Tax rates on royalty, fee for technical services

Tax rates on royalty, fee for technical services

The Federal Board of Revenue (FBR) has announced updated tax rates for payments made to certain non-residents, specifically on account of royalty or fees for technical services, as defined under Section 6 of the Income Tax Ordinance, 2001.

The revised rates, effective from the incorporation of amendments through the Finance Act, 2021, are aimed at providing clarity and alignment with the evolving dynamics of the digital economy.

The Income Tax Ordinance, 2001, which has been updated up to June 30, 2021, serves as the regulatory framework for taxation matters in Pakistan. The recent amendments introduced through the Finance Act, 2021, have necessitated a reevaluation of tax rates applicable to non-resident payments for royalty, technical services, and offshore digital services.

As per the latest notification by the FBR, the rate of tax imposed under Section 6 on payments to non-residents for royalty or fee for technical services will be 15% of the gross amount. This adjustment reflects an increase from the previous rates and is intended to streamline the taxation process for such transactions.

Additionally, a distinct rate has been introduced for offshore digital services. According to the updated ordinance, payments for offshore digital services will be subject to a tax rate of 5% of the gross amount. This move is in line with the global trend of taxing digital services and addresses the growing significance of digital transactions in the contemporary business landscape.

The revision in tax rates signifies the government’s proactive approach to adapting tax policies to the changing economic environment, especially in the digital sphere. The 15% tax rate on royalty or technical services acknowledges the value derived by non-residents from their intellectual property or technical expertise provided to entities within Pakistan.

Furthermore, the 5% tax rate on fees for offshore digital services reflects the acknowledgment of the increasing prevalence of online transactions and the need to ensure that non-residents contributing to the digital economy are appropriately taxed.

This announcement is expected to have implications for businesses engaging in transactions with non-residents for services falling under the purview of royalty, technical expertise, and offshore digital services. It is crucial for businesses to stay informed about these changes to ensure compliance with the updated tax regulations and avoid any potential penalties or legal complications.

As the global economy continues to digitize, such regulatory adjustments are essential to create a fair and transparent taxation framework that addresses the nuances of contemporary business practices. The FBR’s initiative to revise tax rates demonstrates a commitment to fostering a conducive environment for both domestic and international transactions in the evolving landscape of the digital economy.