Whether you are a tax resident of Pakistan determines what income Pakistan can tax. Overseas Pakistanis frequently assume that living abroad settles the question. It does not - the test is mechanical, it is based on physical presence, and it is applied tax year by tax year.
The test
Under section 82 of the Income Tax Ordinance, 2001, an individual is a resident individual for a tax year if:
- They are present in Pakistan for a period of, or periods amounting in aggregate to, 183 days or more in the tax year; or
- They are an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.
Pakistan's tax year runs from 1 July to 30 June, which is the point that catches people who count on a calendar year. A person who spends four months in Pakistan over one winter may straddle two tax years and be non-resident in both, or may not - it depends where the year end falls.
Successive Finance Acts have also introduced additional tests for individuals who are citizens of Pakistan and are not resident anywhere else, aimed at people with no tax residence at all. If you spend substantial time in Pakistan and have no tax residence elsewhere, take advice rather than assuming.
Counting the days
Presence is counted in days present in Pakistan. Part days are generally counted as whole days present. The reliable evidence is your passport stamps and travel record, and FBR has access to immigration data - so the count in your return needs to match the count at the airport.
Keep a simple record of arrivals and departures each tax year. Reconstructing it years later from old passports is unpleasant.
What follows from the answer
A resident is taxed in Pakistan on worldwide income - salary earned abroad, rental income abroad, foreign business income, foreign capital gains. Relief for tax paid abroad comes through the foreign tax credit under the Ordinance and through any applicable double taxation agreement.
A non-resident is taxed only on Pakistan-source income: rent from property in Pakistan, profit on debt from Pakistani deposits, capital gains on Pakistani property, dividends from Pakistani companies, and business income attributable to a permanent establishment here.
Non-residents still have obligations
This is the point most often missed. Being non-resident does not mean having nothing to do with FBR.
- A non-resident who owns immovable property in Pakistan is within the compulsory filing categories under section 114.
- Filing puts you on the Active Taxpayer List, which is what determines the withholding rate you suffer on a property transfer. The differential on a property transaction dwarfs the cost of filing.
- Rental income from Pakistani property is taxable here and is subject to withholding by the tenant where the tenant is a withholding agent.
Non-resident Pakistanis can register on IRIS and file. NICOP holders can be enrolled, and the process does not require presence in Pakistan.
Remittances
Foreign remittances brought into Pakistan through normal banking channels have historically been given protection from inquiry as to source, subject to conditions and limits that have been tightened over successive Finance Acts. The essential requirements are that the remittance comes through banking channels and is encashed into rupees with the bank's certificate obtained.
This matters for the wealth reconciliation: a documented remittance explains an increase in assets. An undocumented transfer does not, and becomes unexplained income under section 111.
Obtain and keep the encashment certificate for every remittance you intend to rely on. Reconstructing it from a bank years later is difficult.
Double taxation agreements
Pakistan has treaties with a large number of countries, including the UK, the US, the UAE, Saudi Arabia, Canada and Australia. Where you are resident in both countries under their respective domestic laws, the treaty's tie-breaker provisions decide residence by reference to permanent home, centre of vital interests, habitual abode and nationality, in that order.
Treaties also cap the rate on dividends, interest and royalties, and allocate taxing rights on employment income and pensions. If your position is genuinely dual, the treaty is where the answer is, and it is worth reading the specific one rather than generalising.
Practical checklist
- Count your days in each Pakistani tax year, 1 July to 30 June, and keep the record.
- If you own property in Pakistan, file - regardless of residence.
- Keep encashment certificates for remittances.
- Declare Pakistani rental income and claim credit for tax withheld.
- If you are resident under Pakistani law and also resident abroad, check the applicable treaty before filing either return.
This article describes the general residence rules under the Income Tax Ordinance, 2001. The rules, thresholds and remittance conditions change with each Finance Act. It is not tax advice; consult a tax practitioner, particularly where two countries are involved.