Dividends payable to US firm: SC helps settle row over rebate against supertax
ISLAMABAD: The Supreme Court of Pakistan has settled the controversy regarding the rebate available against supertax on dividends payable to a US company by a Pakistani company.
In this regard, the SC has issued a judgement (civil appeal number 368 to 372 of 2017, 1589 to 1594 and 1596 to 1599 of 2020).
The appeal was filed by the Commissioner Inland Revenue against the judgments passed by the Sindh High Court (SHC) and the Lahore High Court (LHC) in favour of five US companies.
The basic issue in all these cases was the interpretation of Article VI of the convention between the government of Pakistan and the government of the USA for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Details of the issue revealed that the Double Tax Treaty between Pakistan and the USA provides a rebate in the tax rate equal to one Anna in a rupee.
The tax department interpreted it as a rebate in the amount of tax, whereas, in fact it is rebate in the rate of tax. One Anna in a rupee means 6.25 per cent. So if the rate of tax is 15 per cent then the said rate will be reduced by 6.25 resulting in the applicable rate of8.75.
The tax department interpreted the same as 6.25 of 15 per cent which has been disregarded by the Supreme Court.
According to the judgement of the Supreme Court, the matter in issue for the Appellants (Commissioner Inland Revenue) is that the impugned judgment and orders have misinterpreted Article VI of the Convention mainly that the tax is to be reduced by 1 Anna in the rupee which is 1/16th of the tax rate which comes to 0.0625 per cent and not 6.25 per cent. So, as per their contentions, it means that from the given rate of 15 per cent a rebate of 0.0625 per cent has to be subtracted that is 14.0625 per cent. This, they argue, is the applicable rate. The counsel for the Appellants state that this aspect of the matter has been overlooked and the court below have granted relief which is more than the amount given in Article VI of the Convention as being 1/16th(1 Anna in the rupee).
The SC has examined the given Article as well as the impugned judgment and orders, wherein, two aspects are very clear.
First, Article VI applies to the rate of tax and not on the amount of the tax. In this respect, the Article is clear that the rebate is given on the rate of tax. The rebate provision reduces the rate of the tax and not the amount of the tax. The reduction in the rebate is 1 Anna in the rupee which expressed in percentage term is 6.25 per cent. This is the figure that has to be subtracted from the applicable rate of tax which at the time was 15 per cent.
This in turn means that the tax rate has been reduced to 8.75 per cent.
The argument of the Appellants, that the reduction in the rate would bring the rate of tax to 14.0625 per cent, has been aptly dealt with by the High Court of Sindh.
Second, the rebate provision is not linked with the super tax. The Article VI of the Convention merely fixes the rate of the rebate to 1 Anna in the rupee.
The SC has noted that the basic difference of opinion is the understanding of the calculation as to what the rate of the rebate is resulting in a reduction in the rate of tax. There can be no other interpretation in this respect and whether it is looked at as 1/16thor it is looked at in the form of 1 Anna in the rupee, while expressed in percentage term, the amount comes to 6.25 per cent.
Therefore, the SC finds no illegality or infirmity in the impugned judgment and orders.
Under the circumstances, these appeals of the tax department are dismissed, the SC judgement added.
Copyright Business Recorder, 2024
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