Withholding taxes are applicable on a multitude of payments made to resident taxpayers by withholding agents specified in the local law (commonly known as ‘prescribed persons’) and on payments to non-residents in connection with a Pakistan source income.
Under the local law, for non-residents having no PE in Pakistan, withholding taxes (WHT) are applicable on payments such as Fee for technical service, royalties, dividends, interests, insurance premiums, fees for digital services etc. The applicable withholding tax rate on such payments ranges from 5% to 20% subject to any relief available under the double tax treaty. The tax withheld is deemed to be the final tax liability of the non- resident.
Common payments to non-resident, applicable tax rate under the local law and any relief available under the respective tax treaty are tabulated below:
|Recipient (1, 2, 3)||WHT (%)|
|Belgium||10 (11)/15||15||15/20 (12)|
|Bosnia and Herzegovina||10||20||15|
|Canada||15 (11)/20 (10)||25||15/20 (12)|
|Czech Republic||5/15 (10)||10||10|
|Finland||12/15/20 (10)||10 (13)/15||10|
|Germany||10/15 (10)||10 (13)/20||10|
|Ireland, Republic of||5 (10)/10||10||10|
|Italy||15/25 (10, 11)||30||30|
|Korea, Republic of||10 (11)/12.5 (10)||12.5||10|
|Malaysia||15 (11)/20 (11)/10||15||15|
|Nepal||10 (10)||10 (19)/15||15|
|Netherlands||10/20 (10)||10 (13)/15/20 (10)||5/15 (16)|
|Philippines||15/25 (10)||15||15 (14)/25|
|Poland||15 (10, 11)||(7)||15/20 (12)|
|Saudi Arabia||5 (15)/10||10||10|
|South Africa||10/15 (10)||10||10|
|Sri Lanka||15 (10)||10||20|
|Thailand||15 (11)/25 (10)||10 (13)/25||10/20 (18)|
|Turkey||10 (11)/15 (10)||10||10|
|United Arab Emirates||10/15 (10)||10||12|
|United Kingdom||10 (11)/15/20 (10)||15||12.5|
- This table is a summary only and does not reproduce all the provisions that may be relevant in determining the application of WHT in each tax treaty.
- Resident and non-resident imply tax status.
- Individuals and companies are required to render annual returns of income and pay tax at the applicable rates. Credit is given for WHT deducted.
- WHT rates for interest and royalties given to non-resident corporations (treaty countries) also apply to non-resident individuals.
- The following remarks for dividends should be noted:
- The inter-corporate rate of tax on dividends received by a foreign corporation is 15%; corresponding treaty WHT rates in excess of 15% have been specified.
- The rates given in the table for treaty countries relate to recipient corporations. The maximum rate, as stated above, in respect of inter-corporate dividends is 15%.
- Certain treaties provide for tax exemption of interest paid to the government or the central bank of the contracting state and on foreign loans specifically approved by the federal government.
- No concession is provided under the treaty.
- Royalties are exempt from tax, provided the recipient does not have a PE in Pakistan.
- WHT rate depends on percentage of holding in the company.
- This rate applies if the paying company is engaged in the industrial undertaking.
- Consideration for technical know-how or information concerning industrial, commercial, or scientific experience.
- This rate applies if the beneficial owner is a bank.
- This rate applies if the paying company operates in preferred areas.
- This rate applies if the company is owned by the government.
- 5% is applicable for royalties payable for copyright of a literary, artistic, or scientific work, but excluding cinematograph films and tapes for television or broadcasting. All other royalties are taxable at 15%.
- 18% is applicable for royalties payable for patent, trademark, design or model, plan, secret formula, or process of any industrial or scientific equipment, or for information concerning industrial and scientific experience; 15% for copyright of literary, artistic, or scientific work; and 10% for copyright of cinematograph films or tapes for television or radio broadcasting.
- 10% is applicable for royalties payable for copyright of literary, artistic, and scientific work. All other royalties are taxable at 20%.
- The rate applies if the beneficial owner is a financial institution, an insurance company, or investment company.
- 15% applies if the beneficial owner of dividends is a company.
- 0% applicable in case interest is being earned by the government, a company 51% or more shares of which are held by the government, or the loan is guaranteed by the government or any of its institutions.
For resident taxpayers and non-residents having a PE in Pakistan, withholding taxes are applicable on a number of the transactions including sale of goods, execution of contract and rendering of services. These taxes are generally considered as transaction-based minimum taxes (except for sale of goods by a manufacturer or a company listed on Pakistani stock exchange) and are adjustable against a person’s annual tax liability.
It should be noted that certain withholding taxes are enhanced by a hundred percent, where a taxpayer does not appear on a list maintained by the tax authorities detailing particulars of taxpayers who duly files their tax returns. This list is known as the active taxpayers list.
Withholding tax implications / provisions in the local law on following transactions have been withdrawn through Finance Act, 2021:
153B: Payment of royalty to residents.
231A: Cash withdrawals by those not appearing on Active taxpayers list [‘ATL’].
231AA: Banking instruments sold / cancelled against cash by those not appearing on ATL.
236P: Banking transactions by those not appearing on ATL.
236Y: Amounts remitted abroad through credit or debit or prepaid cards.
236B: Domestic air travel.
236L: International air travel.
236V: Extraction of minerals.
233A: Commission earned by member of stock exchange. The said withholding was otherwise made inapplicable with effect from March 1, 2019. A clarity is required whether such omission would render withholding tax under section 233 applicable on the commission earned by members of the stock exchange.
233AA: Margin financing by NCCPL.
234A: Gas bill of CNG stations.
236HA: Sale of petroleum products to petrol pump operator or distributor not receiving commission or discount.