Tax Rates on Payments to Non Residents

Every person making certain types of payments to non-residents is required to deduct tax at specified rates. These payments may include:

a. Royalty and Fees for Technical Services

• The rate of tax imposed shall be 15% of the gross amount of royalty or fees for technical services and 10% in any other case.

b. Contract Payments

Tax shall be 7% of the gross amount payable on payments made for:

• Construction, assembly, or installation projects in Pakistan.
• Supervisory services related to such projects.
• Advertisement services rendered by TV satellite channels.

c. Payments for Advertisement Services

• Payments for advertisement services to non-resident media entities broadcasting from outside Pakistan are also taxable at 10%/20%.

d. Insurance and Re-Insurance Premiums

• Payments made for insurance or re-insurance premiums to non-residents are subject to withholding tax at 5% of the gross amount paid.

e. Offshore Digital Services

• Payments remitted outside Pakistan for offshore digital services are taxed at 10%

f. Capital Gains from Debt Instruments

• If a non-resident earns a capital gain on debt instruments or government securities (e.g., through special accounts like SCRA, FCVA, or NRVA), 10% withholding tax applies.

g. Payments for Sukuks

• Return on investments in sukuks (Islamic bonds) paid to non-resident sukuk holders is taxable.
  Company 25%
  Individual & AOP 12.5% (Where the return is more than Rs. 1 m)
  Individual & AOP 10%     (Where the return is less than Rs. 1 m)

2. Tax Rates and Final Tax Status

• The applicable rates are defined in the First Schedule of the Ordinance and vary based on the type of transaction.
• In some cases (e.g., payments related to specific financial services), the tax deducted is treated as a final tax, meaning the non-resident does not need to pay further tax in Pakistan for that income.

3. Exemptions and Reduced Rates

• Tax exemptions or reduced rates can be applied under Double Taxation Agreements (DTAs) or with the Commissioner’s written approval.
• Non-residents or their representatives can apply to the Commissioner Inland Revenue to reduce the withholding tax rate, provided specific conditions are met (e.g., not a minimum tax).

4. Minimum Tax

For certain transactions, the deducted tax is considered a minimum tax, meaning the non-resident cannot claim refunds or credits against it. However, manufacturers or others specified in the law may qualify for exceptions.

5. Documentation and Reporting

Before making a payment without tax deduction, the payer must notify the Commissioner with details such as:

• Name and address of the non-resident.
• Nature and amount of the payment.

The Commissioner may issue an exemption certificate if the non-resident is not liable to tax, or may direct the payer to deduct tax if the income is chargeable.

6. Responsibilities of Banking Companies and Exchange Companies

• Banks or financial institutions making remittances or payments (e.g., service charges to international operators) are obligated to deduct and deposit tax.
• Exchange companies handling global remittances must also deduct tax on service fees or commissions.