Tax rates on payments to non-residents on services, contract execution

ISLAMABAD: Federal Board of Revenue (FBR) has updated tax rates on payments to non-residents as fee for technical services or execution of contracts during tax year 2021 (July 01, 2020 to June 30, 2021).

The FBR issued Income Tax Ordinance, 2001 (updated up to June 30, 2020) after incorporating amendments brought through Finance Act, 2020.

The FBR updated the following rates against payment made to non-residents under Section 152 of the Income Tax Ordinance, 2001:

(1) The rate of tax to be deducted from a payment referred to in sub-section (1A) of section 152 shall be 7 percent of the gross amount payable.

(1A) The rate of tax to be deducted from payments referred to in sub-section (1AA) of section 152, shall be 5 percent of the gross amount paid.

(2) The rate of tax to be deducted under sub-section (2) of section 152 shall be 20 percent of the gross amount paid.

(3) The rate of tax to be deducted under sub-section (1AAA) of section152, shall be 10 percent of the gross amount paid.

(3A) The rate of tax to be deducted under sub-section (1D) of section 152 shall be 10 percent of the amount of capital gain.

(4) The rate of tax to be deducted from a payment referred to in clause (a) of sub-section (2A) of section 152 shall be—

(i) in case of a company, 4 percent of the gross amount payable ; and

(ii) in any other case, 4.5 percent of the gross amount payable

(5) The rate of tax to be deducted from a payment referred to in clause (b) of sub-section (2A) of section 152 shall be—

(i) 3 percent of the gross amount payable, in the cases of transport services, freight forwarding services, air cargo services, courier services, manpower outsourcing services, hotel services, security guard services, software development services, IT services and IT enabled services as defined in clause(133) of Part I of the Second Schedule, tracking services, advertising services (other than by print or electronic media), share registrar services, engineering services, car rental services, building maintenance services, services rendered of Pakistan Stock Exchange Limited and Pakistan Mercantile Exchange Limited inspection and certification, testing and training services;

(ii) in cases other than sub-paragraph (i),—

(a) in case of a company, 8 percent of the gross amount payable; and

(b) in any other case, 10 percent of the gross amount payable;

(6) The rate of tax to be deducted from a payment referred to in clause (c) of sub-section (2A) of section 152 shall be,—

(i) 10 percent of the gross amount payable in case of sportspersons;

(ii) 7 percent of the gross amount payable.

The Section 152 of the Income Tax Ordinance, 2001 is as follow:

152. Payments to non-residents.— (1) Every person paying an amount of royalty or fees for technical services to a non-resident person that is chargeable to tax under section 6 shall deduct tax from the gross amount paid at the rate specified in Division IV of Part I of the First Schedule.

(1A) Every person making a payment in full or part (including a payment by way of advance) to a non-resident person on the execution of –

(a) a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project; or

(b) any other contract for construction or services rendered relating thereto; or

(c) a contract for advertisement services rendered by T.V. Satellite Channels, shall deduct tax from the gross amount payable under the contract at the rate specified in Division II of Part III of the First Schedule.

(1AA) Every person making a payment of insurance premium or re-insurance premium to a non-resident person shall deduct tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule.

(1AAA)Every person making a payment for advertisement services to a non-resident media person relaying from outside Pakistan shall deduct tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule.

(1B) The tax deductible under sub-section (1A) shall be a minimum tax on the income of a non-resident person arising from a contract.

(1BB) The tax deductible under sub-section (1AA) shall be a minimum tax on the income of the non-resident person arising out of such payment.

(1BBB) The tax deductible under sub-section (1AAA) shall be minimum tax on the income of non-resident person arising out of such payment.

(1C) Every banking company or a financial institution remitting outside Pakistan an amount of fee for offshore digital services, chargeable to tax under section 6, to a non-resident person on behalf of any resident or a permanent establishment of a non-resident in Pakistan shall deduct tax from the gross amount paid at the rate specified in Division IV of Part I of the First Schedule.

(1D) Every banking company or a financial institution maintaining special convertible rupee account (SCRA) of a non-resident company having no permanent establishment in Pakistan shall deduct tax from capital gain arising on the disposal of debt instruments and Government securities including treasury bills and Pakistan investment bonds invested through SCRA at the rate specified in Division II of Part III of the First Schedule.

