

is attributable to two factors: 1) Unprecedented increase in technological innovations, and

make a comparison of taxability of residents and non-residents, instead it analyzes the

taxation principles of non-residents under the Income Tax Law of Pakistan.

Legislative History of Income Tax

Dr. Ikramul Haq4, observed:

amendments and judicial pronouncements made it a workable, better

understandable and acceptable piece of legislation for everybody, yet another

contradictions, dichotomies and conflicts. …it contains a numerous mistakes of

drafting, concepts and what not…

complicated and unworkable. We pointed out in the very beginning a number of

typographical errors, drafting blunders, legal lacuna, inconsistencies, conceptual

fallacies and dichotomies.

explicates adoption of pre-independence Income Tax Act, 1922 through

Constitution has prescribed a four month life of an Ordinance in case the

parameters prescribed under the scheme of the Constitution.

accordance with the injunctions of Islam and the Doctrine of expectation of

consultations as law laid down in the following judgments:--

(ii) Re Liverpool Taxi Owners' Association's case (1972) 2 All ER 589.

including computation of taxable income, computation of tax liability, payment of tax,

taxpayers, including individuals (natural persons), companies and association of persons

(artificial persons) whether residents or non-residents are administered through the

provisions of this Ordinance.

These Schedules are treated as part of the Ordinance.

Supreme Court of Pakistan.

Constitutional Validity of Income Tax

State. In fact, Constitution6 as a well-established document of a state is known to be a

from time to time.

The Federal Government of Pakistan is empowered by Entry 47, of Part I of Federal

Federation except by or under the authority of Act of Majlis-e-Shoora (Parliament).