AVOIDANCE OF DOUBLE TAXATION
Pakistan's agreement with Syria to benefit airlines of both countries
From YOUSAF RAFIQ
Special Correspondent, Islamabad
August 02 - 08, 1999
The Federal Cabinet in its meeting, held in April 1992, approved the agreement for reciprocal exemption of income of airlines of Pakistan and Syria. The aforementioned agreement was scheduled to be signed on January 8, 1995, but before it could be signed, the Pakistan Embassy in Damascus received a note from Syrian Minister for Finance, expressing unwillingness to sign the agreement because instead of being effective from the date of signing it was retroactively applicable from 1979.
Soon after, at the meeting of the Joint Ministerial Commission held in Damascus on April 4 and 5, 1995, Pakistan and Syria decided to resolve the issue by holding negotiations on the subject. Consequently, with the permission of the Prime Minister, a two-member Central Board of Revenue delegation visited Damascus and managed to conclude and ink a comprehensive agreement on avoidance of double taxation on November 28, 1995. Unfortunately, Syrians did not agree to the text of articles on taxation of airlines and shipping business income from royalties. Finally a delegation from Syria visited Pakistan last November and the remaining articles were also initialed.
The initialed convention with Syria is a comprehensive draft agreement and is part of Pakistan's efforts to promote economic ties with brotherly Arab States. The Convention will provide the required certainty in respect of taxation rules applicable to transactions between the enterprises of both the states. It will further ensure that the two states avoid double taxation of income by allowing credit for the taxes paid in the other state. Pakistan and Syria would also be able to exchange information that could help prevent tax evasion. It is to be mentioned here that the cabinet has approved the signing of the agreement with Syria last week.
The draft convention applies to residents of the two states and to taxes on income imposed on behalf of the either state. Taxes, similar to the existing taxes, if imposed subsequently by either State, shall also be covered by the Convention. The concept of permanent establishment, which forms the basis of taxation of a foreign enterprise in the source country includes place of management, a branch, an office, a factory, a workshop, a warehouse and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, a construction or assembly or installation project continuing for a period of more than six months within any twelve months period. The Convention provides that the source country has the right to tax income from immovable property. Business profits are taxable in the source country if the foreign enterprise has a permanent establishment therein and to the extent as are attributable to that permanent establishment. Profits derived by an enterprise of a Contracting State from the operation of aircraft or ships in international traffic shall be taxable in that State. The primary right of taxation of dividends shall rest with the country of origin of the recipient. The source country shall, however, also be entitled to charge tax at the rate of 10 per cent of the gross amount of the dividends.
So far as interest is concerned, the general principle is the same as in the case of dividends. The source country is entitled to levy tax at the rate of 10 per cent of the gross amount of interest. However, it would be exempted, if it is derived and beneficially owned by the government of the other contracting State or its local authorities. The general principle regarding taxation of royalties is the same as in the case of dividends and interest. The source country would, however, be entitled to charge tax at a maximum rate of 18 per cent, 15 per cent and 10 per cent of the gross amount of royalties. Gains from the alienation of immovable property shall be taxed in the country where such property is situated. Similarly, gains from alienation of moveable property belonging to a permanent establishment or a fixed base shall be taxable in the source country. Dependent personal services would be taxable in the source country if the recipient is in that country for a period exceeding 183 days during the fiscal year. The tax paid on income derived by a resident of Pakistan from sources in Syria shall be allowed as credit against the total tax payable by such person on that income in Pakistan. Similar credit shall also be allowed by Syrian tax authorities against the tax paid by a resident of Syria in Pakistan. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is higher or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned state are or may be subjected. In case a person considers that the action of the Contracting State is not in accordance with the terms of the Convention, he may, within three years of such action, present his case to the competent authorities of the State of which he is a resident. The competent authorities of the two states, shall endeavor through mutual agreement to settle such dispute for which purpose they may communicate directly with each other.