Islamabad: In a significant move, Pakistan has passed legislation aimed at expanding the scope of permanent establishment to regulate transactions conducted through electronic mediums.
The Finance Act, 2023, which was recently approved by the National Assembly of Pakistan, introduced crucial amendments to the definition of permanent establishment, as outlined by analysts at KPMG Taseer Hadi & Co.
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One of the key changes in the legislation involves the omission of the term ‘fixed’ from the existing definition of permanent establishment. Previously, permanent establishment referred to a situation where a person’s business was wholly or partly conducted through a fixed physical location. However, with the recent amendments, a new clause (bb) has been introduced, explicitly incorporating virtual business presence in Pakistan. This includes any business engaging in transactions conducted via the internet or other electronic means, regardless of whether there is a physical presence.
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The primary objective behind this change is to enhance the scope of permanent establishment by shifting the focus from physical fixed locations to economic presence. By encompassing virtual business activities, Pakistan aims to keep pace with the rapidly evolving digital landscape and ensure that transactions conducted through electronic mediums are subject to appropriate regulation.
Additionally, the Finance Act also introduced the term “entity” alongside personnel and employees in the context of providing services, including consultancy services. This amendment broadens the range of individuals and entities liable to comply with the furnishing of services.
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However, experts suggest that the effectiveness of these amendments to the definition of permanent establishment may be limited due to the overriding effect of tax treaties on local provisions of the Income Tax Ordinance 2001. The impact of the legislation may vary depending on the existence of treaty protection in different jurisdictions.
While these legislative changes signify Pakistan’s proactive approach towards adapting to the digital economy, it remains to be seen how the amendments will be implemented and the potential impact they may have on businesses operating within the country.
