Tax authorities accused of misinterpreting global tax conventions

LAHORE: Tax authorities are accused of misinterpreting international tax conventions instead of implementing them while assessing the income of foreign companies working in Pakistan.

These tax conventions are supposed to be of a special nature between the states being party to such bilateral agreements and their aim is to avoid and relieve double taxation through equitable (and acceptable) distribution of tax claims between the countries.

The purpose of these treaties has significant relevance as to how their provisions are to be interpreted. The reason is that the efficacy of such treaties depends on a common and workable interpretation of the treaty terms.

According to sources, such an interpretation requires taking into consideration the international tax language and terminology and placing reliance on legal decisions and practices in other countries because these materials of part of the legal context.

They further pointed out that most countries accept the common interpretation principles of the Vienna Convention on the Law of Treaties of 23rd March 1969 under customary international law.

According to this convention, there may be a number of periods, interspersed with breaks, during which services are furnished by an enterprise. If the aggregate of this period crosses the threshold of four months within any twelve-month period, a permanent establishment will stand constituted.

However, the tax officials prefer to impose a tax on the basis of the permanent establishment of foreign companies and deny tax exemption to the income derived by them against their consultancy services from tax provided in the conventions.

Tax authorities generally allege that foreign companies have permanent establishments in Pakistan; therefore, they are liable to pay tax on the business generated from such permanent establishments.

The sources said the irony is that the assessing authorities wrongly apply the clauses of the international conventions to tax foreign companies, especially those having no permanent establishment here, but providing only consulting services to their Pakistani partners.

It is remorseful to note that the tax authorities seldom bother about proving their claims and prefer to wrong application of the conventions to fleece the foreign consulting firms. Their observations about the actual involvement of foreign companies are not supported by any material on record.

Copyright Business Recorder, 2023