Chapter 1 Tax year and resident
Chapter 1
Tax Year and Residential Status
1.Tax Year – section 74
1.1.Tax year is of 3 types;Normal tax year, Special tax year and Transitional tax year.
1.2.Normal Tax Year:
A period of 12 months from 1 July to 30 June denoted by the calendar year in which the normal tax year ends. For the year ending 30 June 2015 the tax year shall be 2015.
1.3.Special Tax Year:
Any income year ending other than 30thJune is special tax year and denoted by the calendar year relevant to the normal tax year in which the closing date of the special tax year falls.
Special year 1.1.2012 to 31.12.2012 – this year end falls in the normal tax year 1.7.2012 to 30.6.2013 and therefore tax year relevant to the normal tax year i.e. TAX YEAR 2013 shall be the tax year for this special year as well.
Special tax year 1.10.2010 to 30.9.2011 – tax year shall be 2012
The FBR has authority to prescribe any special tax year in respect of any particular class of taxpayers.
If the tax year is not specified by the FBR and a taxpayer wants to have any special tax year then he is required to make an application to the FBR specifying the reasons for the purpose.
1.4.Transitional Tax Year:
If a normal tax year or special tax year changes then the period from the day next following the last full tax year to the date of commencement of new tax year shall be treated as transitional tax year.
Normal tax year 1.7.2009 to 30.6.2010 i.e. Tax year 2010 changes to special year 1.1.2011 to 31.12.2011 i.e. Tax year 2012. In this case, period from 1.7.2010 to 31.12.2010 shall be treated as a transitional tax year i.e. Transitional tax year 2011.
1.5.Change in the Tax Year:
(a) A person using normal tax year may apply to the Commissioner to allow him to use any special tax year.
(b) A person using special tax year may apply to the Commissioner to allow him to use any other special tax year or normal tax year.
(c) The Commissioner shall grant permission subject to conditions, if any, as the Commissioner may impose only if the person has shown a compelling need for the change.
(d) If the Commissioner wants to reject the application or to withdraw his permission earlier allowed,he shall provide an opportunity of being heard to the person and shall record in the order the reasons for such rejection or withdrawal of permission.In this case the person may file a review application to the FBR and the decision of the FBR shall be final.
Q.2(b) Sept 2007 ICAP CAF-06: One of your client which is a subsidiary of a foreign company wants to change its accounting year from June 30 to December 31 as the income year of its parent company ends on December 31. Advise the client about the requirements of the Income Tax Ordinance, 2001 regarding change in tax year from normal to special. (Marks 3)Q.4(a) March 2013 ICAP CAF-06: Inspired Pakistan Ltd (IPL) wants to change its accounting year from 30 June to 31 December as the income year of its parent company in USA ends on 31 December.
Required: Advise IPL about the requirements of the Income Tax Ordinance, 2001 regarding the change of tax year from normal to special. (Marks 3)
2. Residential Status of an Individual – section 82
Residential status for tax purpose has no relationship with nationality or domicile. Residential status of an individual is based on number of days he is physically present in Pakistan during a tax year. Therefore, a foreigner can also be a resident person for Pakistan tax purpose. On the other hand, a Pakistan national may become non-resident for tax purpose.
Physical stay in a tax year in Pakistan /Status
0 – 182 days / Non-Resident183 or more days / Resident
A government employee posted abroad in the tax year is resident irrespective of his physical stay in Pakistan
Rule 14 of the Income Tax Rules 2002:
Rule to count days an individual present in Pakistan becomes vital when a person has frequent visits to or from Pakistan. Rule 14 of the Income Tax Rules prescribes the procedure for counting of days as under:
- Part of a day that an individual is present in Pakistan counts as a whole day including:
A day of departure from Pakistan
A public holiday
A day of leave
A day that the individual’s activity in Pakistan is interrupted because of a strike, lock-out or delay in receipt of supplies
A holiday spent in Pakistan before, during or after any activity in Pakistan
- A day in Pakistan solely by reason of being in transit does not count as a day present in Pakistan
3. Residential Status of a company – section 83
3.1A company incorporated in Pakistan, provincial government and local government are resident without any condition.
3.2Other company (i.e. a company incorporated outside Pakistan) is resident if control and management of the affairs is situated wholly in Pakistan in the year.
