The Double Taxation Relief (Taxes on Income) (Pakistan) Order 1987

Made: 26th November 1987

At the Court at Buckingham Palace, the 26th day of November 1987 Present, The Queen’s Most Excellent Majesty in Council

Now, therefore, Her Majesty, in exercise of the powers conferred upon Her by section 497 of the said Income and Corporation Taxes Act 1970, and of all other powers enabling Her in that behalf, is pleased, by and with the advice of Her Privy Council, to order, and it is hereby ordered, as follows:—

1

This Order may be cited as the Double Taxation Relief (Taxes on Income) (Pakistan) Order 1987.

2

It is hereby declared—

• (a) that the arrangements specified in the Convention set out in the Schedule to this Order have been made with the Government of the Islamic Republic of Pakistan with a view to affording relief from double taxation in relation to income tax, corporation tax or capital gains tax and taxes of a similar character imposed by the laws of Pakistan;

• (b) that those arrangements include provisions with respect to the exchange of information necessary for carrying out the domestic laws of the United Kingdom and the laws of Pakistan concerning taxes covered by the arrangements including, in particular, provisions about the prevention of fiscal evasion with respect to those taxes; and

• (c) that is is expedient that those arrangements should have effect.

SCHEDULE — CONVENTION BETWEEN THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND AND THE ISLAMIC REPUBLIC OF PAKISTAN FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS

The Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Islamic Republic of Pakistan;

Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains;

Have agreed as follows:

Article 1 — Personal scope

This Convention shall apply to persons who are residents of one or both of the Contracting States.

Article 2 — Taxes covered

Article 3 — General definitions

Article 4 — Fiscal domicile

Article 5 — Permanent establishment

Article 6 — Income from immovable property

Article 7 — Business profits

Article 8 — Shipping and air transport

Article 9 — Associated enterprises

Where

• (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or

• (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State;

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, may be included by a Contracting State in the profits of that enterprise and taxed accordingly.

Article 10 — Dividends

Article 11 — Interest

Article 12 — Royalties

Article 13 — Technical fees

Article 14 — Capital gains

Article 15 — Independent personal services

Article 16 — Dependent personal services

Article 17 — Directors' fees

Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Article 18 — Artistes and athletes

Article 19 — Pensions

Article 20 — Government service

Article 21 — Students and trainees

Article 22 — Teachers

Article 23 — Elimination of double taxation

Provided that relief from United Kingdom tax shall not be given by virtue of this paragraph in respect of income from any source if the income arises in a period starting more than ten years after the exemption from, or reduction of, Pakistan tax was first granted in respect of that source.

• (4) For the purposes of paragraphs (1) and (2) of this Article, profits, income and capital gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Convention shall be deemed to arise from sources in that other Contracting State.

• (5) Where profits on which an enterprise of a Contracting State has been charged to tax in that State are also included in the profits of an enterprise of the other State and the profits so included are profits which would have accrued to that enterprise of the other State if the conditions made between the enterprises had been those which would have been made between independent enterprises dealing at arm’s length, the amount included in the profits of both enterprises shall be treated for the purposes of this Article as income from a source in the other State of the enterprise of the first-mentioned State and relief shall be given accordingly under the provisions of paragraph (1) or paragraph (2) of this Article.

Article 24 — Non-discrimination

Article 25 — Mutual agreement procedure

Article 26 — Exchange of information

Article 27 — Members of diplomatic or permanent missions and consular posts

Article 28 — Entry into force

Article 29 — Termination

This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may terminate the Convention, through diplomatic channels, by giving notice of termination at least six months before the end of any calendar year after the year 1992. In such event, the Convention shall cease to have effect:

• (a) in the United Kingdom:

• (i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6 April in the calendar year next following that in which the notice is given;

• (ii) in respect of corporation tax, for any financial year beginning on or after 1 April in the calendar year next following that in which the notice is given;

• (b) in Pakistan, for any year of assessment beginning on or after 1 July in the calendar year next following that in which the notice is given.

In witness whereof the undersigned, duly authorised thereto by their respective Governments, have signed this Convention.

Signed

G. I. de Deney — Clerk of the Privy Council

Explanatory note

(This note is not part of the Order)

The Convention with Pakistan set out in the Schedule to this Order replaces the Agreement signed on 24th April 1961 (S.I. 1961/2467).

It provides for business profits not arising through a permanent establishment to be taxed only in the taxpayer’s country of residence. Profits attributable to a permanent establishment may be taxed in the country in which the permanent establishment is situated, but only so much of them as are attributable directly or indirectly to that permanent establishment (Articles 5 and 7). Profits arising from the operation of ships and aircraft in international traffic are to be taxed only in the country in which the place of effective management of the enterprise is situated (Article 8).

Income from immovable property may be taxed in the country in which the property is situated (Article 6). Capital gains arising in one country may be taxed in that country in accordance with the provision of its domestic law (Article 14).

The rate of tax which may be applied in the country of source on dividends must not exceed 15 per cent of the gross amount of the dividend where the beneficial owner is a company, and 20 per cent in all other cases. However, the rate of tax to be applied in Pakistan is 10 per cent where the payer of the dividends is a Pakistan company engaged in industrial enterprises and the UK recipient of the dividends controls at least 50 per cent of the voting power of that company (or in the case of an industrial undertaking set up in Pakistan after the date of entry into force of the Convention, the UK company controls at least 25 per cent of the voting power) (Article 10).

The rate of tax imposed in the source country on interest (Article 11), royalties (Article 12) and technical fees (Article 13) is, in general, not to exceed 15, 12½ and 12½ per cent respectively. The source country will exempt interest paid to the Government (or government agency) of the other country. The provisions relating to technical fees (Article 13) have effect in respect of amounts paid on or after 1st July 1985.

The earnings of temporary business visitors are, subject to certain conditions, to be taxed only in the taxpayer’s country of residence (Articles 15 and 16).

Income derived in respect of the personal activities of entertainers and athletes may normally be taxed in the country in which those activities are exercised (Article 18).

Government remuneration and pensions are to be taxed by the paying country only, unless the recipient is a resident of the other country and is or was generally engaged and employed by the paying country in that other country, in which case the country of residence has sole taxing rights. Any other pensions paid in consideration of past employment and annuities are to be taxed only by the taxpayer’s country of residence (Articles 19 and 20).

The remuneration of teachers and payments made to students and trainees are, subject to certain conditions, to be exempt from tax in the country visited (Articles 21 and 22).

Where income continues to be taxed in both countries, credit will be given by the taxpayer’s country of residence in respect of tax imposed by the other country. In the case of dividends, the UK will also give credit for underlying tax paid in Pakistan while the UK company receiving the dividend controls at least 10 per cent of the voting power in the Pakistan company. The UK will also give credit for up to 10 years for tax spared under certain provisions of the Pakistan Income Tax Ordinance 1979 (XXXI of 1979) (as amended) (Article 23).

There are provisions safeguarding nationals and enterprises of one country against discriminatory taxation in the other country (Article 24) and for consultation and exchange of information between the competent authorities of the two countries (Articles 25 and 26).

The Agreement will enter into force when the legislative procedures in both countries have been completed and will have effect in the UK from April in the following calendar year (Article 28).

Footnotes

[^f00001]: 1970 c. 10; section 497 was amended and extended by sections 98(2) and 100(1) of the Finance Act 1972 (c. 41), section 10 of the Capital Gains Tax Act 1979 (c. 14) and section 70 of the Finance Act 1987 (c. 16).