Permanent Establishments of Non-Resident Persons: FBR clarifies taxation status

To facilitate foreign investors, the Federal Board of Revenue (FBR) has ruled that permanent establishments of non-resident persons would not be required to obtain any declaration/certificate of Commissioner Inland Revenue (IR) seeking reduced rate of tax under Income Tax Ordinance, 2001.
Sources told Business Recorder here on Sunday that the FBR has issued a clarification dated November 16, 2012 regarding amendment made in Section 152 of the Ordinance vide Finance Act 2012.
Through this clarification, no declaration of permanent establishments of Non-Resident Persons in Pakistan (PE) to be issued for treating an Establishment of a Non-Resident as its PE for the purposes of Income Tax Ordinance, 2001 as the term PE has been defined in sub-section 41 of section 2 of the Income Tax Ordinance, 2001.
Sources said that a Lahore-based tax lawyer Waheed Shahzad Butt has written a letter to the FBR, seeking clarification on the taxation status of PE. Finance Act 2012 has made some changes in the tax structure for the PE which has raised legal issues whether there is any need to obtain certificate of "PE" from the Commissioner under Section 152(3)(b) of the Income Tax Ordinance, 2001? Later, the matter was forwarded to Federal Tax Ombudsman Dr. Muhammad Shoaib Suddle for Own Motion Intervention under Section 9(1) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000. The FBR's clarification dated November 16, 2012 is outcome of intervention by Dr. Shoaib Suddle which has facilitated foreign investors.
The FBR's clarification said that Section 152 of the Income Tax Ordinance 2001 has been amended vide Finance Act 2012 in a way that all withholding provisions regarding non residents are consolidated. The tax practioners have apprised the Board that some confusion exists in the field formations regarding application of the said provision.
Therefore, the FBR has clarified that sub-section (1) provides for deduction of tax on payment of royalty or fees for technical services. Secondly, sub section (1A) provides for deduction of tax on payment in full or part (including payment by way of advance) on the execution of a contract or sub contract under a construction, assembly or installation project or supply of supervisory activities in relation to such project, or any other contract or a contract for advertisement services rendered by T.V. satellite channels in Pakistan;
Thirdly, sub-section (1AA) applies to payment of insurance premium or re-insurance premium. Fourthly, sub-section (1AAA) relates to payment for advertisement services to a media person relaying from outside Pakistan. Fifthly, sub-section (2A) covers deduction of tax for sale of goods, rendering or providing of services and execution of contract for the sale of goods or rendering or providing of services. Sixthly, all the transactions covered by sub sections are liable to tax at separate rates. Sub section (2) further provides that, in, case of any other payment not covered by sub sections, withholding tax shall be deducted as per rates provided under Division II of Part III of the first schedule with certain exclusions as per sub section (3) which are summarised, below;
1. Amounts on which tax is to be withheld under other provisions of the Ordinance viz, Salary (u/s 149), Dividends (u/s 1 50)), Profit on debt(u/s 151), Income from Property (u/s 155), Prizes and Winnings (u/s 156) and Brokerage and Commission(u/s 233).
2. On payment to permanent establishment in Pakistan of a non resident person subject to the written approval of the Commissioner that the payment may be made without deduction of tax.
3. Representative of non-resident person under section 172(3).
4. A non-resident person who is not chargeable to tax in Pakistan.
It is clarified that the exclusions provided under sub section (3) are not applicable on the payments referred to in paragraph 2 supra as these payments are subject to withholding tax independently under the relevant sub-sections and not under sub section (2). The term permanent establishment has been defined in sub section (41) of section 2 of the Income Tax Ordinance 2001. No declaration of permanent establishment (P.E.) to be issued by any other government agency such as Board of Investment is required for treating an establishment of a non resident as its P.E. for the purposes of Income Tax Ordinance, 2001.
The legal position may be brought into the notice of all field formations, FBR's clarification added.
According to the tax expert, the FBR has amended the Income Tax Ordinance 2001 to facilitate branches of Non-Resident Persons operating here in Pakistan as PE of Non-Resident. Legally, the provisions of newly-inserted Sub-Section 2A in Section 152 have categorically been excluded from the purview of Section 152(2). Therefore, Sub-Section 3, which is directly linked with Section 152(2), does not apply in all cases where PE in Pakistan of a non-resident person falls under newly-inserted Sub-Section 2A for the purposes of income tax deduction at the rate of 3.5%, 2%, or 6% etc.
There is no need to obtain certificate of "PE" from the Commissioner u/s 152(3)(b) and taxpayers already operating as PE of Non-Resident is sufficient enough to claim the facility allowed by the Government by inserting sub-section 2A in Section 152 of the Income Tax Ordinance, 2001 through Finance Act, 2012, tax expert added.
In his communication to the FBR's Member, IR, Waheed Shahzad Butt stated that attention "is invited towards amended provisions of Section 152 of the Income Tax Ordinance, 2001 vide Finance Act, 2012, wherein solely to facilitate the Branches of Non-Resident Person operating here in Pakistan as PE of Non Resident, certain new provisions have been inserted in the statute book". Consequently, Division II of Part III of the First Schedule to the Income Tax Ordinance, 2001 has also been modified accordingly to cater to the changes made in Section 152 of the Income Tax Ordinance, 2001. He said that definition of PE under Section 2(41) is very much clear and does not require any approval from any authority.