They said that one of the opinions of the tax official is that all cases of taxation involving non-resident taxpayers, having whatever structure, would have to be processed under the relevant provisions of the Income Tax Ordinance, 2001, and the Avoidance of Double Taxation Agreements. Moreover, non-resident companies cannot be taxed under the Presumptive Tax Regime and denied exemption certificates/refunds merely on the basis that the person is doing business under arrangement of Joint Venture. Apparently, this opinion is based on the interpretation of Circular 4 of 1964 and Circular 8 of 1986 and all relevant provisions of the Income Tax Ordinance 2001.
The issue mainly related to the issuance of exemption certificates and taxation of non-resident companies having some joint ventures with local resident taxpayers. The dispute is that whether such joint ventures are entitled to exemption certificates/refunds.
Tax expert further told that on this crucial issue of non-resident taxation, the FBR has already issued Circular 4 of 1964 dated 11.12.1964 and Circular 8 of 1986 dated 09.02.1986 which are quite clear while the same issue is also under investigation by the Federal Tax Ombudsman (FTO). The text of earlier circular is unambiguous, which says, "With the objective of attracting foreign capital and technical know-how and for the benefit of local investors willing to join hands with foreign companies, to undertake projects involving large investments, the Board, vide its Circular No 4 of 1964, allowed Pakistani and Foreign companies undertaking ''joint ventures'' to be taxed on the share income of `joint venture'' separately. Reference has been received as to whether the concession given in the above circular is applicable to `joint ventures'' between Pakistani Companies also.
It is clarified that Circular No 4 of 1964 is applicable to only such `joint ventures'' which are between foreign companies and Pakistani Companies. Joint ventures between Pakistani companies, as these do not serve the purpose stated above are not eligible for the concession. Joint ventures may be between government and a local enterprise, government and a foreign enterprise, to or more foreign enterprises, at least one foreign enterprise and one or more local enterprises and local enterprises. In other words, one of partners in the `joint venture'' should be a foreign enterprise.
Sources further stated that it has been alleged that the tax department has issued tax exemption certificates to some so-called foreign companies and some officials have sent the matter to the Justice and Law Division despite the fact that the case has already constituted a finality. In this regard a Chinese company''s exemption has been cancelled by the Peshawar Chief Commissioner of Regional Tax Office. Such type of companies indulged in the business of contract which covered by the dictation of law under Presumptive Tax Regime and tax thereon constitutes full and final income tax liability. Therefore, grant of exemptions and issuance of refund in such cases is totally illegal causing huge loss to the national exchequer, expert opined.
Tax experts said that foreign entrepreneurs, who are called ''non-resident persons'' in technical language, are exempted from paying tax under the law, however, in some cases, their companies are bound to register themselves and enter into joint ventures (JV) with Pakistani companies or individuals, for which they have to get licence from Pakistan Engineering Council. When the Non-Resident Persons enter into JV with locals, as per Income Tax Ordinance their status changes to Resident Persons and they are bound to pay tax under section 153(1)(c) of the ITO 2001. On the basis of clear provisions of the ie, sections 84, 153(6), 169(1)(b) and 169(3) of the Income Tax Ordinance, 2001 neither any refund could be created nor issued due to the reason tax deducted is final discharge of income tax liability.