The Asia Internet Coalition (AIC), which represents global media firms, has raised serious issues about the interpretation of Pakistan’s tax laws, especially about the concept of “permanent establishment” (‘PE’). In the opinion of AIC, the performance differs from the internationally recognized standards and could negatively impact the Pakistani economy.

In a note addressed to Malik Amjedzubair Tiwana, Chairman of the Federal Board of Revenue (FBR), Jeff Paine, the Managing Director at AIC, pointed out the ambiguities regarding the changes recently made in the definition of PE. Paine pointed out that the new rules don’t align with international norms and could cause harm to the Pakistani economy. He raised concerns over the possible negative effect on investment from foreign investors and the potential for threats from other countries that those of the United States, which could slow the development of Pakistan’s technology industry for the long term.

In addition, Paine pointed out that the tax relief measures typically cause additional expenses to be transferred to consumers that could result in unproductiveness by not focusing on vital factors in business operations, including marketing costs, which are crucial to small businesses.

The debate over the PE definition grew as it was announced that the Sindh Revenue Board (SRB) required banks to place an additional 13 per cent provincial sales tax for advertisements from non-resident-based businesses like Facebook and Google. This issue became a hot topic as banks started imposing an extra sales tax of 16 per cent for purchases that advertise using credit cards, which includes Facebook ads.

Paine was adamant about the PE definition, explicitly eliminating the term “fixed” and introducing a clause that refers to “virtual PE.” The amendment suggests that companies conducting business online or through electronic devices could be considered online PE, irrespective of their physical presence.

As a response to these issues, AIC addressed these concerns. AIC suggested a few ideas to ensure that the PE definition is aligned with international standards if abrogation of the modification in the PE definition isn’t feasible.

In addition, it was noted that the AIC stressed the necessity of providing tax authorities regarding treaty benefits. Despite its Supreme Court’s decisions concerning treaties with double taxation, Pakistan’s tax department has been unable to comply with its Tax Ordinance’s concept of “nexus” over treaty definitions, which has led to inconsistent tax exemptions.

Tax treaties signed by Pakistan and over 60 countries, including those of the United States and the United Kingdom, are defined as “permanent establishment” requiring the establishment of an actual establishment in Pakistan. Non-resident businesses that provide services online to Pakistani customers typically don’t possess a physical presence and, therefore, are not legally liable to Pakistani tax on the profits derived through those services.

The AIC called on Pakistan’s tax officials to give firms ample time to adapt to changes in the new tax law. Businesses that are digital, particularly online-based platforms, need sufficient time to fully comprehend and comply with the new rules, which could require adjustments to their business models and internal processes.

In addition, it is the case that AIC suggested the addition of an income minimum threshold into the Pakistani PE law to exclude small-scale enterprises from the compliance requirements, thereby reducing the burden of administration for the tax authorities and businesses.

In the end, the issues expressed through Google, Facebook, and other members of the AIC emphasize the necessity of aligning Pakistan’s tax laws with international norms to create the right conditions for development and investment.