Foreign investors of Japan, Germany and China and other European Countries are availing tax concessions on royalty, interest income, dividends under various provisions of the avoidance of double taxation and prevention of fiscal evasion agreements inked with Pakistan.
Sources told Business Recorder on Wednesday that a number of foreign companies operating in Pakistan are getting benefits of these bilateral tax treaties. Presently, a number of foreign companies of Japan, Germany, China and European countries are operating in Pakistan. These investors can enjoy benefits under the avoidance of double taxation treaties, which helps in increasing investment.
Pakistan had inked full scope treaties and limited purpose agreements with different countries. However, major beneficiaries are those non-residents, who had made huge investment in the country. Under the limited purpose treaty signed between India and Pakistan, airline services are exempt from tax on reciprocal basis.
Pakistani investors can also enjoy the tax reductions with the contracting states on making investment in that country. However, foreign investors are getting more benefits of such investment in Pakistan under the bilateral tax conventions. Foreign investors have termed such conventions as tax haven for making investment in Pakistan.
In certain cases, some countries do not charge any kind of tax from Pakistani students studying abroad. For example, commissioners of the income tax have issued 'resident tax exemptions certificates' to the Pakistani students, who intend to go for higher studies on scholarship in Italy.
These Pakistani students would not be required to pay taxes in Italy under the provisions of such conventions. Pakistani teachers, researchers, dentists/doctors, etc, can also avail tax concessions in foreign countries under these conventions for a specific time period spend in the respective country.
Under Article 20 of the avoidance of double taxation convention inked between Pakistan and Italy, an individual who was a resident of a contracting state and is temporarily present in other country as a student at a university, college or other similar educational institution would be exempt from tax on all remittances from abroad for purposes of his maintenance, education or training. Sources said that Pakistan has exempted certain Chinese banks from interest income under the second protocol of convention on avoidance of double taxation.
The government had accepted the request of Chinese government to amend article 11(3c) of double taxation avoidance agreement 1989, to exempt some banks from interest income. Article 11(3c) of the agreement gives exemption to the State Bank of Pakistan and the People's Bank of China on their interest income. Similarly, an interpretation dispute pertaining to "Business Profit" between Germany and Pakistan was also removed under the respective convention in the past.
Double taxation agreement between the two countries was signed in June 1994 and enforced in July 1995. A protocol to the agreement was also signed in 1994 and enforced along with the agreement subsequently certain taxation issues regarding interpretation of the provisions of the agreement cropped up.
The memorandum will contribute to the economic development and business relationship of both the countries, and facilitate the cross border transactions between businessmen of the contracting states.
German and Japanese firms are getting tax befits on the royalty and interest income in Pakistan. In case of Japan, the new convention will be a "model tax treaty" based on OECD tax model. The income tax exemption would be available to the government owned banks and financial institutions of Pakistan and Japan under the revised convention from November 2008.
Another important feature of the revised treaty is that the royalty at source country will be taxed at 10 percent. This provision would enable Pakistan to deduct 10 percent tax on royalty paid to Japanese car manufactures.
Similarly, permanent establishment in the case of building site has been agreed at 6 months. The permanent establishments in Pakistan have a different tax rate as compared to non-resident companies. Similarly, the delivery from a warehouse will be considered as permanent establishment.
The dividend in case of holding companies having 50 percent voting share for 6 months will be taxed @ 5 percent holding companies with 25 percent voting share at 7.5 percent and all other cases will be taxed @ 10 percent in the source country.
The fee for technical services is taxable @ 10 percent in the source country under the revised convention and student's and business apprentices' exemptions on their remuneration has been increased from 360,000 Japanese yen to 1,500,000 Japanese yen. Sources said that a convention was inked among the Saarc member states on November 13, 2005.
The is agreement, called, "Saarc Limited Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in Tax Matters" was implemented to ensue mutual co-operation for assisting each other in improving their taxation management to accelerate the pace of economic development under the banner of South Asian Association for Regional Co-operation (Saarc).
Under the convention, following are country-wise existing taxes to which this agreement shall apply: In Bangladesh, convention would apply on taxes on income that is direct tax; Bhutan, income Tax imposed under Income Tax Act 2001 and the rules thereof; India, income tax, including any surcharge thereon; Maldives, taxes on income that is direct tax; Nepal, Income Tax imposed under the Income Tax Act; Pakistan, taxes on income and in case of Sri Lanka, convention would apply on income tax including the income tax based on the turnover of enterprises licensed by the Board of Investment.
Under the agreement, authorities of the member states shall exchange information, including documents and public documents or certified copies thereof, as is necessary for carrying out the provisions of this agreement or of the domestic laws of the member states concerning taxes covered by this agreement in so far as the taxation thereunder is not contrary to the agreement.
Experts said that the interest income is taxed as "profit on debt" in the case of non-corporate recipients at the rate of 10 percent. Pakistan tax treaties with various countries prescribe the following rates:
UNITED KINGDOM: Rate of taxation of interest income is 15 percent as per agreement with the UK. United States: Each country has to apply its domestic rates of taxation. In Pakistan the rate of tax is 10 percent of the yield or profit paid.
HONG KONG: Pakistan has no avoidance of double taxation treaty with Hong Kong. The negotiations will take place in September 2007. In the absence of tax agreement each country has to apply its domestic law. Hence, the rate of taxation is 10 percent in this case.
MIDDLE EASTERN COUNTRIES: Qatar, rate of interest would be 10 percent; UAE 10 percent; Saudi Arabia 10 percent; Oman 10 percent; Kuwait 10 percent; Syria 10 percent; Yemen 10 percent; Iran 10 percent and rate of interest is 10 percent for Egypt.
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