Karachi, October 22, 2023 – As the deadline for filing income tax returns for 2023 approaches in Pakistan, a thorny issue has emerged, causing confusion among Pakistani tax residents who own properties in the United Arab Emirates (UAE).
A commentary on the situation has been issued by Syed Shabbar Zaidi & Co., pointing out various aspects of the issue.
The issue revolves around the taxation of income derived from foreign immovable properties, particularly in Dubai and other emirates. With a growing number of Pakistanis investing in overseas real estate, it is crucial to decipher Pakistan’s taxation laws and the implications of the Double Taxation Avoidance Agreement (DTAA) between Pakistan and the UAE.
Pakistani citizens constitute the second-largest group of foreign property owners in the UAE, after Indians. A significant portion of these properties is rented out, yet many remain undeclared in Pakistan’s tax returns, even when the income generated originates within Pakistan. To encourage property owners to declare their foreign assets, the Pakistani government introduced Asset Declaration laws in 2018 and 2019. This is significant because income generated from properties held outside Pakistan is considered taxable for individuals who are tax residents in Pakistan.
The key question at the center of this issue is whether any exemption exists if a DTAA, following the Organization for Economic Cooperation and Development (OECD) Model, is in place between the foreign country (the UAE) and Pakistan.
Pakistan has indeed signed a DTAA with the UAE, based on the OECD Model. Article 6 of this treaty focuses on “Income From Immovable Property,” specifying that income derived by a resident of one contracting state from immovable property in the other contracting state may be taxed in the latter state.
The crux of the matter lies in the interpretation of Article 6(1) of the DTAA between Pakistan and the UAE, which has led to conflicting judgments from different tax authorities in Pakistan.
In a notable instance, the Appellate Tribunal Inland Revenue in Islamabad and Lahore issued contradictory rulings. The Lahore Bench, in its September 2022 order (ITA No. 4299/LB/2022), argued that the phrase “may be taxed” in Article 6(1) of the DTAA implies that income from immovable property can only be taxed in the state where the property is located. Conversely, the Islamabad Bench, in its November 2022 order (ITA No. 1524/IB/2021), asserted that such income is taxable in Pakistan, with no restrictions on the state of residence to impose tax on rental income from foreign properties.
Two aspects must be considered in interpreting the DTAA: official commentary and court decisions. The OECD commentary suggests that income from immovable property should be taxed in the state where the property is situated, emphasizing the economic connection between income sources and the source state. However, Indian court decisions under similar DTAA agreements, such as the one with Malaysia, have upheld the right to tax immovable property income in the resident country.
The Karnataka High Court’s decision in the case of Commissioner Of Income-Tax vs. R.M. Muthaiah in 1992, interpreting the India/Malaysia DTAA, is noteworthy. It concluded that income from immovable property situated in Malaysia may be taxed by the Malaysian government, acting as a bar on the power of the Indian government to tax the income. The treaty language indicates that both countries must levy taxes for specific provisions to apply.
The situation remains complex and ambiguous for Pakistani taxpayers due to conflicting decisions from the Appellate Tribunal Inland Revenue and the lack of specific guidance from tax authorities. In cases where taxes have not been paid voluntarily, international precedents, including the Indian High Court’s interpretation of a similar provision, could support the stance taken by the Lahore Bench. However, clarity from Pakistani tax authorities is essential to avoid further confusion and disputes on this matter. With the October 31, 2023 deadline looming, property owners and tax experts are eagerly awaiting a more definitive stance from the authorities to address these uncertainties.
FBR Initiates Action Against Millers for Under-Declaring Sugar Value to Evade Sales Tax
