Tax haven for foreigners

Government of Islamic Republic of Pakistan always endeavours to create environment for foreigners conducive to their comforts and satisfaction through applying soft, simple, relax and straight terms and conditions and exemptions and tax concessions in the income tax, sales tax & excise duty (VAT Mode) and other income related laws for foreigners.

INCOME TAX In Income Tax Laws, non-resident foreign taxpayers may be (a) an individual, whose stay in Pakistan is less than 183 days in a tax year, (b) a Firm / Association of persons, if the control and management of their affairs is not situated wholly or partly in Pakistan at any time in the tax year, and (c) a Company, which is not incorporated or formed by or under any law in force in Pakistan, and the control and management of their affairs are not situated wholly in Pakistan at any time in the tax year.

1. The non-resident foreigners are not taxed in Pakistan for their foreign source income;

2. The following Pakistan source income of non-resident foreigners are subjected to special concessional rate of income tax , which are deducted as a final tax, and the non-resident foreigners are not required to file Income Tax Return for such income but to just furnish a statement to the Commissioner of Inland Revenue to that effect:

2.1 Income Tax at 6% on gross amount of (a) a contract under a construction, assembly or installation project in Pakistan, including (b) a contract for the supply of supervisory activities in relation to such project, and (c) a contract for advertisement services rendered by TV Satellite Channels (Section 152 (1A) and (1B) of and (Clause 41, Part IV of Second Schedule attached to) the Income Tax ordinance 2001;

2.2 Income Tax at 5% on gross amount of insurance premium or re-insurance premium (Section 152 (1AA) and (1BB) of Income Tax Ordinance 2001);

2.3 Income Tax at 8% on gross amount of shipping income for the carriage of passengers, livestock, mail or goods embarked in Pakistan (income receive in or outside Pakistan) or embarked outside Pakistan (income receive in Pakistan) from carrying on the business of operating ships as the owner or charterer (Section 7 and 8 of Income Tax Ordinance 2001);

2.4 Income Tax at 3% on gross amount of air transport income for the carriage of passengers, livestock, mail or goods embarked in Pakistan (income receive in or outside Pakistan) or embarked outside Pakistan (income receive in Pakistan) from carrying on the business of operating aircraft as the owner or charterer (Section 7 and 8 of Income Tax Ordinance 2001);

2.5 Income Tax at 15% shall be deducted from the gross amount paid on royalty or fee for technical services to non-resident foreigner (Section 6 and 8 of Income Tax Ordinance 2001);

3. The non-resident foreigners are not necessarily required to be in Pakistan for income tax purpose as they are allowed to have any person in Pakistan as their representative under section 172 and 173 of the Income tax ordinance 2001.

4. The following Pakistan source income of non-resident foreigners are not subjected to income tax as they are totally exempted:

4.1 Agricultural income which includes (a) any rent or revenue derived from land which is situated in Pakistan and is used for agricultural purposes, (b) any income derived from such land, and (c) any income derived from any building which is on or in the immediate vicinity of such land (Section 41 of Income Tax Ordinance 2001);

4.2 The income of an individual shall be exempt from income tax entitled to privileges under the Diplomatic and Consular Privileges Act 1972 or under the United Nations (Privileges and Immunities) Act 1948 to the extent provided for in those Act. (Section 42 of Income Tax Ordinance 2001);

4.3 Any salary received by a foreign citizen employee of a foreign government as remuneration for services rendered to such government shall be exempt from income tax. (Section 43 of Income Tax Ordinance 2001);

4.4 Any Pakistan source income which Pakistan is not permitted to tax under a tax treaty shall be exempt from income tax. (Section 44 (1) of Income Tax ordinance 2001);

4.5 Any salary received by a foreign citizen employee shall be exempt from income tax as per an Aid Agreement, whose salary paid out of funds or grants released as aid to Pakistan. (Section 44 (2) of Income Tax ordinance 2001);

4.6 Any income received by a foreign citizen person engaged as a contractor, consultant or expert on a project in Pakistan shall be exempt from income tax as per a bilateral or multilateral technical assistance Agreement, such income is paid out of funds or grants in accordance with the said agreement. (Section 44 (3) of Income Tax ordinance 2001);

4.7 Any profit received on a security issued by a resident person shall be exempt from income tax, where the security was widely issued by the resident person outside Pakistan for the purpose of raising a loan outside Pakistan for use in a business carried on in Pakistan and the profit was paid outside Pakistan. (Section 46 of Income Tax ordinance 2001);

4.8 Any income of a foreign national (company, firm or association of persons) or any other non-resident person from profit on moneys borrowed under a loan agreement or in respect of foreign currency instrument approved by the federal Government is exempt from total income (Clause 75 , Part I of Second Schedule attached to the Income Tax ordinance 2001);

4.9 Any income received by a taxpayer from a corporate agricultural enterprise, distributed as dividend out of its income from agriculture (Clause 105B, Part I of Second Schedule attached to the Income Tax ordinance 2001);

4.10 Any amount received on encashment of Special US Dollar Bond issued under the Special US Dollar Bonds Rules, 1998 (Clause 135, Part I of Second Schedule attached to the Income Tax ordinance 2001);

4.11 Any income from investment in OGDCL exchangeable bonds issued by the Federal Government (Clause 135A, Part I of Second Schedule attached to the Income Tax ordinance 2001);

