Karachi, December 3, 2023 –Pakistan has unveiled a comprehensive tax treatment framework for royalty income earned by non-residents during the tax year 2024.
The Federal Board of Revenue (FBR), the country’s apex tax collection agency, has updated the Income Tax Rules, 2002, to elucidate the taxation procedures for non-resident individuals deriving income from royalty.
According to the FBR, the new tax treatment is designed to ensure transparency and streamline the taxation process for non-resident individuals receiving royalty income from a resident person or a permanent establishment in Pakistan. The guidelines, which come into effect for the tax year 2024, aim to strike a balance between encouraging foreign investments and safeguarding national interests.
The FBR outlines the tax treatment as follows:
(a) Royalty Agreements Before March 8, 1980: For royalties received in accordance with an agreement made before the 8th day of March 1980, or an agreement made on or after the said date with government approval before the said date, the taxable amount shall be the gross amount of the royalty, less deductions allowed under section 40 of the Income Tax Ordinance, 2001.
(b) Other Royalty Agreements: In cases not covered by the aforementioned provision, where sub-section (2) of section 6 does not apply, the taxable amount is the gross amount of the royalty, less specific expenditures. These expenditures include any costs incurred in Pakistan to earn such royalty, irrespective of the location of payment, and any costs incurred outside Pakistan in adherence to the agreement, not exceeding ten percent of the gross amount of royalty.
(c) Specific Expenditures for Other Royalty Agreements: For royalty received in pursuance of any other agreement, the taxable amount is the gross amount of the royalty, less specific expenditures. These expenditures include any costs incurred in Pakistan to earn the income, any costs incurred in Pakistan for work done in compliance with the agreement, and any costs incurred outside Pakistan for work done in adherence to the agreement, not exceeding ten percent of the gross amount of such royalty.
(d) Exception for Section 169 of Income Tax Ordinance, 2001: Notably, the provisions of clauses (b) and (c) do not apply when royalty income is covered by section 169 of the Income Tax Ordinance, 2001.
This new tax treatment aims to provide a clear framework for non-resident individuals and entities involved in royalty agreements with residents or permanent establishments in Pakistan. It not only ensures a fair and standardized approach to taxation but also incorporates safeguards to prevent misuse and protect the country’s economic interests.
As Pakistan continues to position itself as an attractive destination for foreign investment, the introduction of a well-defined tax structure for royalty income contributes to the overall ease of doing business in the country. The FBR’s proactive approach in updating tax regulations demonstrates the government’s commitment to fostering a conducive environment for both local and international economic activities.
