Pakistan may end special tax system

Considers bringing foreign companies on par with local firms

Shahbaz Rana June 01, 2020

ISLAMABAD: Pakistan is considering ending preferential tax treatment for foreign companies working in the country aimed at bringing them on a par with domestic firms and getting an additional Rs22 billion in revenues from them in the next fiscal year.

The proposals are part of the measures shortlisted by the Federal Board of Revenue (FBR) for fiscal year 2020-21, starting July, highly placed sources told The Express Tribune. However, no final decision has been taken yet as there are some critical voices against the proposal, they added.

The FBR has proposed that the tax withheld from contractual payments to permanent establishments of non-resident companies should be treated as “minimum” withholding tax, the sources said.

At present, the tax paid by these companies is adjustable. The proposal is expected to yield at least Rs21 billion in revenues, they added.

The sources said that withholding taxes being collected on supplies to permanent establishments of non-resident companies should also be treated as minimum tax aimed at collecting another over Rs1 billion.

The proposal, if endorsed by Prime Minister Imran Khan, will ensure a level playing field for local companies that are against the special tax treatment given to foreign firms. In case of declaring the withholding tax as minimum tax, their tax deductions will be treated as minimum and the FBR will not be required to pay them refunds.

At present, Chinese companies are complaining about blocking of their tax refunds by the FBR.

Prime Minister Imran Khan on Monday chaired a meeting on the upcoming budget, scheduled to be announced on June 12. Certain budgetary numbers remain tentative due to discussions with the International Monetary Fund (IMF).

Sources said that the IMF remains adamant on the question of Rs5.1 trillion tax collection target for the FBR for the next fiscal year but discussions were ongoing. They said that the government was making budget at Rs5.1 trillion target, which requires 31% growth rate over expected collection this year.

Another issue with the IMF was clubbing the second and third review of the IMF programme, which remains technically suspended for last few months. Pakistan aims to revive the IMF programme from July, which will require some tough decisions on part of Prime Minister Imran Khan.

The avoidance of double taxation treaties with foreign countries would dilute the fiscal impact of any such proposal, as under section 107 of the Income Tax Ordinance, the Avoidance of Double Taxation Treaties tax precedence over the domestic laws, said Dr Ikram ul Haq, an eminent tax lawyer.

Any change in taxation status of permanent establishments of non-resident companies and persons will be against the Article 5 of the avoidance of double-taxation treaties, said Dr Haq.

But tax authorities said that since place of business of non-resident companies is Pakistan they will have to pay minimum tax as per domestic law. It will also resolve the issue of income tax refunds, mainly of Chinese companies.

Changing taxation regime of permanent establishments of foreign companies is the second largest proposed revenue spinner after the proposed uniformed income tax rate on profit on debt that is expected to fetch Rs26 billion in next fiscal year.

Currently, the rate of tax imposed under section six on payments to non-residents is 15% of the gross amount of the royalty or fee for technical services and 5% of the gross amount of the fee for offshore digital services, according to the Income Tax Ordinance.

Dr Haq said that as against 15% tax rate, the Chinese companies are charged 12% rate and Singapore companies at 10% rate under the bilateral avoidance of double taxation treaties. In case tax rate under the local law is higher, the non-resident companies will be charged under the double taxation treaty, he added.

There is also section 105 in the Income tax Ordinance that sets out principles to collect taxes from the permanent establishments of non-resident companies.

Under section 152, every person paying an amount of royalty or fees for technical services to a non-resident person that is chargeable to tax under section 6 shall deduct tax from the gross amount paid at the rate of 15%.

Under section 152 (1C), tax shall be deducted on remittance outside Pakistan, of fee for off-shore digital services at 5% rate.

Under section n152 (2A) every prescribed person making payment to a Permanent Establishment of Non-Resident for sale of goods to a company will charge 4% tax of the gross amount and other than company case 4.5% of the gross amount.

Under section 153, the non-resident persons are also charged at varying rates.

Published in The Express Tribune, June 2nd, 2020.

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