Who will be a resident Pakistani taxpayer?

The Federal Board of Revenue (FBR) has brought another change in the definition of a resident Pakistani taxpayer to bring in those people in the tax net that stay abroad for over six months in a tax year.

The latest amendment enacted through the Finance Act 2022 has created some confusion among frequent flyers about their status whether they would be treated as taxpayers of a foreign country or as Pakistani ones.

Before the Finance Act 2022, a person was treated as a resident Pakistani taxpayer if they were "present in Pakistan for a period of, or periods amounting in aggregate to 183 days or more in a tax year”.

This meant that a person had to stay abroad for more than six months to avoid becoming a Pakistani resident taxpayer.

Many wealthy people would exploit this opportunity and plan their individual taxation in a manner that they avoided becoming a taxpayer of any country.

Now the government has amended the Income Tax Ordinance through the Finance Act 2022 to plug this and created a lacuna.

According to the new definition, “an individual shall be a resident … for the tax year if [they], being a citizen of Pakistan, is not present in any other country for more than 182 days during the tax year or who is not a resident taxpayer of any other country”.

This has also created confusion among the people about whether they would have to stay in a particular country for continuous six months to avoid becoming a Pakistani resident taxpayer or they could fly in and out of the foreign country.

The answer is that a person will have to stay in a foreign country for 183 days to claim the status of a non-resident Pakistani taxpayer, and this can be achieved by coming in and going out for more than one time.

For instance, Mr A travels to Dubai, stays there for four months and then leaves for Switzerland and also stays there for over two months. Then Mr A again comes back to Dubai and stays for two months and is entitled to claim the status of a non-resident Pakistani taxpayer.

But if Mr A stays abroad in four different countries during 365 days of a tax year and his stay in any one particular country is less than 183 days, he will be treated as a Pakistani taxpayer by the FBR. Mr A will also be a Pakistani taxpayer if he is not paying income taxes in any foreign jurisdiction.

It is the fourth time in as many years that the FBR has tried to plug the loophole but every time it has created a mess.

In 2019, it amended the law and stated that a person would be treated as resident Pakistani and be liable to pay income tax, if they stayed in Pakistan for a minimum of four months.

Then it again brought an amendment last year to delete a clause that had been retrospectively applied to calculate 183 days but the FBR had again failed to get the desired results.

During the past few years, the PML-N and PTI governments brought substantial changes to the Income Tax Ordinance 2001 aimed at improving tax recovery from abroad. However, so far these changes have not translated into revenues due to the capacity and implementation issues.

Pakistan has so far received information about $35 billion from the Organization for Economic Cooperation and Development (OECD). However, the information about nearly $30 billion turned out to be not actionable.

There are over 4,000 Pakistanis who have about $2 billion assets abroad but are non-residents for tax purposes, according to the information that the OECD shared with the FBR.