Government decides to revise convention of double taxation
Pakistan has decided to revise obsolete convention of double taxation and provision of fiscal evasion convention with the United State of America (USA) aimed at bringing the treaty at par with neighbouring countries, well informed sources told Business Recorder. Pakistan and US signed a convention on the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income on July 1, 1957 and enforced in 1959.
It consisted of 20 articles however at the time OECD and UN Model Tax Convention had not been developed, therefore, the convention does not conform to these conventions. The sources said, quite a few heads of income were not covered by this convention such as income from shipping, interest income, capital gains, income from immoveable property, free for technical services, dependent personal, director”s fee, artists and sportspersons and other income. Since then income tax statute has been changed twice in Pakistan, therefore, certain articles of the convention have become obsolete having lost relevance to the current statute. The definitions of permanent establishment and royalty do not correspond to the contemporary business environment, resultantly many businesses have escaped taxation.
Every ADTA has two primary objectives, (i) avoidance of double taxation and (ii) prevention of fiscal evasion. The current ADTA between Pakistan and USA falls short of its second objective and may be used as convenient tool for fiscal evasion and treaty shopping.
“The current Pak-US ADTA, when compared with other US treaties with the countries of the region like India and Bangladesh, is the least updated treaty. India updated its treaty in 1990 and Bangladesh entered into a treaty in 2006. Both the treaties are more relevant to current international practices on tax treaties,” the sources maintained. Federal Board of Revenue (FBR) which is responsible to negotiate avoidance of double taxation treaties argues that it would be in the fitness of things that “we renegotiate the existing convention for ADTA between Pakistan and the US”.
According to the article 11 of the Treaty, (1) an individual, who is a resident of the United States, shall be exempt from Pakistan tax on profits or remuneration in respect of personal (including professional) services performed within Pakistan in any financial year if- (a) he is present within Pakistan on a temporary visit for a period or periods not exceeding in the aggregate 183 days during that year, and (b) the services are performed for or on behalf of a resident of the United States, and (c) the profits or remuneration are subject to the United States tax. (2) An individual, who is a resident of Pakistan, shall be exempt from United States tax on profits or remuneration in respect of personal (including professional) services performed within the United States in any taxable year if- (a) he is present within the United States on a temporary visit for a period or periods not exceeding in the aggregate 183 days during that year, (b) the services are performed for or on behalf of a resident of Pakistan, and (c) the profits or remuneration are subject to Pakistan tax.