3.3Definition of company – section 80(2)(b)
“company” means –
(i)a company as defined in the Companies Ordinance, 1984 including a small company;
(ii)a body corporate formed by or under any law in force in Pakistan;
(iii)a modaraba;
(iv)a body incorporated under the law of a country outside Pakistan relating to incorporation of companies;
(iii)a co-operative society, a finance society or any other society;
(iv)a non-profit organisation;
(v)a trust, an entity or a body of persons established or constituted by or under any law for the time being in force;
(vi)a foreign association, whether incorporated or not, which the Board has, by general or special order, declared to be a company for the purposes of this Ordinance; or
(vii)a Provincial Government or a Local Government in Pakistan.
4. Residential Status of Association of Persons (AOP) – section 84
AOP shall be considered as resident if control and management of the affairs is situated wholly or partly in Pakistan in the year.
AOP includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company – section 80(2)(a)
Note for students: Partnership firm and joint venture are the common examples of AOP.
5. Income with reference to Resident and Non-Resident
(i.e. Scope of Total / Taxable Income)
5.1A resident person is taxable for his worldover income subject to agreement for the avoidance of double taxation (Tax Treaty). A non-resident person is taxable only for his Pakistan-source income subject to Tax Treaty. {section 11(5)(6)}
Tax Treaty: section 107
Tax treaty shall apply in case of any contradiction between local laws and tax treaty e.g. if a tax treaty provides exemption to a particular income say dividend income then the local laws regarding taxability of dividend would have no effect.
Note for students:Tax treaty shall be considered for:
-Foreign source income of a resident person; and
-Pakistan source income of a non-resident person.
Foreign source income of a non-resident person is not taxable in Pakistan irrespective of tax treaty and the tax treaty has nothing to do with Pakistan source income of a resident person.
5.2Foreign source income of a short term resident – Section50
An individual shall be exempt in respect of his foreign-source income which is not brought / received in Pakistan if he is resident only by reason of his employment and he is present in Pakistan for not exceeding 3 years.
This section does not apply on business established in Pakistan by an individual foreigner.
5.3Foreign source income of a returning expatriate – Section51
If an individual citizen of Pakistan (returning expatriate) is resident in the current tax year but was non-resident in the 4 preceding tax years, his foreign-source income shall be exempt in the current tax year and in the following tax year.
5.4Foreign source salary of resident individual
Foreign source salary by a resident individual is exempt in Pakistan if he has paid foreign income tax on foreign source salary or his employer has deducted tax at source from salary and paid to the revenue authority of that foreign country – Section 102
Salary earned outside Pakistan shall be exempt if a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year – Section 51(2)
Questions ICAP Module CAF-06
Q.6 Sept 2000: Briefly describe the provisions related to the scope of total income. (Marks 10)
Q.2(ii) March 2000: State the basis of taxation regarding residents and non resident. (Marks 8)
Q.6(a) Sept 2003: Under what circumstances a resident individual is entitled to claim exemption from tax on his foreign source salary, and when is the foreign tax treated as having been paid? (Marks 4)
*Q.4(b) March 2006: Mr. A, a Pakistani Citizen, returned to Pakistan in November 20X7 after completing his employment contract in United Arab Emirates (UAE). He worked till October 20X7 in UAE where there was no tax on salaries. Mr. A is in Pakistan since then and has been employed by a local company. Explain the tax implication on Mr. A’s income, earned in UAE and Pakistan, for the tax year 20X8. (Marks 4)
*Q.2(b) March 2009: Briefly discuss the residential status of the following persons under the Income Tax Ordinance, 2001 for the tax year 20X8:
(i) Asif is an employee of Balochistan Government, who has been sent to United Kingdom for an official assignment on 1.12.20X6 for two years.
(ii) Messrs. Akhtar & Co. is a partnership firm, doing business of financial consultancy in Pakistan as well as United Arab Emirates (UAE). The management and control of its affairs is situated partly in UAE and partly in Pakistan. (Marks 4)
*Q.4(a) Sept 2011:Briefly discuss the residential status of the following persons for the tax year 20X8 under theIncome Tax Ordinance, 2001:
(i)Mr. Shah has been working as an Information Analyst in the Ministry of Foreign Affairs.On 1.11.20X7, he was posted to Pakistan Embassy in Canada for three years.
