The government has expanded the scope of taxation for non-residents earning income in Pakistan through digital means or presence under the amended Finance Bill 2024.
This new measure affects tech companies and dual nationals who are tax residents of other countries but receive income in Pakistan, such as rental income. These individuals and entities will now be subject to taxation in Pakistan.
In cases where Pakistan signs a double taxation agreement with another country, foreign nationals from that country will only pay tax in one of the two countries. Any business presence in Pakistan will make them liable for taxation.
Tola & Tola/Tola Associates explained that the amended Bill proposes to add new sub-sections 3A and 3B to Section 101 of the 2001 Ordinance. According to Section 101(3) of the 2001 Ordinance, the business income of a non-resident person is considered Pakistan-source income if it is directly or indirectly attributable to any business connection in Pakistan.
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The amended Bill proposes to define “business connection” more inclusively by adding “significant economic presence in Pakistan” to its definition. “Significant economic presence” is further defined as follows:
- Transactions involving goods, services, or property carried out by a non-resident with any person in Pakistan, including the provision or download of data or software in Pakistan, if the total payments from such transactions during the tax year exceed an amount to be prescribed;
- Systematic and continuous solicitation of business activities or engaging in interaction through digital means with a prescribed number of users in Pakistan, regardless of whether:
- The agreement for such transactions or activities is signed in Pakistan;
- The non-resident has a residence or place of business in Pakistan; or
- The non-resident renders services in Pakistan.
Only the income attributable to these transactions or activities will be considered to accrue or arise from a business connection in Pakistan. This proposed amendment seeks to expand the scope of taxation for non-residents earning income in Pakistan through digital means or presence. However, this new sub-section will only take effect once the prescribed amounts and number of users are determined. It is also unclear who will be the prescribing authority.
