Karachi, July 26, 2023 – In a significant move, Pakistan has revised its tax laws to include virtual businesses operated by foreign entities within the scope of taxation.
The Federal Board of Revenue (FBR) issued Circular No. 02 of Income Tax on Wednesday, providing details about the amendments made through the Finance Act, 2023.
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The primary focus of these amendments is on redefining the concept of “Permanent Establishment” (PE) as it applies to non-residents in the country. The changes were prompted by the increasing prevalence of virtual businesses and the need to adapt to the evolving global economic landscape.
Until now, the definition of PE in the Income Tax Ordinance, 2001 was limited to a “fixed place of business.” However, with the rise of digital commerce and cross-border transactions, it became essential to expand this definition to accommodate non-resident businesses operating virtually or without a physical presence.
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The amended section 2(al) of the Ordinance removes the word “fixed” wherever it appears in the definition, broadening the scope of what constitutes a PE. As a result, the new definition now includes what is termed as “virtual business presence.” This encompasses any business that conducts transactions through the internet or other electronic media, regardless of physical presence.
Furthermore, an additional amendment has been made in clause (d) of sub-section (41) of section 2 of the Ordinance. This amendment specifies that the furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purposes, will now be considered under the definition of PE. The term ‘entity’ has been inserted in this clause, meaning that businesses providing services through an entity in Pakistan will also be covered under the revised definition of PE.
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It’s important to note that the revised definition of PE will be applied to determine the status of non-resident entities operating in Pakistan. However, the specific application of the definition will be assessed on a case-by-case basis and in accordance with relevant provisions of the applicable Agreement for Prevention and Avoidance of Double Taxation between Pakistan and the non-resident entity’s home country.
This move by Pakistan to amend its tax laws reflects the government’s commitment to keeping pace with the changing dynamics of the global economy and ensuring a fair and equitable taxation system for both domestic and foreign businesses operating within its borders.
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The new regulations are expected to have significant implications for virtual businesses of foreign entities in the country and could potentially generate increased revenue for the Pakistani economy.
