Pakistan has implemented the new convention on Avoidance of Double Taxation Agreement signed with Japan from November 9, 2008. The Federal Board of Revenue (FBR) has issued an SRO.1138(I)/2008 here on Thursday to enforce the agreement.
Under the revised convention, the income tax exemption would be available to the government owned banks and financial institutions of Pakistan and Japan under the revised convention on the avoidance of double taxation inked between the two countries.
According to SRO.1138(I)/2008, interest arising in a Contracting State (Japan or Pakistan) shall be taxable only in the other State if the interest is beneficially owned by the government of that other State, a political subdivision or local authority thereof, or the central bank of that other State or any institution wholly owned by the Government of that other country.
The interest is beneficially owned by a resident of that other Contracting State with respect to debt-claims guaranteed or insured by any institution wholly owned by the Government of that other State.
In case of Japan, the "central bank" and "institution wholly owned by the Government" means the Bank of Japan; Japan Bank for International Co-operation; Japan International Co-operation Agency; the Nippon Export and Investment Insurance and any other institution the capital of which is wholly owned by the Government of Japan.
In the case of Pakistan, "central bank" and "institution wholly owned by the Government" means the State Bank of Pakistan and any other institution the capital of which is wholly owned by the Government of Pakistan. Another important feature of the revised treaty is that the royalty at source country will be taxed 10 percent. This provision would enable the Pakistan to deduct 10 percent tax on royalty paid to Japanese car manufactures. As per convention, the term "royalties" covers payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
The provisions shall not apply if the beneficial owner of the royalties, being a resident of a State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
Under the new convention, 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. Subject to the provisions of the laws of Japan regarding the allowance as a credit against Japanese tax of tax payable in any country other than Japan.
Where a resident of Japan derives income from Pakistan which may be taxed in Pakistan in accordance with the provisions of this Convention, the amount of Pakistan tax payable in respect of that income shall be allowed as a credit against the Japanese tax imposed on that resident.
The amount of credit, however, shall not exceed that part of the Japanese tax which is appropriate to that income. Where the income derived from Pakistan is dividends paid by a company which is a resident of Pakistan to a company which is a resident of Japan and which has owned at least 25 per cent either of the voting shares or of the total issued shares of the company paying the dividends during the period of six months immediately before the day when the obligation to pay dividends is confirmed, the credit shall take into account Pakistan tax payable by the company paying the dividends in respect of its income.