(1E) The tax deductible under sub-section (1D) shall be a final tax on the income of the non-resident company arising out of such capital gain.

(2) Subject to sub-section (3), every person paying an amount to a non-resident person (other than an amount to which sub-section (1) or sub-section (1A) , (1AA), (1AAA), (1C) or (2A) applies shall deduct tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule.

(2A) Every prescribed person making a payment in full or part including a payment by way of advance to a permanent establishment in Pakistan of a non-resident person—

(a) for the sale of goods except where the sale is made by the importer of the goods and tax under section 148 in respect of such goods has been paid and the goods are sold in the same condition as they were when imported;

(b) for the rendering of or providing services; and

(c) on the execution of a contract, other than a contract for the sale of goods or the rendering of or providing services, shall, at the time of making the payment, deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division II of Part III of the First Schedule.

(2AA) sub-section (1AA) shall not apply to an amount, with the written approval of the Commissioner, hat is taxable to a permanent establishment in Pakistan of the non-resident person.

(2B) the tax deductible under sub-section (2A) shall be minimum tax:

Provided that tax deductible under clause (a) of sub-section (2A) shall not be minimum tax where payments are received for sale of goods by a company being a manufacturer of such goods.

(3) Sub-section (2) does not apply to an amount —

(a) that is subject to deduction of tax under section 149, 150,  156 or 233;

(b) with the written approval of the Commissioner, that is taxable to a permanent establishment in Pakistan of the non-resident person;

(c) that is payable by a person who is liable to pay tax on the amount as representative of the non-resident person under sub-section (3) of section 172; or

(d) where the non-resident person is not chargeable to tax in respect of the amount.

(4) Where a person claims to be a representative of a non-resident person for the purposes of clause (c) of sub-section (3), the person shall file a declaration to that effect with the Commissioner prior to making any payment to the non-resident person.

(4A) The Commissioner may, on application made in the prescribed form by the recipient of payment referred to in sub-section (1A) having permanent establishment in Pakistan, or by a recipient of payment referred to in sub-section (2A), as the case may be, and after making such inquiry as the Commissioner thinks fit, allow by order in writing, in cases where the tax deductable under sub-section (1) or sub-section (2A) is not minimum tax, any person to make the payment without deduction of tax or deduction of tax at a reduced rate.”;

(4B) The Commissioner may, in case of payment that constitutes part of an overall arrangement of a cohesive business operation as referred to in paragraph (ii) of sub-clause (g) of clause (41) of section 2, on application made by the person making payment and after making such inquiry, as the Commissioner thinks fit, allow by order in writing, the person to make payment after deduction of tax equal to twenty percent of the tax chargeable on such payment under sub-section (1A):

Provided that the credit of the tax so deducted shall be available to the permanent establishment of the non-resident accounting for overall profits arising on the overall cohesive business operation.

(5) Where a person intends to make a payment to a non-resident person without deduction of tax under this section,other than payments liable to reduced rate under relevant agreement for avoidance of double taxation, the person shall, before making the payment, furnish to the Commissioner a notice in writing setting out —

(a) the name and address of the non-resident person;

(b) the nature and amount of the payment ;and

(c) such other particulars as may be prescribed.

(5A) The Commissioner on receipt of notice shall, within thirty days, pass an order accepting the contention or making the order under sub-section (6).

(6) Where a person has notified the Commissioner of a payment under sub-section (5) and the Commissioner has reasonable grounds to believe that the non-resident person is chargeable to tax under this Ordinance in respect of the payment, the Commissioner may, by order in writing, direct the person making the payment to deduct tax from the payment in accordance with sub-section (2).

(7) Sub-section (5) shall not apply to a payment on account of –

(a) an import of goods where title to the goods passes outside Pakistan and is supported by import documents, except where —

(i) the supply is made in connection with the overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the associates of the person supplying the goods or its permanent establishment, whether or not the title passes outside Pakistan and whether or not the goods are imported in the name of the associate or any other person; or

(ii) the supply is made by a resident person or a Pakistan permanent establishment of a non-resident person in connection with the overall arrangement as referred to in sub-clause (i); or”

(b) educational and medical expenses remitted in accordance with the regulations of the State Bank of Pakistan.

(8) In this section “prescribed person” means a prescribed person as defined in sub-section (7) of section 153.

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