Karachi, August 20, 2024 – The Federal Board of Revenue (FBR) has recently outlined the income tax rates applicable to payments made to non-residents during the tax year 2024-25.
These details are part of the updated Income Tax Ordinance, 2001, which has been revised and enforced as of June 30, 2024. The ordinance provides clear guidance on the tax obligations for both individuals and businesses making payments to non-residents for various services.
Key Provisions Under Section 6
Section 6 of the Income Tax Ordinance focuses specifically on tax obligations related to certain payments made to non-residents. This section is crucial for businesses and individuals engaging in international transactions, especially those involving services provided by foreign entities.
1. Taxable Payments: According to Section 6, a tax is imposed on all non-resident persons receiving Pakistan-source income from royalties, fees for offshore digital services, money transfer operations, card network services, payment gateway services, interbank financial telecommunication services, or technical services. The tax rate is specified in Division IV of Part I of the First Schedule of the ordinance.
2. Tax Calculation: The tax is computed based on the gross amount of the payments mentioned in the subsection. This means the tax is levied on the total payment without allowing any deductions for expenses or costs incurred in generating the income.
3. Exemptions and Special Cases: Certain exceptions are outlined in the ordinance:
o Permanent Establishment: If the property or service related to the payment is connected with a permanent establishment in Pakistan of the non-resident, the tax under this section does not apply. For instance, if a non-resident provides technical services through a permanent office in Pakistan, the payment might not be subject to this tax.
o Exempt Royalties and Fees: Any royalty or fee for technical services exempted under other provisions of the ordinance is also not subject to tax under Section 6.
4. Business Income Attribution: For Pakistani-source royalties or fees that are exempt due to a connection with a permanent establishment, the income is treated as business income attributable to that establishment. This income is then subject to the applicable corporate tax rates instead of the withholding tax rates.
Rate of Tax on Payments
The FBR has specified the tax rates applicable to different types of payments made to non-residents:
• Royalties and Technical Services: A tax rate of 15% is imposed on the gross amount of any royalty or fee for technical services.
• Other Services: For all other types of services, a 10% tax rate is applied.
These rates are crucial for businesses operating in Pakistan and engaging in transactions with foreign entities, as failure to comply with these tax requirements can lead to penalties and additional liabilities.
Conclusion
The updated Income Tax Ordinance provides clarity on the tax obligations for payments to non-residents, ensuring that Pakistan-source income is appropriately taxed. Businesses and individuals making such payments must carefully consider these provisions to remain compliant with the law. As international transactions become increasingly common, understanding and adhering to these tax obligations is essential for maintaining good standing with the FBR and avoiding any legal complications.
