Karachi, July 31, 2024 – Pakistan has introduced stricter tax rules for non-residents with substantial business activities within the country. This initiative, driven by the Federal Board of Revenue (FBR), aims to capture a larger share of revenue from global entities benefiting from the Pakistani market.
The FBR issued Circular No. 1 of 2024-25 to elaborate on the recent amendments to the Income Tax Ordinance, 2001. The most notable change pertains to Section 101, which specifies the geographical source of income. This revision is crucial in determining the tax liabilities of non-residents operating in Pakistan.
Under the new rules, the FBR clarified that the income of a non-resident will be computed based on amounts sourced from Pakistan. Specifically, Section 101(3) now stipulates that business income of a non-resident is considered Pakistan-source if it is linked directly or indirectly to any business connection in the country. This includes any form of economic activity that generates revenue within Pakistan’s borders.
To provide further clarity, new definitions have been added to Section 101 through sub-sections (3A) and (3B). These amendments define “business connection in Pakistan” to include significant economic presence. This term encompasses transactions involving goods, services, or property with any individual or entity in Pakistan. For instance, the provision of data or software downloads to users in Pakistan now falls under this category. If the total payments from such transactions in a tax year exceed a prescribed threshold, they are classified as significant economic presence, making the non-resident liable for taxes in Pakistan.
Moreover, the new rules address the modern digital economy by including systematic and continuous business activities or digital interactions with users in Pakistan under the umbrella of significant economic presence. This means that even if a non-resident does not physically operate from Pakistan, their digital business operations can still be subject to Pakistani taxes. This includes:
• Agreements for such transactions signed outside Pakistan;
• Non-residents lacking a physical residence or place of business in Pakistan; and
• Services rendered remotely by non-residents to Pakistani customers.
These changes underscore Pakistan’s commitment to adapting its tax laws to the evolving global economic landscape. By targeting non-residents with significant economic activities in the country, the FBR aims to ensure that all entities benefiting from Pakistan’s market contribute their fair share to the national exchequer. This move is expected to generate additional revenue for the country and level the playing field for local businesses competing with international players.