Section 84 of Income Tax Ordinance, 2001 defines the criteria that determine whether an association of persons qualifies as a resident association for taxation purposes.
The updated Income Tax Ordinance, 2001, with amendments, was released by the Federal Board of Revenue (FBR) and is effective as of June 30, 2021.
In a bid to establish clear parameters for tax residency, the Finance Act, 2021 introduced a significant provision in the Income Tax Ordinance, 2001 through Section 84.
The amended Section 84 reads: “Resident association of persons. — An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association are situated wholly or partly in Pakistan at any time in the year.”
Let’s delve into the key components of Section 84 and understand how it shapes the concept of resident associations of persons:
1. Defining Residency for Associations of Persons:
• Section 84 sets the groundwork for determining the residency status of an association of persons for a given tax year. The primary criterion is based on the location of the control and management of the association’s affairs. If this control and management are situated wholly or partly in Pakistan at any time during the tax year, the association qualifies as a resident association of persons.
2. Control and Management as Key Factors:
• The emphasis on “control and management” highlights the significance of decision-making authority and administrative oversight in determining tax residency. The provision recognizes that the location of these pivotal functions is indicative of the association’s substantial connection to Pakistan.
3. Wholly or Partly in Pakistan:
• The provision acknowledges that the control and management may be situated either wholly or partly in Pakistan. This recognition allows for flexibility in assessing residency, taking into account associations with diverse operational structures that may have some functions conducted within the country.
4. Annual Assessment for Residency:
• The determination of residency is based on an annual assessment, considering the situation of control and management during the specific tax year. This ensures that residency status is reviewed and established for each fiscal period.
The introduction of Section 84 is viewed as a crucial step in providing clarity and consistency in the tax treatment of associations of persons. By articulating specific criteria for residency, the amendment aims to facilitate a more straightforward and transparent process for identifying associations subject to Pakistani taxation.
While the provision serves to define residency, tax professionals and stakeholders emphasize the need for meticulous documentation and adherence to regulatory guidelines. Clear record-keeping of decision-making processes and administrative structures will play a pivotal role in supporting claims of residency or non-residency.
Section 84 of the Income Tax Ordinance, 2001 plays a vital role in establishing the criteria for determining the tax residency of associations of persons. By focusing on the location of control and management, the provision sets a clear standard that aligns with global practices in assessing tax residency. As businesses and associations navigate the complex landscape of tax regulations, Section 84 serves as a cornerstone for understanding the residency status and ensuring compliance with the tax obligations for associations of persons in Pakistan.
