Karachi, July 14, 2024 – Pakistan has introduced measures through the Finance Act 2024 to capture significant economic presence by non-resident entities in Pakistan, aiming to close tax avoidance loopholes and broaden the tax base.
Tax experts at KPMG Taseer Hadi & Co. explain that previously, a non-resident’s business income was considered Pakistan-sourced if it was linked to any ‘business connection in Pakistan.’ The new law expands this definition to include ‘significant economic presence.’
Significant economic presence is defined in the Act as follows:
1. Transactions involving goods, services, or property carried out by a non-resident with any person in Pakistan, including the provision of data or software downloads, if the aggregate payments during the tax year exceed a prescribed amount set by the Federal Board of Revenue (FBR).
2. Systematic and continuous business solicitation or digital interaction with users in Pakistan, regardless of:
o Whether the transaction agreements are signed in Pakistan,
o Whether the non-resident has a physical presence or business operations in Pakistan,
o Whether the services are physically rendered in Pakistan.
Only the income attributable to these specified transactions or activities will be deemed to arise from a business connection in Pakistan.
“The new provisions are a significant step towards capturing the digital and economic activities of non-residents who have substantial interactions with Pakistan,” noted a KPMG expert. “This change ensures that non-residents contributing economically through digital means are brought into the tax net, aligning Pakistan’s tax framework with global trends in digital taxation.”
The Act aims to address the challenges posed by digital businesses and their tax obligations. By broadening the definition of business connections, the government seeks to ensure fair tax contribution from non-resident entities benefiting from the Pakistani market.
The introduction of these rules reflects Pakistan’s commitment to strengthening its tax regime and curbing tax avoidance practices. It aligns with international efforts to address the tax challenges posed by the digital economy, ensuring that non-resident businesses engaging with Pakistani users or earning significant revenue from the country contribute their fair share of taxes.
As Pakistan adapts to the evolving global tax landscape, these measures mark a proactive approach in enhancing tax compliance and revenue collection. Non-resident businesses are now required to reassess their operations and tax obligations in light of these new regulations, ensuring alignment with Pakistan’s tax laws.
The Finance Act 2024 represents a crucial step in modernizing the country’s tax system, emphasizing the importance of economic presence in determining tax liabilities and fostering a fairer taxation environment.