Determination of status of non-residents in Pakistan: Amendments to definition of PE shall apply

ISLAMABAD: The amendments in the definition of Permanent Establishment (PE) shall apply for determination of status of the non-residents in Pakistan.

The FBR has issued circular No 2 of 2023 (Income Tax) to explain important amendments made in the Income Tax Ordinance, 2001 (the Ordinance) through Finance Act 2023.

The FBR stated that in order to enlarge the scope of definition of PE, Finance Act has made amendment in section 2(al) of the Ordinance by removing word “fixed” wherever appearing in the definition. In the existing definition the word “fixed” preceded the word “place”.

Hence, in the existing definition scope was limited to fixed place of business. In the present world non-residents also carry out business in other countries or territories through virtual presence or non-fixed presence, hence; the amendment is made to cater to new reality.

Consequently, the second amendment is also made in the definition by enlarging the scope of PE to “virtual business presence”.

The new clause (bb) has been inserted after the clause (ba) to define the virtual business presence in Pakistan as any business where transactions are conducted through the internet or any other electronic medium, with or without physical presence.

Further, a third amendment has also been made in clause (d) of sub-section (41) of section 2 of the Ordinance. This clause includes the furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purpose in the definition of PE.

In the clause word “entity” has been inserted after the word personnel. Therefore, furnishing of services including consultancy services through an entity in Pakistan is now covered under the definition of PE.

The definition of PE as amended shall apply for determination of status of the non-residents in Pakistan as regards existence of PE, however; the definition shall be applied based on facts of each case and in accordance with relevant provisions of applicable Agreement for Prevention and Avoidance of Double Taxation between Pakistan and the country/state of the non-resident person, the FBR added.

Copyright Business Recorder, 2023