5. Other special concession and relieves in income tax to non-resident foreigners include the following:

5.1 The income tax at 10% instead of 20% to be deducted under Section 152 (2) in respect of payments from profit on debts from debt instruments, Government securities including treasury bills and Pakistan Investment Bonds, which shall be final tax as well, and the investments are exclusively made through a Special Rupee Convertible Account maintained with a bank in Pakistan (Clause 5A, Part II of Second Schedule attached to the Income Tax ordinance 2001);

5.2 Deduction of income tax at 20% under Section 152 (2) shall not apply in respect of payments to foreign news agencies, syndicate service and non-resident contributors, who have no permanent establishment in Pakistan. (Clause 41B, Part IV of Second Schedule attached to the Income Tax ordinance 2001);

5.3 The provisions of Section 113 (Minimum Income Tax) and Section 151 (tax deducted at source from profit on debts) shall not apply in respect of receipts from Pak Rupees denominated Government and Corporate securities and redeemable capital, where the investments are made exclusively from foreign exchange remitted into Pakistan through a Special Convertible Rupee Account maintained with a bank in Pakistan. (Clause 19, Part IV of Second Schedule attached to the Income Tax ordinance 2001);

5.4 The non-resident foreigner shall not be required to furnish Income Tax return if his only Pakistan source income is from owns immovable property with a land area of 250 square yards or more or owns any flat / apartment (Section 115 (3) of the Income Tax ordinance 2001);

When the non-resident maintains permanent establishment in Pakistan, then their income will be subjected to income tax applicable to resident taxpayers and may also enjoy deductions subject to some terms and conditions. (Section 101, 105 and 152 of Income Tax Ordinance 2001 and Rules 17 to 19 of Income Tax Rules 2002)

SALES TAX (VAT MODE) In Pakistan General Sales Tax (GST) is being maintained at VAT Mode as a result input tax paid is recovered against output tax received on supplies and services, and accordingly there will be almost no burden of sales tax on business people as burden of sales tax goes to end consumers who need to pay sales tax without recovery.

In Pakistan sales tax on goods are subjected to sales tax Laws maintained by Federal Government and charged at 17% except in some cases increased / reduced rates are allowed, and sales tax on services are subjected to sales tax Laws maintained by Provincial Government and charged at 16% except in some cases increased or reduced rates are allowed.

Under the Sales tax Laws, foreigners enjoy exemptions, concession and relief as under:

6. The following goods charged to sales tax at Zero rate. (Section 4 of Sales Tax Act 1990 and Fifth Schedule attached thereto):

6.1 Goods exported out of Pakistan;

6.2 Supply of goods to diplomats, diplomatic missions, privileged persons and privileged organisations;

6.3 Supplies to duty free shops;

6.4 Supplies of raw materials, components and goods for further manufacture of goods in the Export Processing Zones;

6.5 Supplies of such Pakistani plant and machinery to the export processing Zones and to petroleum and gas sector exploration and production companies, their contractors and sub-contractors as may be specified by the federal government;

6.6 Supplies made to exporters under the Duty and Tax Remission Rules 2001;

6.7 Imports or supplies made to Gwadar Special Economic Zones excluding vehicles.

7. The supply of following goods or import of goods shall be exempt from sales tax. (Section 13 of Sales Tax Act 1990 and Sixth Schedule attached thereto):

7.1 Gold and silver in un-worked condition;

7.2 Incinerators of disposal of waste management, motorized sweepers and snow ploughs;

7.3 Goods imported by various agencies of the United Nations, diplomats, diplomatic missions, privileged persons and privileged organisations;

7.4 Import of articles of household and personal effects including vehicles and also the goods for donation to projects established in Pakistan, imported by any rulers of Gulf Shaikhdoms who is in possession of residential accommodation in Pakistan and goods including vehicles by the United Arab Emirates dignitaries for their personal use and for donation to welfare projects established in Pakistan;

7.5 Educational, scientific and cultural material imported from a country signatory to UNESCO Agreement or a country signatory to bilateral commodity exchange agreement with Pakistan;

7.6 Personal wearing apparel and bona fide baggage imported by overseas Pakistanis and tourists;

7.7 Goods and services purchased by non-resident entrepreneurs and in trade fairs and exhibitions subject to reciprocity;

7.8 Supplies made by cottage industry and retailers whose annual turnover from supplies, whether taxable or otherwise, made in any tax period during the last twelve months ending any tax period does not exceed rupees five million;

7.9 Supply of fixed assets against which input tax adjustment is not available;

7.10 Foodstuff and other eatables prepared in the flight kitchens and supplied for consumption on-board in local flights;

7.11 Agricultural produce of Pakistan, not subjected to any further process of manufacture.

Conclusion Hassle-free systems and procedures and a lot of exemptions, concessions and relief in tax regime in Pakistan encourages foreigners and overseas Pakistanis to invest in Pakistan, which is evidenced by the fact that Direct Foreign Investment (DFI) has shot up manifolds under the present Government as economic indicators are positive. Apart from these advantages, other economic benefits one can avail in Pakistan includes: availability of skilled and cheap labour, high rate of return on investments and savings, relaxed foreign exchange rules, low rate accommodations, cheap food, rich mineral deposits and government extra care for foreigners etc.

(The writer is a fellow member of Chartered Accountants of Pakistan and has experience of 25 years in different capacities as Head of Finance & Accounts, Audit Partner, Management and Business Consultant, Professional Examiner and contributes articles to Journals and newspapers)