Withholding Tax on Payments to Non Residents
Withholding tax on payments to non residents in Pakistan is applicable under Section 152 of the Income Tax Ordinance, 2001. The rate of withholding tax on payments to non-residents varies depending on the nature of the payment.
Some common examples of payments to non-residents subject to withholding tax in Pakistan include:
The person making payment for royalty or fee for technical services will deduct income tax at the rate of 15%.
For the sake of clarification, fee for technical services is defined under Section 2(23) of the Income Tax Ordinance, 2001 as under:
“any consideration, whether periodical or lump sum, for the rendering of any managerial, technical or consultancy services including the services of technical or other personnel, but does not include —
(a) consideration for services rendered in relation to a construction,
assembly or like project undertaken by the recipient; or
(b) consideration which would be income of the recipient
chargeable under the head “Salary” .
It infers that services relating to the construction and assembly i.e. Engineering Services and consideration in the form of salary don’t fall under fee for technical services.
In the same way, Royalty has been defined under Section 2(54) of the Income Tax Ordinance, 2001.
In relation to the withholding tax on payments to non residents pertaining to the contracts, the Section 152 (1A) of the Income Tax Ordinance 2001 enunciates:
“Every person making a payment in full or part (including a payment by way of advance) to a non-resident person on the execution of –
(a) a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project; or
(b) any other contract for construction or services rendered relating thereto; or
(c) a contract for advertisement services rendered by T.V. Satellite Channels, shall deduct tax from the gross amount payable under the contract at the rate specified in Division II of Part III of the First Schedule.”
In accordance with Section 152 (1AA) of the Income Tax Ordinance, 2001, every person making payment to a non resident, on account of an insurance premium or reinsurance premium, will deduct withholding tax from the gross amount paid at the rate specified in Division II of Part III of the First Schedule.
The withholding tax on payment to non residents on account of advertising services relaying outside Pakistan, is deducted under Section 152 (1AAA) of the Income Tax Ordinance, 2001 at the rate specified in Division II of Part III of the First Schedule.
Under Section 152 (1BA) of the Income Tax Ordinance, 2001, withholding tax on payments to non-residents for foreign-produced commercial for advertisement on any television channel or any other media, shall be twenty per cent of the gross amount paid
Every banking company or financial institution remitting to a non-resident outside Pakistan an amount of fee for offshore digital services, on behalf of any resident or a permanent establishment of a non-resident in Pakistan, shall deduct tax from the gross amount paid under Section 152 (1C) at the rate specified in Division IV of Part I of the First Schedule of Income Tax Ordinance, 2001.
Every banking company or financial institution maintaining special convertible rupee account (SCRA) of a non-resident company having no permanent establishment in Pakistan shall deduct tax from capital gain arising on the disposal of debt instruments and Government securities including treasury bills and Pakistan investment bonds invested through SCRA under Section 152 (1D) at the rate specified in Division II of Part III of the First Schedule.
According to Section 152 (1DA) of the Income Tax Ordinance 2001, “Every banking company maintaining a Foreign Currency Value Account (FCVA) or a non-resident Pakistani Rupee Value Account (NRVA) of a non-resident individual holding a Pakistan Origin Card (POC) or National ID Card for Overseas Pakistanis (NICOP) or Computerized National ID Card (CNIC) shall deduct tax from capital gain arising on the disposal of debt instruments and government securities and certificates (including Shariah-compliant variant) invested through aforesaid accounts at the rate specified in Division II of Part III of the First Schedule.”
As per Section 152 (1DB) of the Income Tax Ordinance, 2001, the withholding tax on the payments to non residents on account of a return on investment in Sukuk bonds will be deducted at the rate specified in Division IB of Part III of the Income Tax Ordinance, 2001.
a) Section 152 (1DC) enunciates that every exchange company, licensed by SBP, shall withhold tax while making international money transfers or cross-border remittances at the rates mentioned in Division IV, Part I of the First Schedule.
b) As mentioned in Section 152 (1DD), “every banking company while making payment to card network company or payment gateway or any other person, of any transaction fee or licensing fee or service charges or commission or fee by whatever name called or interbank financial telecommunication services, shall deduct tax at the rates given in Division IV, Part I of the First Schedule.”
The subsection 2A of Section 152 of the Income Tax Ordinance, 2001 deals with the withholding tax on payments to permanent establishment of non residents. A permanent establishment has been defined under Section 2(41) of the Income Tax Ordinance, 2001 as “a fixed place of business through which the business of the person is wholly or partly carried on…”
The Section 152 (2A) enunciates, “Every prescribed person making a payment in full or part including a
payment by way of advance to a permanent establishment in Pakistan of a non resident person—
(a) for the sale of goods except where the sale is made by the importer of the goods and tax under section 148 in respect of such goods has been paid and the goods are sold in the same condition as they were when imported];
(b) for the rendering of or providing services; and
(c) on the execution of a contract, other than a contract for the sale of goods or the rendering of or providing services, shall, at the time of making the payment, deduct tax from the gross amount payable (including sales tax, if any) at the rate specified in Division II of Part III of the First Schedule.”
It’s important to note that there are certain exemptions and reductions available under Pakistan’s tax laws and tax treaties that can lower the rate of withholding tax on payments to non-residents. It’s recommended that businesses consult with a tax professional to ensure compliance with Pakistan’s regulations for withholding tax on payments to non residents.
Withholding Tax Rates on Payments to Non-Residents Section 152
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