The undesired event:

The Federal Board of Revenue (FBR) through a letter dated October 31, 2022 has clarified that income from rental property situated outside Pakistan is taxable in the hands of a person resident in Pakistan. This means that if Mr A is a tax resident in Pakistan and he earns rent from a property in the UAE then such rent is taxable in Pakistan even if the said rent is also taxed in the UAE.

A credit under the law will be allowable to Mr A if the amount is doubly taxed. In this author’s view, there is no ambiguity and confusion on this matter as per the generally acceptable interpretation of international tax laws, including the Agreements for Avoidance of Double Taxation, which Pakistan has signed with other countries, hereinafter referred to as treaties.

In Pakistan, like many other issues, this subject has again been confused by conflicting decisions made by the Appellate Tribunal Inland Revenue. This ambiguity is causing a serious loss to the exchequer as there are a very large number of Pakistanis who own properties outside Pakistan and earn rental income from such properties.

It is not equitable that such income is not taxed in Pakistan when salaries, etc., are taxed with a very low threshold. This problem is further aggravated by the fact that a particular interpretation of Agreements for Avoidance of Double Taxation is adopted to decide matters, which are well settled at the international forums.

In a recent decision released by the ATIR on October 23, 2024, it has been held that income from the UAE cannot be taxed in Pakistan even if the recipient of such rental income is a Pakistan tax resident, as such income cannot be charged to tax by way of application of Article [6(1)] of the DTA between Pakistan and the UAE. In this respect it is important to note that there were two earlier conflicting decisions on this issue, where the latter being a detailed judgment that has decided the matter against the taxpayer.

Pakistani tax law:

Section [11(5)] of The Income Tax Ordinance, 2001, Provides as under:

“The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-Source income and amounts that are foreign-source income.”

International practice and interpretation:

In the famous case of Azadi Bachao Andolan, the Supreme Court of India explained the nature of bilateral tax treaties as under:

“According to Klaus Vogel, Double Taxation Conventions establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part.

Contracting States are said to waive ‘tax claims’ or more illustratively to divide ‘tax sources’, ‘taxable objects’, amongst themselves“.

Double taxation avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920s by the League of Nations explained this method of classification of items and their assignments to the Contracting States. While the English lawyers called it ‘classification’ and ‘assignment rule’, the German jurists........

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