In a bold development, the Federal Board of Revenue (FBR) has amended the Income Tax Rules, 2002 last week. The amendment, for the first time, brings foreign nationals and companies into the national tax net.
The new development hasn’t been introduced via some new legislation, instead the Federal Board of Revenue removed a lacuna in the exiting tax laws that allowed foreign individuals or entities to have tax amenity. The amendment brings foreigners – individuals as well as organizations, engaged in taxable business transactions in Pakistan into the tax net.
According to the earlier loophole in the tax laws, the Commissioner Inland Revenue could issue notices to get a foreign person or company having taxable income registered, only at the condition of their possession of a computerized national identity card (CNIC). The amendment introduced removes this condition.
The FBR official revealed in Karachi:
“Prior to the amendment, tax authorities were required to mention CNIC in the notice asking a person to get register. Now, tax officials could ask a foreign national working as a resident to comply with the local tax laws.”
As per the Board’s sources, availing the provision offered by the existing tax rules several domestic companies employed services from foreign nationals against huge sums, however, due the the CNIC clause the tax authorities could not bring those locally employed foreign nationals into the tax net.
Similarly, tax authorities failed to bring foreign companies operating in the country into the tax net due to lacuna in the tax laws despite their local sources of income.
The FBR spokesperson shared that the Income Tax Ordinance, 2001, lays proper definition of resident individual and companies statuses. As per the ordinance, resident status belongs to an individual present in Pakistan for a period of 183 days or more in a tax year. Similarly a foreign company shall be treated as resident company, after it is incorporated or formed under any law of the country. The tax treatment of foreign entities would be the same as local individual or company, the official added.
The new development as announced by the FBR makes it essential for the unregistered foreign persons and companies to register under the FBR, file income tax returns and provide details of transactions under the amendment into the Income Tax Rules, 2002.