Withholding tax from payments under cohesive business operation rationalized

KARACHI: The Finance Bill 2019 has proposed certain amendments to address the practical issues which were being faced by withholding agents of non-resident contractors in relation to payments for offshore portion of the contract which were otherwise not taxable in Pakistan. [the_ad id=”31605″]Under the proposed amendment in the Income Tax Ordinance, 1969, in case of payment that constitutes part of an overall arrangement of a cohesive business operation, on an application made by the payer, the Commissioner may allow the person to make payment after deduction of tax equal to 30% of tax chargeable on such payment under section 152(2) viz. 20%.

The effective tax rate would thus be 6%. The credit of such tax will be available to the Permanent Establishment of the non-resident person accounting for profits arising on the overall cohesive business operation.

A clarification as to justification of using tax rate under section 152(2) is required, as such contracts are taxable under section 152(1A) of the Ordinance.

Through Finance Act, 2018, a concept of cohesive business operation was introduced for taxation of non-resident contractors who were mainly engaged in execution of Engineering, Procurement and Construction Contracts consisting of certain offshore supplies and services.

As a result of these amendments, payments for offshore supplies were being subject to withholding tax even though the same were outside the taxation ambit of Pakistan due to double tax treaty provisions.

It may be mentioned here the existing law provides for availing the option of taxation under final tax regime by non-resident persons on execution of a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for supply of supervisory activities in relation to such project and other contracts mentioned in section 152(1A). The Bill proposes to abolish such option, as a policy step. Tax deducted on such transactions is proposed to be minimum tax.

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