Karachi, September 26, 2024 — The Federal Board of Revenue (FBR) has released comprehensive guidelines regarding the taxation of income based on its geographical source within Pakistan for the 2024-25 tax year.
These guidelines, derived from Section 101 of the Income Tax Ordinance, 2001, detail how different forms of income are classified and taxed based on their connection to Pakistan.
Overview of Geographical Source Rules
The FBR has emphasized that understanding the geographical source of income is essential to determining the taxation for both residents and non-residents engaged in economic activities within Pakistan. Section 101 of the Income Tax Ordinance defines the specific criteria for what constitutes Pakistan-source income.
Key Provisions of Section 101 for Taxation
1. Income from Employment
According to the FBR, salary is considered Pakistan-source income if:
• It is received from employment exercised in Pakistan, regardless of where it is paid.
• It is paid by the Federal, Provincial, or Local Government of Pakistan, regardless of where the employment is exercised.
2. Taxation of Business Income for Residents
For residents, business income is treated as Pakistan-source income if it is derived from any business carried out within Pakistan.
3. Taxation Business Income for Non-Residents
Non-residents are also subject to tax on their business income if it can be directly or indirectly attributed to Pakistan. This includes:
• Income from a permanent establishment in Pakistan.
• Sales of goods or services in Pakistan, even if similar products are sold through a permanent establishment.
• Any business activities related to a business connection in Pakistan.
• Importation of goods tied to supply chains, installation, or construction carried out by associates or permanent establishments.
Significant Economic Presence
The guidelines also expand the scope of taxation for non-residents by introducing the concept of “significant economic presence.” This concept applies to non-resident entities engaging in business activities through digital platforms. Transactions involving goods, services, or data downloaded in Pakistan, as well as systematic digital interactions with Pakistani users, are now considered taxable income under the geographical source rules.
Specific Income Categories
Several other categories of income have been clearly outlined by the FBR as Pakistan-source income under the Income Tax Ordinance:
1. Dividends
Dividends are classified as Pakistan-source income if they are paid by a resident company.
2. Profit on Debt
Any profit on debt is considered Pakistan-source income if paid by a resident person, with certain exceptions for businesses carried on outside Pakistan through a permanent establishment.
3. Royalties
Royalties are deemed Pakistan-source income when paid by a resident person, unless the royalty pertains to business activities outside Pakistan through a permanent establishment.
4. Rental Income
Income generated from the lease of immovable property located within Pakistan is treated as Pakistan-source income.
5. Gains from Asset Disposal
Any gain from the disposal of assets or properties used to derive business income in Pakistan will also be considered Pakistan-source income.
6. Fees for Offshore Digital Services
Fees paid for offshore digital services, including software downloads and other online services, are taxable as Pakistan-source income if paid by a resident or borne by a permanent establishment in Pakistan.
Clarifications on Business Income
The FBR has provided clarifications on the taxation of non-resident business income, including income derived from independent services like professional services, entertainment, or sports activities. If a non-resident individual is paid by a resident person or their services are borne by a permanent establishment in Pakistan, that income will be taxed as Pakistan-source income.
Other Taxable Categories
In addition to the main categories of income, the FBR has outlined the following as Pakistan-source income:
• Pensions or annuities paid by residents or borne by permanent establishments.
• Technical fees paid by residents for services utilized in Pakistan.
• Any income not explicitly mentioned in the previous sections if it is paid by a resident or borne by a permanent establishment in Pakistan.
Conclusion
The FBR’s guidelines on the taxation of geographical sources of income are a critical component of Pakistan’s tax regime, particularly as the country expands its taxation scope to cover digital transactions and cross-border services. These rules ensure that income earned through significant economic activity in Pakistan, whether by residents or non-residents, is appropriately taxed, supporting the government’s revenue collection efforts.
Taxpayers and businesses are advised to familiarize themselves with these provisions to ensure compliance and avoid potential penalties during the 2024-25 tax year.