(ii)ASLearningCenter is a partnership concern, providing IT training to professionals inPakistan, UAE and Saudi Arabia. Up to 31.7.20X7, the management and control of itsaffairs was situated partly in Pakistan. However, with effect from 1.8.20X7, theentire management and control of the affairs of the partnership was shifted to Dubai.
(iii)Mr. LT was sent to Pakistan on a special assignment by his UK-based company on 1.3.20X8. He left Pakistan on 9.9.20X8.
(iv)F Trading LLC was incorporated as a limited liability company in UAE. Themanagement and control of its affairs are situated wholly in Pakistan. (8 marks)
*Q.3(b) Sept 2012: Margaret, a German national was employed as a Technical Manager of F ChemicalsLtd, a resident company, on 1.10.20X6 for a term of two years. Under the terms ofemployment, she was allowed to deliver lectures at various professional organizations. Duringtax year 20X8, she conducted three workshop sessions, the details of which are as follows:
− Workshop Session in Lahore: A fee of US$ 15,000 in equivalent Pak Rupees was receivedfrom a local event manager. The fee was credited to her bank account maintained inKarachi.
− Workshop Session in Munich: A fee of US$ 25,000 was received in Germany in her Munichbank account.
− Workshop Session in Dubai: A fee of US$ 20,000 was remitted to her bank account inKarachi.
Required:Discuss the taxability of the amounts received by Margaret for conducting theworkshopsessions during tax year 20X8. (Marks 6)
AnswersICAP Module CAF-06
Answer to Q.4(b) March 2006:
Mr. A is a resident person during the year for tax purpose as he was in Pakistan during November to 30th June i.e. for more than 182 days.
His Pakistan source salary is taxable in Pakistan.
Foreign source salary income of a resident person is exempt in Pakistaninter alia if a resident person is a returning expatriate. If an individual citizen of Pakistan is resident in the current tax year but was non-resident in at least 4 preceding tax years, his foreign-source income including foreign source salary shall be exempt in the current tax year and in the following tax year.
Answer to Q.2(b) March 2009
(i)A government employee posted abroad in the tax year is resident irrespective of his physical stay in Pakistan and therefore Mr. Asif is a resident person for tax purpose.
(ii)An Association of Persons (AOP) shall be considered as resident if control and management of the affairs is situated wholly or partly in Pakistan in the year. Therefore, Akhter & Co. being an AOP having management and control of its affairs partly in Pakistan is a resident person.
Answer to Q.4(a) Sept 2011
(i)Being an employee of Federal Government Mr. Shah would be treated as a resident irrespective of number of days he stays in Pakistan.
(ii)AS Learning Centre (ALC), being a partnership firm, is an AOP.AOP shall be a resident person for a tax year if the control and management of its affairs is situated wholly or partly in Pakistan at any time in the year.
Since ALC’s management and control of affairs were present partly in Pakistan during the tax year, it shall be considered as a resident person.
(iii)The stay of Mr. LTduring the relevant tax year is 122 days (31+30+31+30).
Since his stay in Pakistan is less than 183 days, he is a non resident for tax purposes.
(iv)Since the management and control of affairs of F Trading LLC was wholly situated in Pakistan during the relevant tax year, it is a resident companyirrespective of the fact that it was incorporated in UAE.
Answer to Q.3(b) Sept 2012
The foreign-source income of a short term resident individual is exempt if he/she is:
(i)a resident individual solely by reason of the individual’s employment; and
(ii)present in Pakistan for a period or periods not exceeding three years
Ms. Margaret is a short term resident person having fulfilled the above conditions.
However, exemption is not available toany income derived from a business of the person established in Pakistan; orany foreign-source income brought into or received in Pakistan.
Taxability of her activities is as under:
(i)Receipt of US$ 15,000 in equivalent Pak Rupees for conduction the workshop session at Lahoreis Pakistan source income and taxable wherever received.
(ii)Receipt of US$ 25,000 for conducting the workshop session at Munichis foreign source income and shall not be taxable as it has neither been received in nor brought into Pakistan.
(iii)Receipt of US$ 20,000 for conducting the workshop session at Dubaiis foreign source income and shall be taxable as it has been brought into Pakistan.
