The Supreme Court of Pakistan has dismissed, “with no order as to costs”, appeals against the High Court of Sindh and the Lahore High Court decision regarding the interpretation of Article VI of the ‘Convention between the Government of Pakistan and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income’.
As per the apex court judgment, a copy of which is available with Business Recorder, the basic issue in all these cases was the interpretation of “(1) The rate of United States tax on dividends paid by a United States corporation to a Pakistan company- (i) not having a permanent establishment in the United States, and (ii) owning shares carrying more than 50 per cent of the voting power in the corporation paying such dividends. Shall not exceed fifteen per cent.
“(2) (i) Where a United States corporation- has no permanent establishment in Pakistan, and (ii) is a public company… and (iii) owns shares carrying more than 50 per cent of the voting power of a company which is a resident of Pakistan and is engaged in an industrial undertaking of the classes specified in section 15-B of the Income Tax Act, 1922 (XI of 1922), the rate of Pakistan super tax otherwise pavable with respect to dividends paid by such company to such corporation shall be reduced by 1 anna in the rupee.
As per the Supreme Court, the matter in issue for the Appellants is that the impugned judgment and orders have misinterpreted Article VI of the Convention mainly that the tax is to be reduced by 1 anna in the rupee which is 1/16th of the tax rate which comes to 0.0625% and not 6.25%.
“So, as per their contentions, it means that from the given rate of 15% a rebate of 0.0625% has to be subtracted, that is 14.0625%. This, they argue, is the applicable rate,” read the judgement.
The SC said that after examining the given Article as well as the impugned judgment and orders wherein two aspects are very clear.
“Firstly, Article VI applies to the rate of tax and not on the amount of the tax. In this respect, the Article is clear that the rebate is given on the rate of tax. The rebate provision reduces the rate of the tax and not the amount of the tax. The reduction in the rebate is / anna in the rupee which expressed in percentage term is 6.25%.
“This is the figure that has to be subtracted from the applicable rate of tax which at the time was 15%. This in turn means that the tax rate has been reduced to 8.75%. The argument of the Appellants, that the reduction in the rate would bring the rate of tax to 14.0625%, has been aptly dealt with by the High Court of Sindh,” it added.
“Secondly, the rebate provision is not linked with the super tax. The Article VI of the Convention merely fixes the rate of the rebate to 1 anna in the rupee,” read the judgment.
The Supreme Court noted that the basic difference of opinion is the understanding of the calculation as to what the rate of the rebate is resulting in a reduction in the rate of tax. “There can be no other interpretation in this respect and whether it is looked at as 1/16th or it is looked at in the form of 1 anna in the rupee, while expressed in percentage term, the amount comes to 6.25%.
“Therefore, we find no illegality or infirmity in the impugned judgment and orders,” read the SC judgment.
“Under the circumstances, these Appeals, being devoid of force, are dismissed with no order as to costs,” it added.
The development means the Supreme Court of Pakistan has settled the controversy regarding the rebate available against super tax on dividend payable to a US Company by a Pakistani entity.
The Double Tax Treaty between Pakistan and the United States of America provides a rebate in the tax rate equal to one anna in a rupee.
Tax department interpreted it as a rebate in the amount of tax whereas in fact it is rebate in the rate of tax. One anna in a rupee means 6.25%. So if the rate of tax is 15% then the said rate will be reduced by 6.25 resulting in the applicable rate of 8.75.
The tax department interpreted the same as 6.25 of 15% which has been disregarded by the Supreme Court.
This case depicts that a relevant clause in the treaty remained under litigation since 1957 when the said treaty was signed. This means that US companies were under litigation for 67 years. It added nothing but confusion and legal charges and waste of time of the courts.
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