Pakistan’s appellate tribunal rules on tax treaty override

By Muzammal Rasheed (Co-founder, CEO & Head of Practice, WTS Global, Pakistan)

The Appellate Tribunal Inland Revenue of Pakistan (ATIR) has disapproved applicability of Section 111 on Non-Residents in the case (2020) 122 TAX 10 (Trib.).

ATIR is the second forum of appeal against the Tax Assessment Orders issued by the Tax Authority. The appeal was filed by a Non-Resident Individual, challenging the best judgment assessment finalized by the Inland Revenue Department under section 121/111 of the Income Tax Ordinance, 2001 on ex parte basis.

Apart from the technical grounds raised before ATIR, the major thrust of the arguments on behalf of appellant involved the contention that the taxpayer was a non-resident person, having no Pakistan source income during the relevant tax year.

In the judgment, ATIR considered the overriding application of Article 4 of the tax treaty signed between Pakistan and France which provides rules for determination of residential status of person. The so-called tie-breaker rule enshrined in Article 4 of the tax treaty was discussed in detail along with judgments from other jurisdictions of international tax literature.

The tie-breaker rule won in favor of France as the center of vital interest of the taxpayer was determined in France on the basis of factors including taxpayer’s permanent home, location of family and physical presence of the taxpayer, as it was the place where taxpayer carried out economic activity.

The relevant evidence of business undertaken in France, residence of appellant’s family members and lack of physical presence in Pakistan were considered while concluding that the taxpayer was non-resident in Pakistan. Finally, ATIR allowed the appeal by disapproving the tax assessed and ordered the concerned Commissioner Inland Revenue to refund the amount of tax recovered from taxpayer. A Divisional Bench of Lahore High Court has dismissed the reference filed by Inland Revenue Department against the judgment of ATIR.

In terms of section 111 of the Income Tax Ordinance, 2001, the Direct Tax Code of Pakistan, a resident person is liable to tax in respect of his / her worldwide income whereas a non-resident person is liable to tax in respect of Pakistan source income only. This section has not specifically been discussed in this judgment. However, it provides the fundamental rule on scope of Pakistan tax vis-a-vis residential status of the taxpayer.

According to the definition of resident individual applicable for tax year 2008 (the year under appeal), an individual who was present in Pakistan for one hundred and eighty-three days or more in aggregate during the tax year is considered as resident individual. Non-resident individuals are required to file tax return only if they have Pakistan source income.

However, unlike resident individuals, non-residents are not required to file their statements of assets and liabilities / wealth statement along with their return even if they declare Pakistan source income unless such statement is required by the Commissioner Inland Revenue specifically.

The judgment discussed in detail the scope of section 111 of the Income Tax Ordinance, 2001 which empowers the tax authority to tax unexplained income or assets. A penalty of 100% of the amount of tax evaded is imposed in addition to the amount of tax. The judgment in so far as it holds that Section 111 of the Ordinance cannot be invoked against non-resident person is based on the specific facts of the case before ATIR i.e. no Pakistan source income was established. Therefore, the judgment of ATIR will not apply in the cases where tax authority has evidence of Pakistan source income concealed by the non-resident.

Pakistani diaspora is one of the largest immigrant population in the world. The remittances of overseas workers are considered backbone of the economy and a  major source of foreign exchange reserves of the country. The overseas Pakistanis are often aggrieved with the similar fate as they receive tax notice as a consequence of any economic activity in Pakistan such as purchase of real estate or motor vehicle.

As per the Broadening of Tax Base Programs of the tax authority, various registration authorities report the transactions involving registration of immovable property and motor vehicle to the tax authority. Consequently, a tax notice would be sent to the taxpayer if such activity is not reflected in the tax returns of the taxpayer. In most of the cases of non-residents, the notices could not be properly responded due to communication lapses as they are not present in Pakistan and, as a result, the proceedings are finalized ex parte. In some cases, tax authority recovers the tax liability from bank accounts in Pakistan.

Applicability of Section 111 on Non-Residents Pakistanis

The author is Co-founder, CEO & Head of Practice at WTS Global, Pakistan.