Immovable properties in the UAE, UK: Rental income of resident Pakistanis taxable in country: expert

ISLAMABAD: The rental income of resident Pakistanis, having immovable properties in the United Kingdom (UK) and United Arab Emirates including Dubai, is taxable in Pakistan.

The question of the taxability of properties held by Pakistanis in Dubai and UK has been answered by former FBR Chairman Shabbar Zaidi in his technical release issued on Saturday.

The technical release titled, ‘Pakistan Tax on Rent from Properties in Dubai, London, etc., by Pakistan Tax Resident’ has responded to the queries keeping in view the judgments of courts and tribunals of Pakistan and India.

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“We consider it prudent to adopt the position that the said income is taxable in Pakistan,” the technical release concluded.

Shabbar Zaidi stated that the income tax returns for the Tax Year 2023 are due by October 31, 2023. There are many persons being tax resident in Pakistan who hold properties in Dubai, other emirates of the United Arab Emirates, London and other foreign countries.

The taxation of income from immovable property in a state that has an Agreement for Avoidance of Tax (DTAA) under the OECD Model is subject to varying interpretations. Accordingly, there is a view that such income is not taxable in Pakistan.

We, as a firm, on the basis of prudence do not concur with view; however, it is our duty to provide complete background on the matter for reference and deliberations.

The former FBR Chairman said Pakistani citizens are the second largest foreigners holding properties in the UAE. First are Indians. Similarly, Pakistani tax residents hold properties in the UK and other foreign countries. A substantial number of these properties are on rent.

A large number of such properties were not declared in the Pakistan tax return even in the cases where sources were from Pakistan and the Pakistani citizen is a tax resident in Pakistan.

Shabbar Zaidi said the Pakistan government provided opportunities to declare such properties under the Asset Declaration laws of 2018 and 2019. Income from rent on properties held outside Pakistan is a taxable income in the hands of a person resident in Pakistan.

The secondary question is whether or not there is any exemption if there is a DTAA under the OECD Model between the state where property is situated and Pakistan.

Two such agreements were inked with the UAE and UK. This matter has taken a new turn on account of two conflicting orders of the Appellate Tribunal Inland Revenue in the year 2022 and earlier decisions of the superior courts in India.

Many people consider that payment of Pakistan tax necessarily requires inward remittance of the amount of rent to Pakistan, he said.

However, the foreign exchange laws have no relation to taxation and any accretion to assets held outside Pakistan are not required to be brought to Pakistan under the Foreign Exchange Regulation Act, 1947. These amounts can be retained outside Pakistan.

Referring to the law of tax on rental income for a person resident in Pakistan, Shabbar Zaidi said that a person who is a tax resident in Pakistan under Section 82 of the Income Tax Ordinance, 2001 is taxable both on Pakistan and foreign source income.

It includes all income. Any rent received or receivable by a Pakistan tax resident from an immovable property anywhere in the world including the UAE or UK is taxable in Pakistan. Effect of DTAA Pakistan has entered into a DTAA with the UAE, UK and many other countries. For the purposes of this note, only the DTAA of UAE and UK have been referred.

The property under consideration is owned by a tax resident of Pakistan and is situated in the UAE or UK. Pakistan has taxed such income under the Pakistan tax law.

The only question is whether any exemption arises to the Pakistan tax resident under Article 6(1) of DTAA between UAE or UK and Pakistan or any other treaty with the same wordings, the technical release questioned.

This particular matter was taken up by two different Benches of the Appellate Tribunal Inland Revenue of Islamabad and Lahore, respectively. Both have decided the matter in completely different manner. Furthermore, there is no reference of earlier order in the later order.

The Lahore Bench of the ATIR in their order ITA No. 4299/LB/2022 (Tax Year 2022) has adopted an approach that words ‘may be taxed’ in Article 6(1) of DTAA restricts the right of taxability in Pakistan.

In other words Article 6(1) means that income from immovable property under the UAE/ Pakistan tax treaty can only be taxed in the state where such property is situated. This order is dated September 8, 2022.

On the other hand, the Islamabad Bench of the same tribunal in their order ITA No. 1524/ IB/ 2021 dated November 7, 2022 has held that such income is taxable in Pakistan.

The primary interpretation of the Islamabad Bench is that there is no bar on the state of residence to impose tax on rental income arising in the UAE. As per our information there is no further development on these orders as yet.

Both these decisions do not take into account the significant development in India on the exactly same matter, he maintained.

Shabbar Zaidi stated that there are two interpretations of DTAA. One is to derive the meaning from the literature of OECD which is the official commentary. Second are the decisions by the appellate authorities and the courts.

On the legal side, this matter has been taken up by the High Court in India and the Supreme Court where the same provisions exist in the respective treaties.

Though in the decision of the Supreme Court of India the income was considered not to be taxable in India; however, as can be seen from the emphasised portion the Supreme Court of India’s decision has added to the problem then solving it. It is important to note that the decision of the Karnataka High Court was also considered by the Indian Supreme Court. After the decision of the Supreme Court of India, one of a senior practising person in India in tax commented on the order.

Consequently, in 2008 the Indian tax authorities issued the following notification: In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of a resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.

The technical release concluded that, “We consider it prudent to adopt the position that the said income is taxable in Pakistan. Nevertheless, those who have taken other positions are entitled to take other positions subject to condition that up to the level of Tribunal the matter will be decided against the taxpayer.

Even at the level of superior courts, the matter is open“, Shabbar Zaidi referred to the release.

Copyright Business Recorder, 2023