KARACHI: The Finance Bill 2018 has proposed a fundamental change in the concept of Pakistan source income wherein any gain from disposal made outside Pakistan, of an asset located in Pakistan, shall be considered as Pakistan source income.
This proposed amendment in the Income Tax Ordinance, 2001 strengthens capital gains tax claims of Pakistan’s tax authority on the pending sale of K-Electric Limited’s shares by KES power to China’s Shanghai Electric Company.
Dubai-based Abraaj Group in October 2016 signed a definitive agreement for the sale of its 66.4 percent shareholding in K-Electric to Shanghai Electric Power Company (SEP), a subsidiary of the State Power Investment Corporation of China. However, the transaction has not been closed so far due to certain pending issues including determination of a favorable multiyear tariff (MYT) for KEL and certain taxation issues.
Any gain from disposal made outside Pakistan, of an asset located in Pakistan, shall be considered as Pakistan source income, said an amendment introduced into Income Tax Ordinance 2001 through Finance Bill 2018.
Previously, this provision was only applicable on immovable properties and certain rights in relation thereto [section 101(9) and (10)]. The proposed amended provisions mean that a gain arising to a non-resident person that is otherwise not taxable in Pakistan will become taxable in Pakistan if it relates to an underlying asset in Pakistan.
This provision of law is an extension of the concept of nexus of taxability of income in Pakistan. The concept of taxability in relation to the underlying source is generally limited to real estate properties. The commentaries on international taxation reveals that in the case of real estate properties the jurisdiction where the property is located has the primary right to tax gain from such property.
Analysts said the extension of this concept to ‘all assets’ need to be examined under the concept of nexus and territorial jurisdiction of Pakistan tax law.