A leading tax consultant Shahid Jami has approached the Federal Board of Revenue (FBR) for early clarification from the FBR, as the last date for filing of returns is approaching. When contacted, Shahid Jami explained that there is confusion amongst the taxpayers regarding taxability in Pakistan of foreign rental income in the context that convention for avoidance of double taxation between Pakistan and UAE, UK and Canada provide that that the rental income of the resident Pakistanis from the properties located in aforesaid countries would be taxable in those countries only. Whereas for resident Pakistanis having foreign income an additional return of foreign income has been prescribed without any clarification about the implications of tax treaties.
He also explained the background facts of the issue. As per him a large number of taxpayers had availed tax amnesties regarding their foreign immoveable properties and most of these have been given on rent. Now for the tax year 2018 the return of total income is due where the aforesaid rental income is required to be declared. As per the provisions of section 101 of the Income Tax Ordinance (ITO), rental income shall be Pakistan Source Income if it is derived from use of immovable property located in Pakistan. All other rental income shall be treated as foreign source Income.
As per provisions of section 11 of Income Tax Ordinance a resident person is required to pay tax on his world income subject to tax treaty. Tax treaty shall prevail in case of any contradiction between local laws and tax treaty. Tax treaty shall be considered for foreign source income of a resident person. Therefore, taxability of income from property of resident person shall be determined in accordance with Treaties of Pakistan with respective countries.
As per Article 6(1) of the agreement, Income derived by a resident of Pakistan from immovable property situated in UAE may be taxed in UAE. However, there is no income tax on rental income in UAE though as per tax treaty rental income of the resident Pakistanis of their properties in UAE is to be taxed in UAE. Whereas Article 24(1) of the Convention states the laws in force in either of the Contracting State will continue to govern the taxation of income in the respective contracting State except where provisions to the contrary are made in this Convention. Jami urged the FBR to clarify whether rental income of UAE property of resident Pakistani is taxable in Pakistan or required to be declared in the columns of exempt foreign income.
Moreover, Article 24 of the agreement also stipulates that in the event any income is taxable in Pakistan, credit of taxes paid and/or deducted in UAE with respect to such income shall be allowed to the taxpayer in Pakistan. Furthermore, in case any income is not subject to tax in Pakistan owing to the agreement, such income may be taken into account for the purpose of calculating tax rate to be imposed on total income.
He added that there is income tax on the rental income of non-resident in UK and Canada are provision of the tax treaty are similar providing taxation in UK and Canada but tax rates of property income are lower in UK as compared to Pakistan. This also needs clarification from FBR that whether difference of tax rates would be payable in Pakistan after availing tax credit of tax paid in UK.
Jami stressed for very prompt clarification as last date of filing income tax returns is approaching.