‘Significant economic presence’: FTO asks FBR to tax non-resident cos

ISLAMABAD: The Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to invoke the law to tax non-resident companies having “significant economic presence” in Pakistan.

In exercise of jurisdiction u/s 9 (1) of the FTO Ordinance, the FTO conducted an “Own Motion Investigation” into the subject “significant economic presence of a non-resident in Pakistan.”

According to detailed research conducted by the research section of the FTO Secretariat, the following areas of the FBR were highlighted. The research noted some “glaring acts of maladministration; i.e., neglect, inattention, delay, and ineptitude in the discharge of duties and responsibilities by the FBR functionaries.”

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According to the FTO, altogether, a new, innovative, bold, and revenue-yielding measure has been taken by introducing two new provisions in the Tax Statute, adding subsections (3A) and (3B) in the existing section 101 of the Income Tax Ordinance.

Through the above-referred new legal provisions, the legislature intended to tax the hitherto untaxed massive outflow of money from Pakistan.

According to the FTO, for this purpose, a new legal concept of “significant economic presence” was introduced to be read with the existing provisions of business connection in Pakistan.

However, the business connection under “significant economic presence” hinges upon two conditions: First, the total amount of annual transactions of a taxpayer must exceed a certain threshold. Secondly, the total number of digital interactions of a taxpayer seeking business activities with users in Pakistan in that year should also exceed a specified threshold, the FTO said.

The FTO stated that it is strange that even after a lapse of around 15 months from the introduction of sub-sections (3A) and (38) of section 101, both thresholds are yet to be prescribed by the implementing agency; i.e., the FBR.

The FBR, the sole authority, which through delegated powers is obligated to prescribe both thresholds by making rules and issuing explanatory circulars, has thus far failed in discharging its obligation even after the lapse of over one year.

This “neglect, inattention, delay, and ineptitude, in the administration or discharge of duties and responsibilities” by the FBR is tantamount to maladministration in terms of section 2 (3 xii) of the FTO Ordinance, 2000.

This act of maladministration, whereby legislative intent has been put on the cold burner, renders the whole tax regime perverse, unjust, and discriminatory, allowing a huge flow of taxable money to go untaxed since the 1st July 2024 to date.

The FBR’s above-referred “neglect, inattention, delay and ineptitude, in the administration or discharge of duties and responsibilities” becomes more glaring when read with the following: Exhaustive study shows that over the last 3/4 decades, the dimensions of education in Pakistan have totally changed.

On the one hand, the public school system has gradually and abysmally deteriorated, while on the other, the space lost by this segment was first captured by the local private school chains, run by different trusts and taxable entities, and then by the foreign entities.

This foreign educational segment/stream can be further divided into (A)The Cambridge school system in Pakistan: This system refers to over 750 schools operating in Pakistan, but it follows the Cambridge Assessment International Education (CAIE) curriculum, which includes IGCSE and International AS &A Levels.

Currently, over 100000 students are taking part in O-level and A-level exams each year. As clarified by the Cambridge Coordinator for Pakistan, during 2025 alone, around 127OOO students appeared in A-level exams. These schools are duly recognized by education authorities as the Inter-Board Chairmen Committee (IBCC) recognizes Cambridge qualifications, providing equivalence for higher education in Pakistan.

While the tax burden on resident Pakistani citizens & entities is increasing day by day, the above-referred huge outward flow of money remains untaxed. It is pertinent to mention that FBR had made a good start in this direction in 2018when, by amending section 6 of the Income Tax Ordinance, 2001, through Finance Act 2018, income tax @5% was levied on offshore digital services received by non-resident taxpayers. The rate was doubled in 2022 and tripled in 2025, the FTO said.

Copyright Business Recorder, 2025