Resident Pakistanis in UAE, UK: Rental income, capital gain not taxable: ATIR DB

ISLAMABAD: A division bench of Appellate Tribunal Inland Revenue (ATIR) has held that under the tax treaties of Pakistan with United Arab Emirates and United Kingdom the rental income and capital gain derived from these countries by resident Pakistanis are not taxable in Pakistan.

The ATIR has discussed two earlier conflicting judgements of the Tribunal and has followed the first one which was in favour of the taxpayer and has held that under the tax treaties taxing rights over these heads of income have been given to the country where income arises and not to the country where the recipient of income is resident.

Tax expert explained the relevant facts that the taxpayer is a resident of Pakistan and in his tax return had declared exempt foreign income under the heads of rental income, capital gain and bank profit. The assessing officer issued show cause notice that being a resident individual foreign income is not exempt rather tax credit of foreign taxes paid would be available.

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The taxpayer replied that under the respective tax treaties the right to tax has been given exclusively to the state where income from these sources has arisen. The explanation was rejected by the assessing officer with the observation that under the treaties taxing rights have been given to both the states, that is where the income arises as well as where the recipient is tax resident.

Since tax levied was more than Rs.20 million appeal directly with the ATIR was filed. The ATIR in its order after reproducing the principles of interpretation laid down by the Supreme Court in recent judgement reported as 2023 PTD 863 has held as under:

“13. The aforesaid principles of the Supreme Court are to be considered in this case. The learned OIR while interpreting the word “may” used in Article 6.1 and 14.1 in isolation has not considered Article 11.2 where it is expressly mentioned that the interest income “may also be taxed” in other contracting State and such stipulation is not existing in Article 6 or 14 pertaining to income from immovable property and capital gains, respectively.

The OIR erred in understanding the phrase “may be taxed” used in Article 6.1 and 14.1 of the Treaty by completely taking it out of context due to lack of understanding of the principles of interpretation. The bare reading of aforesaid Articles makes it clear that the words “may be taxed” are used to cater to situations exactly like the case at hand wherein the UAE had not levied tax on the rental income when the treaty was executed or even till date.

The intention of the phrase means if at all a taxpayer may be taxed in such situation where the property from which income is being derived is in one Contracting State and the owner is resident of another Contracting State it will be taxed in accordance with the laws of the State in which the property is situated. If the expression “may be taxed” has given jurisdiction to both the states to tax the same income then expression “may also be taxed” used in Article 11.2 becomes redundant which cannot be justified.“

“16. Whereas reliance of the DR on another order of the ATIR in ITA.No.1524/IB/2021 dated 07.11.2022 is not valid wherein a different view has been taken with reference to rental income from property situated in UAE. This order is later in time and learned bench was not assisted properly that there is an earlier precedent in ITA.No.4299/LB/2022 dated 08.09.2022 and a clarification by the FBR Helpline.

It is established principle that decision of a division bench is binding on another division bench. In the case of earlier precedent reference application of the department was pending before Lahore High Court and the principle of propriety and consistency warranted that earlier precedent be followed until it is reversed by high court.“

When contacted for comments Shahid Jami, tax consultant observed that it appears that when tax treaties are being negotiated at tax time the concerned officials are eager to sign agreements without giving due consideration to the on-ground realities and Pakistan’s national interest and later field formation tries to wriggle out of treaties when taxpayer claims exemption based upon treaty.

Jami explained that under the tax treaty taxing rights for certain heads of income have been given to UAE and UAE have not yet imposed taxes on those heads of income and for the taxman it is difficult to digest that income is not being taxed in either country. But the tax treaty will prevail as per principles laid down by the Supreme Court.

Copyright Business Recorder, 2024