The Appellate Tribunal Inland Revenue (ATIR) has ruled that rental income and capital gains earned by resident Pakistanis from the United Arab Emirates (UAE) and the United Kingdom (UK) are not taxable in Pakistan under the tax treaties with these countries.
According to a news report, the tribunal upheld that taxing rights for such income rest exclusively with the country where the income originates.
The ATIR reviewed two conflicting earlier decisions, favoring the taxpayer in this case, and clarified that the tax treaties allocate taxing authority to the country where the income arises, not the country of residence.
The decision comes after a taxpayer, a resident of Pakistan, declared exempt foreign income from rental properties, capital gains, and bank profits in their tax return, citing the treaties.
The assessing officer had issued a show-cause notice arguing that foreign income for a resident is not exempt, though tax credit for foreign taxes paid could be claimed. Rejecting this explanation, the taxpayer filed an appeal with the ATIR as the tax demand exceeded Rs20 million.
In its detailed order, the ATIR highlighted principles from a Supreme Court judgment (2023 PTD 863), clarifying that the phrase “may be taxed” in the treaties does not grant taxing rights to both contracting states for rental income or capital gains. Instead, it applies only to the state where the income originates.
The tribunal ruled that the officer’s interpretation of the phrase “may be taxed” in Articles 6 and 14 of the treaty was flawed. It explained that “may also be taxed,” used elsewhere in the treaties, would become redundant if both states could tax the same income. This reinforced that rental income and capital gains are taxable only in the state where the property is located.
The tribunal also addressed another ATIR ruling from 2022 that took a different stance on rental income, noting that the earlier precedent, supported by an FBR helpline clarification, should have been followed for consistency. It added that the earlier decision remains binding unless overturned by a higher court.
