In Pakistan, the taxation of Permanent Establishments (PEs) is governed by the Income Tax Ordinance, 2001. A Permanent Establishment is a fixed place of business through which an enterprise carries on business in Pakistan. The term “permanent establishment” is defined under Section 80 of the Income Tax Ordinance, 2001 as follows:
“A permanent establishment means a fixed place of business through which an enterprise carries on its business, wholly or partly, and includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.”
The definition is quite broad, and it includes any fixed place of business, whether it is a physical office or a warehouse, through which an enterprise carries on business in Pakistan. It also includes any place where natural resources are extracted.
The taxation of Permanent Establishments in Pakistan is based on the concept of source-based taxation. Under this concept, the income earned by a non-resident enterprise in Pakistan is taxable only to the extent that it has a source in Pakistan. The profits attributable to a Permanent Establishment in Pakistan are taxed in Pakistan.
The taxation of Permanent Establishments in Pakistan is based on the principle of the arms-length transaction. Under this principle, the tax authorities consider the transactions between the Permanent Establishment and its head office as if they were between two independent entities dealing at arms-length. The profits of the Permanent Establishment are calculated based on the income earned by the Permanent Establishment, less the expenses incurred by it. These expenses must be reasonable and related to the business of the Permanent Establishment.
The taxation of Permanent Establishments in Pakistan is based on the following principles:
Business Profits
The business profits of a non-resident enterprise are taxable in Pakistan only if they are attributable to a Permanent Establishment in Pakistan. The profits attributable to the Permanent Establishment are taxed as if they were the profits of a resident taxpayer. The profits of the Permanent Establishment are calculated based on the arms-length principle.
Royalties and Fees for Technical Services
Royalties and fees for technical services paid to a non-resident enterprise are taxable in Pakistan only if they are attributable to a Permanent Establishment in Pakistan.
Dividends
Dividends paid by a resident company to a non-resident enterprise are subject to withholding tax. However, if the non-resident enterprise has a Permanent Establishment in Pakistan, the dividends paid to the Permanent Establishment are not subject to withholding tax.
Examples of Permanent Establishments in Pakistan:
A foreign company sets up a branch office in Pakistan to sell its products. The branch office is a Permanent Establishment in Pakistan, and the profits earned by the branch office are taxable in Pakistan.
A foreign company sets up a manufacturing unit in Pakistan to produce goods for export. The manufacturing unit is a Permanent Establishment in Pakistan, and the profits earned by the manufacturing unit are taxable in Pakistan.
A foreign company sets up a project office in Pakistan to carry out a specific project. The project office is a Permanent Establishment in Pakistan, and the profits earned by the project office are taxable in Pakistan.
A foreign company has a joint venture in Pakistan to explore and extract natural resources. The joint venture is a Permanent Establishment in Pakistan, and the profits earned by the joint venture are taxable in Pakistan.
In conclusion, the taxation of Permanent Establishments in Pakistan is based on the source-based principle, and the profits attributable to a Permanent Establishment are taxed in Pakistan. The taxation of Permanent Establishments in Pakistan is based on the arms-length principle, and the profits of the Permanent Establishment are calculated based on the income earned by the Permanent Establishment, less the expenses incurred by it. The taxation of Permanent Establishments in Pakistan applies to any foreign company that has a fixed place of business in Pakistan, whether it is an office, a factory, a workshop, or any other place of extraction of natural resources. The taxation of Permanent Establishments in Pakistan also applies to any income earned by a non-resident enterprise from royalties, fees for technical services, and dividends that are attributable to a Permanent Establishment in Pakistan.
It is important to note that Pakistan has double taxation agreements with many countries, including the United States, the United Kingdom, and China, which provide relief from double taxation on income earned by a non-resident enterprise. These agreements ensure that the same income is not taxed twice in both Pakistan and the non-resident enterprise’s home country.
The tax rate applicable to the profits of a Permanent Establishment in Pakistan is the same as the tax rate applicable to a resident taxpayer in Pakistan. The tax authorities have the power to determine the profits of a Permanent Establishment based on the transactions between the Permanent Establishment and its head office. The tax authorities can also request information from the head office of the non-resident enterprise to determine the profits of the Permanent Establishment.
