How to Declare and Disclose Tax Deducted on Payments to Non-Residents?

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How to Declare and Disclose Tax Deducted on Payments to Non-Residents?

Payments to non-residents are subject to withholding tax under Income Tax Ordinance, 2001. These taxes vary in nature depending on the type of payment, with some being treated as final tax, others as minimum tax, and adjustable.

Nature of Withholding Taxes on Non-Resident Payments

The nature of the tax deducted depends on the type of payment made to the non-resident:

Final Tax

In the following cases, the tax deducted at source is treated as final, meaning it is the full and final liability for the non-resident on that income:

• Royalties and Fees for Technical Services (FTS): Payments for intellectual property use or technical services rendered.
• Foreign Commercial Payments: Interest or related charges paid to foreign lenders.
• Capital Gains on Debt Instruments: Gains from the sale of debt securities.
• Return on Sukuks (Islamic bonds): Specifically for individuals and Associations of Persons (AOPs).
• Fee for Offshore Digital Services: Payments for online services like software development, cloud services, or digital content.
• Services of Money Transfer Operations: Payments to entities handling remittances or money transfer operations.
• Cross-Border Remittances: Commission on foreign remittances.
• Payments by Banking Companies or Networks: Charges or commissions paid by financial institutions.

For these categories, the non-resident is not required to file further tax returns in Pakistan, as the deducted tax satisfies their liability.

Minimum Tax

In some cases, withholding tax is treated as a minimum liability, meaning the deducted tax cannot be adjusted below the threshold:

• Contract Payments: Payments made to non-residents for contractual obligations.
• Advertisement Payments: Payments for advertising services, including digital advertising.

In these cases, the tax deducted serves as the baseline liability, but additional taxes may apply depending on total income.

How to Disclose the Tax

1. Filing of Withholding Tax Statement:
   
   • Withholding agents (persons or entities deducting the tax) must submit a withholding tax statement to the Federal Board of Revenue (FBR) via the IRIS system.
   • The statement should include details of the payment, tax deducted, and recipient details.
2. Supporting Documentation:
   
   • For cross-border payments, documents such as contracts, invoices, and proof of remittance must be maintained for audit purposes.
   • In cases where tax treaties are applicable, additional documentation may be required to justify reduced withholding rates under the treaty provisions.
3. Tax Treaties:
   Non-residents from treaty partner countries may avail reduced tax rates or exemptions under double taxation agreements (DTAs). The withholding agent must ensure the recipient provides the necessary documentation, such as a residency certificate.
4. Declaration by Non-Residents:
   
   • Non-residents may disclose the tax deducted in their annual tax filings if the amount is adjustable or minimum tax.
   • For final tax cases, the deducted amount must be correctly reported as final liability in their tax disclosures.

https://taxationpk.com/how-to-declare-an...residents/