QuestionsICAP Module F
Q.2(a) Dec 2002 ICAP F
How does an individual person is said to have met the residency test. (Marks 2)
*Q.2(b) Dec 2002 ICAP F [portion only]
Mr. William De Niro signed a contract with PTV to assist in making a film on the wild life sanctuaries in Pakistan. Under the terms of the contract Mr. Niro was to stay in Pakistan for a period of 1 year 3 months and 21 days. He landed in Pakistan on 29.8.20X7. According to the terms of employment Mr. Niro was to be paid the following emoluments:
•Basic Salary of Rs.150,000 per month
•Accommodation.
•Company maintained car (cost of the car Rs.1 million)
•PTV spends Rs.15,000 per month for providing security to Mr. Niro
•Mr. Niro was entitled for utility allowance of Rs.40,000 per month.
•Besides above PTV also pays US $ 2,500 per month in his home country for family subsistence. Mr. Niro is a US national.
Mr. Niro was also responsible as part of his deal to provide training to PTV staff abroad and was responsible to finalize training course in ItalyFrance. Boarding and lodging, finalization of travelling schedule is also his responsibility.
PTV crew left for offshore training on 15.12.20X7 and the training started from 20.12.20X7. Mr. Niro returned to Pakistan with his crew on 14.4.20X8.
Mr. Niro also has other income in his home country.
= Rent from apartment in New York amounting to US $ 15,000 per annum out of which he received US $ 3,000 inPakistan during the income year ending on 30.6.20X8. The balance amount was retained in his bank account abroad.
= Mr. Niro has a partnership in a production house with his wife in New Jersey. During the year he earned a profit of US $ 50,000 which remained in US in his bank account.
Exchange rate Rs.60 = US $ 1
Required:
(i) What is the tax status of Mr. Niro for Pakistan tax purpose in the tax year 20X8?
(ii) Note on foreign source income
*Q.2 Dec 2007 ICAP F
Mr. Kashif, a Pakistani National, left the Pakistani subsidiary of a multinational company and was employed in the role of Director Middle East for the Group company with effect from 1.1.20X8. Due to certain visa issues, he could not travel immediately and remained in Pakistan till 28.2.20X8. While in Pakistan, he continued to work for the Middle East region and received payment from the Group company.
Mr. Kashif is required to return to Pakistan for sorting out certain issues on behalf of the group company and will be staying in Pakistan for about two months. On his return to Pakistan he will continue to be employed and paid by the Group company. The Group company deducts tax @ 20% of the gross salary.
Assumptions: No tax in UAE, no tax treaty, 20% tax deduction is only for Pakistan source salaryRequired: Briefly explain the Pakistan tax implications to Mr. Kashif for the tax years 20X8 and 20X9 in respect of the following:
(a) Salary earned while he was present in Pakistan from 1.1.20X8 to 28.2.20X8.
(b) If he returns to Pakistan before 30.6.20X8.
(c) If he returns to Pakistan after 30.6.20X8. (Marks 10)
*Q.4(a)(ii) June 2010 ICAP F
Mr. B, a Pakistani national, was working as a clearing agent in Taiwan for the past six years. He came back to Pakistan in July 20X6 and joined a clearing house of his brother Ikram. In March 20X8 he received Rs.1 million as his share of commission from the discontinued business in Taiwan.
Briefly explain the taxability of the above situation(Marks 3)
*Q.5 Dec 2010 ICAP F
In view of the provisions of Income Tax Ordinance and the stated rules, determine the residential status of the following persons for the tax year ended 30.6.20X8 under the given circumstances.
(1)Mr. Mubeen came to Pakistan for the first time on a special assignment from his company on 1.4.20X7 and left the country on 30.9.20X7.
(2)Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He went to Canada on 29.12.20X7 to assume his responsibilities as a CFO. In June 20X8 his company sent him to India on a training workshop. On 30.6.20X8 on his way back to Canada he had to stay in Karachi for a whole day in transit.
(3)Mr. Baber, a Federal Government Employee was posted to the Pakistan mission in Geneva from 1.7.20X7 to 30.6.20X8.
(4)Mr. Francis, a sugar dealer in Brazil, came to Pakistan on 31.7.20X7. Duringhis visit he stayed at Lahore for 60 days and spent the rest of the days in Karachi. He left the country on 31.1.20X8. Assume that the Commissioner has granted him permission to use calendar year as a special tax year. (Marks 6)
Q.5(c) June 2011 ICAP F
Who may be regarded as short-term resident individual under the Income Tax Ordinance,2001? Discuss the provisions relating to the taxability of foreign source income of suchindividuals. (Marks 4)