Income Tax Ordinance, 2001 — Section 101: Geographical source of income

101. Geographical source of income. — (1) Salary shall be Pakistan-source income to the extent to which the salary

(a)is received from any employment exercised in Pakistan, wherever paid; or

(b)is paid by, or on behalf of, the Federal Government, a Provincial Government, or a 1[Local Government] in Pakistan, wherever the employment is exercised.

(2)Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan.

(3)Business income of a non-resident person shall be Pakistan-source income to the extent to which it is directly or indirectly attributable to –

(a)a permanent establishment of the non-resident person in Pakistan;

(b)sales in Pakistan of goods merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan; 2[ ]

(c)other business activities carried on in Pakistan of the same or similar kind as those effected by the non-resident through a permanent establishment in Pakistan 3[; or] 4[(d) any business connection in Pakistan 5[; or] 1 The words “local authority” substituted by the Finance Act, 2008. 2 The word “or” omitted by the Finance Act, 2003. 3 Full stop substituted by the Finance Act, 2003. 4 Inserted by the Finance Act, 2003. 5 Full stop substituted by the Finance Act, 2018. 189 Chapter VII – International 1[(e) import of goods, whether or not the title to the goods passes outside Pakistan, if the import is part of an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the associates of the person supplying the goods or its permanent establishment, whether or not the goods are imported in the name of the person, associate of the person or any other person. Explanation.—For the removal of doubt, it is clarified that where the income is subject to taxation under sections 5A, 5AA, 6, 7 and 7A, the income shall not be chargeable to tax under the head income from business.”] Chapter VII – International 1[(4) Where the business of a non-resident person comprises the rendering of independent services (including professional services and the services of entertainers and sports persons), the Pakistan-source business income of the person shall include [in addition to any amounts treated as Pakistan-source income under sub-section (3)] any remuneration derived by the person where the remuneration is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.]

(5)Any gain from the disposal of any asset or property used in deriving any business income referred to in sub-section (2), (3) or (4) shall be Pakistan source income.

(6)A dividend shall be Pakistan-source income if it is 2[—] Chapter VII – International

(b)borne by a permanent establishment in Pakistan of a non resident person.

(9)Rental income shall be Pakistan-source income if it is derived from the lease of immovable property in Pakistan whether improved or not, or from any other interest in or over immovable property, including a right to explore for, or exploit, natural resources in Pakistan.

(10)Any gain from the alienation of any property or right referred to in sub section (9) or from the alienation of any share in a company the assets of which consist wholly or principally, directly or indirectly, of property or rights referred to in sub-section (9) shall be Pakistan-source income.

(11)A pension or annuity shall be Pakistan-source income if it is paid by a resident or borne by a permanent establishment in Pakistan of a non-resident person.

(12)A technical fee shall be Pakistan-source income if it is –

(a)paid by a resident person, except where the fee is payable in respect of services utilised in a business carried on by the resident outside Pakistan through a permanent establishment; or

(b)borne by a permanent establishment in Pakistan of a non resident person. 1[(12A) A fee for offshore digital services shall be Pakistan- source income, if it is –

(a)paid by a resident person, except where the fee is payable in respect of services utilised in a business carried on by the resident outside Pakistan through a permanent establishment; or

(b)borne by a permanent establishment in Pakistan of a non resident person.]

(13)Any gain arising on the disposal of shares in a resident company shall be Pakistan-source income. 2[(13A).Any amount paid on account of insurance or re-insurance premium by an insurance company to an overseas insurance or re-insurance company shall be deemed to be Pakistan source income.]

(14)Any amount not mentioned in the preceding sub-sections shall be Pakistan-source income if it is paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person. 1 Inserted by the Finance Act, 2018. 2 Inserted by the Finance Act, 2008. 192 Chapter VII – International

(15)Where an amount may be dealt with under sub-section (3) and under another sub-section (other than sub-section (14)), this section shall apply

(a)by first determining whether the amount is Pakistan-source income under that other sub-section; and

(b)if the amount is not Pakistan-source income under that sub section, then determining whether it is Pakistan-source income under sub-section (3).

(16)An amount shall be foreign-source income to the extent to which it is not Pakistan-source income. 193 Chapter VII – International 1 [101A. Gain on disposal of assets outside Pakistan.— (1) Any gain from the disposal or alienation outside Pakistan of an asset located in Pakistan of a non resident company shall be Pakistan-source.

(2)The gain under sub-section (1) shall be chargeable to tax at the rate and in the manner as specified in sub-section (10).

(3)Where the asset is any share or interest in a non-resident company, the asset shall be treated to be located in Pakistan, if ─

(a)the share or interest derives, directly or indirectly, its value wholly or principally from the assets located in Pakistan; and

(b)shares or interest representing ten per cent or more of the share capital of the non-resident company are disposed or alienated.

(4)The share or interest, as mentioned in sub-section (3), shall be treated to derive its value principally from the assets located in Pakistan, if on the last day of the tax year preceding the date of transfer ofa share or an interest, the value of such assets exceeds one hundred million Rupees and represents at least fifty per cent of the value of all the assets owned by the non resident company.

(5)Notwithstanding the provisions of section 68, the value as mentioned in sub-section (4) shall be the fair market value, as may be prescribed, for the purpose of this section without reduction of liabilities.

(6)Where the entire assets by the non-resident company are not located in Pakistan, the income of the non-resident company, from disposal or alienation outside Pakistan of a share of, or interest in, such non-resident company shall be treated to be located in Pakistan, to the extent it is reasonably attributable to assets located in Pakistan and determined as may be prescribed.

(7)Where the asset of a non-resident company derives, directly or indirectly, its value wholly or principally from the assets located in Pakistan and the non-resident company holds, directly or indirectly, such assets through a resident company, such resident company shall, for the purposes of determination 1 Inserted by the finance Act 2018. 194 Chapter VII – International of gain and tax thereon under sub-section (8)or, as the case may be, sub-section

(9), shall furnish to the Commissioner within sixty days of the transaction of disposal or alienation of the asset by the non-resident company, the prescribed information or documents, in a statement as may be prescribed: Provided that the Commissioner may, by notice in writing, require the resident company, to furnish information, documents and statement within a period of less than sixty days as specified in the notice.

(8)The person acquiring the asset from the non-resident person shall deduct tax from the gross amount paid as consideration for the asset at the rate of ten percent of the fair market value of the asset and shall be paid to the Commissioner by way of credit to the Federal Government through remittance to the Government Treasury or deposit in an authorized branch of the State Bank of Pakistan or the National Bank of Pakistan, within fifteen days of the payment to the non-resident.

(9)The resident company as referred to in sub-section (7) shall collect advance tax as computed in sub-section (10) from the non-resident company within thirty days of the transaction of disposal or alienation of the asset by such non-resident company: Provided that where the tax has been deducted and paid by the person acquiring the asset from the non-resident person under sub section (8), the said tax shall be treated as tax collected and paid under this 195 Chapter VII – International sub-section and shall be allowed a tax credit for that tax in computing the tax under sub-section (10).

(10)The tax to be collected under sub-section (9) shall be the higher of ─

(a)20% of A, where A – fair market value less cost of acquisition of the asset; or

(b)10% of the fair market value of the asset.

(11)Where tax has been paid under sub-section (8) or (9), no tax shall be payable by the non-resident company in respect of gain under sub-section (8) of section 22 or capital gains under section 37 or 37A.

(12)Where any gain is taxable under this section and also under any other provision of this Ordinance, the said gain shall be taxable under other provision of the Ordinance.] 196 Chapter VII – International PART II TAXATION OF FOREIGN-SOURCE INCOME OF RESIDENTS