Does big tech pay its fair share of taxes in Pakistan? This is perhaps the most relevant question for Pakistan’s tech scene right now. Why? Because tech investment and tech remittances into Pakistan have dropped to their lowest since the ouster of Imran Khan, but some of the bigger tech companies – Google, Meta and ByteDance, which have millions of users in Pakistan – are receiving their share of dollar outflows from Pakistan.
On the other hand, these companies have not invested much in Pakistan and are alleged to not pay their fair share of taxes like they do in other countries. It becomes a double edged sword – their presence not only widens trade deficit but also the current account deficit in a country indebted to the IMF and other lenders.
As far as taxation goes, these companies do not have full-fledged offices in Pakistan and cannot be taxed as local companies in Pakistan get taxed, all the while turning revenues from Pakistan via payments made to these companies by businesses and people using their services in the country. Even without having local offices, the question of taxing these companies on payments sent from Pakistan falls apart because of some bilateral treaties. Here’s what’s exactly going on.
Is there an opportunity to tax these companies?
A bare basic comparison with India reveals much. In India, Google is registered as a full company under the name Google India Private Limited (GIPL) as a subsidiary of Google International LLC, the US-based entity. GIPL provides various services to Indian customers, such as Google Workspace, Google Ads, Google Play, YouTube Premium, and more. As a registered company in India, GIPL is subject to various taxes, such as income tax, goods and services tax (GST), withholding tax (TDS), and equalisation levy, according to a study.
The study reveals that according to the the financial statements of GIPL for the fiscal year 2019-20, GIPL reported a revenue of Indian Rupees (INR) 5,593 crore (about $757 million) and a profit of INR 586 crore (about $79 million) in India. The company paid INR 1,145 crore (about $155 million) as income tax and INR 1,064 crore (about $144 million) as GST to the Indian government. Additionally, GIPL also deducted TDS (tax deducted at source) from the payments made to its parent company and other foreign entities for the services rendered by them.
Furthermore, GIPL also collected equalisation levy from its customers who availed online advertising services from foreign entities. The equalisation levy is a 6% tax imposed by the Indian government on the digital transactions of non-resident companies that do not have a permanent establishment in India.
In Pakistan, Google is not even registered as a company and instead operates through a branch liaison office under the name Google Asia Pacific Pte. Ltd., which is the Singapore-based entity. The branch liaison office provides technical support and consultancy services to Pakistani customers for Google’s products and services. As a branch liaison office, Google is not subject to income tax or GST in Pakistan and only pays a nominal fee per year for its registration, according to the study. Unlike in India, the real numbers of how much Google makes from Pakistan is not even known.
Google is not even the only company enjoying this luxury of operating tax-free. It’s the same with Meta and ByteDance.
Can we ever tax these companies? The answer to that is a little complicated.
To begin with, whatever payments are currently sent to these companies from Pakistan, “cannot be taxed because Pakistan is a signatory to the avoidance of double taxation treaty,” according to Sajidullah Siddiqui, former director general of international taxation at the Federal Board of Revenue (FBR).
Under these bilateral treaties that Pakistan has signed with over 60 countries, Pakistan’s domestic taxation laws are superseded by the terms of these treaties. The avoidance of double taxation treaties were signed between countries to avoid taxation of companies or individuals in the country they were doing business in, while they were paying taxes in their home country.
Under these treaties, Pakistan can charge a fee for technical services provided by these companies but the companies instead contend that these services are rather categorised as offshore digital services. The treaties, however, have no provisions for the concept of offshore digital services and therefore cannot be taxed, says Sajidullah Siddiqui.
Pakistan has signed these treaties with the USA, as well as Singapore from where Google manages its Pakistan operations. A similar treaty exists between Pakistan and China where ByteDance has its headquarters. Any move to tax payments from any of the big tech companies will require revisiting the terms of these treaties – an initiative required from the government.
The government has a small tax in place right now on these payments – a 5% withholding tax, which is currently being borne by the local digital media advertisers and not by the big tech companies. This increases the cost of doing business for local companies instead.
However, the question of taxing offshore digital services and tax treaties arises only because none of these big tech companies have full offices here in Pakistan, like they would have, say in India. If that had happened, domestic taxation laws would prevail and these companies would be taxed just like any other Pakistani company.
Why don’t big tech companies have local offices?
Sarocsh Ahmed, the CEO of Karachi-based digital services firm Symmetry Group says that currently, the business of these companies from Pakistan is not fully known but must be small enough that these companies have not considered opening full-fledged offices in Pakistan. A similar assertion was made by Sajidullah Siddiqui who said that the FBR does not have a consolidated data on how much money these companies generate from Pakistan.
There is only an estimate: according to data from Pakistan’s Aurora magazine for FY 2020-21, advertisers spent Rs16.8 billion on digital media in Pakistan. That is theoretically the money that must have been spent on all platforms including TikTok, Facebook and Google. The dearth of data on these companies simply renders us incapable of analysing the potential taxation that could be collected from these companies, which is further complicated by the lack of estimates around what kind of costs are associated with operating in Pakistan as a percentage of how much money these companies make from Pakistan.
But two of the top level executives – one a CEO of a prominent digital marketing firm and other a high ranking taxman – say that these companies probably do not have a business case of opening a full-fledged office in Pakistan and further add to the costs by paying taxes.
In short, they are probably better off doing business like this in Pakistan, without having to pay any offshore taxes, under relevant treaties.
Absolutely, the issue of big tech companies evading taxes is a global concern, and it’s certainly relevant to Pakistan as well. As a successful blogger with an interest in marketing, you have a unique platform to shed light on this topic. It’s crucial for us to explore what measures can be taken to ensure that these tech giants contribute their fair share to the country’s economy. Keep up the great work in addressing important issues like this through your blog!
yeah, big tech companies are above the law. Just look at Google and YouTube! Talk about a monopoly.
Really interesting.