Tax dept do not treat receipts of software as royalties under DTTs

LAHORE: The income tax department has failed to treat the receipts under the software lease agreement as royalties under Double Taxation Treaties (DTTs).

According to details, the foreign incorporated company declared the receipts under the software lease agreement as business profits in its tax returns and sought exemption from income tax in Pakistan under Article 7 of the Convention between Netherlands and Pakistan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, 1982.

However, the tax department treated these receipts as royalties under Article 12 of the Convention and subjected them to income tax @15%.

The concerned tax officer, Commissioner Appeals and the tribunal concluded that the payments received by the company fell within the definition of royalties and were therefore liable to income tax in Pakistan.

The higher appellate forum ruled in favour of the tax-payer company holding that the amount received by it for leading software program did not qualify as royalties, therefore, not subject to income tax in Pakistan.

The highest forum ultimately seconded the lower forum with an observation that double taxation treaties provide a crucial framework for fostering international economic cooperation, facilitating cross-border investments, and avoiding the dual taxation of income that can impede global commerce.

Also that these treaties serve as bridge between nations, designed to encourage collaboration while preventing conflicts over taxing rights by allocating taxing authority between the source and resident states, promoting predictability for businesses and individuals engaged in international activities.

The highest appellate forum further maintained that courts in developing countries must interpret these treaties as dynamic instruments that balance the need for economic growth with the protection of their tax base, and that treaties should not be interpreted rigidly but should reflect their objectives and purpose, ensuring they serve the broader goal of equitable economic development globally.

Pakistan has three types of DTTs, including bilateral full scope treaties with 68 countries around the world, limited purpose agreement with four countries and five multilateral treaties. Netherlands fall under the category of bilateral full scope of treaties, according to the FBR web portal.

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