PTBP Web Desk
The Appellate Tribunal Inland Revenue (ATIR) has declared that rental income and capital gains derived by resident Pakistanis from the United Arab Emirates (UAE) and the United Kingdom (UK) are not subject to taxation in Pakistan. The decision aligns with Pakistan’s tax treaties with these countries, which prioritize the taxing rights to the nation where the income arises rather than the country of residence.
The tribunal revisited two conflicting judgments on the matter, ultimately favoring a taxpayer-friendly interpretation. It concluded that the tax treaties unequivocally grant taxing rights over rental income and capital gains to the country where such income originates.
The case revolved around a Pakistani resident taxpayer who declared foreign income, including rental income, capital gains, and bank profits, as exempt in their tax return. The assessing officer, however, issued a show-cause notice, arguing that as a resident individual, the taxpayer’s foreign income was not exempt. Instead, the officer suggested that a tax credit for foreign taxes paid might be applicable.
In response, the taxpayer maintained that the respective tax treaties gave exclusive taxing rights to the country where the income originated. This argument was initially rejected by the assessing officer, who interpreted the treaties as allowing both states—the income source and the recipient’s residence—to tax the same income.
The ATIR judgment, rooted in the principles of treaty interpretation laid down by the Supreme Court, addressed the nuances of the term “may be taxed” as used in the treaties.
The tribunal emphasized that the words “may be taxed,” found in Articles 6.1 and 14.1 of the treaties, should not be interpreted in isolation. Instead, they must be read in conjunction with Article 11.2, which uses the phrase “may also be taxed.” The tribunal clarified that this distinction is crucial in understanding the scope of taxing rights.
The ruling explained that the phrase “may be taxed” in Articles 6.1 and 14.1 signifies the taxing rights of the income’s source country. In cases where no tax is levied by the source country, such as the UAE on rental income, the treaty’s provision still holds precedence, ensuring that the income is not taxable in the resident’s home country.
The tribunal criticized a later conflicting ATIR decision that overlooked an earlier precedent favoring taxpayers. It highlighted the principle of consistency, asserting that earlier rulings remain binding unless overturned by a higher court.
Tax consultant Shahid Jami weighed in on the ruling, pointing out systemic issues in Pakistan’s approach to negotiating tax treaties. He noted that officials often rush to sign agreements without fully considering their implications for national interests.
Jami elaborated on the complexities arising when one country, such as the UAE, does not levy taxes on certain incomes. This creates a scenario where the income remains untaxed in both countries. However, Jami stressed that tax treaties, as international agreements, hold primacy and must be respected.
The ruling carries significant implications for resident Pakistanis earning rental income and capital gains abroad. It reinforces the principle that tax treaties prevail over domestic tax laws in such cases. Additionally, it underscores the need for clarity and adherence to international agreements in Pakistan’s tax framework.
