Rental Income and Capital Gains from UAE & UK Are Tax-Exempt in Pakistan: ATIR Ruling
A recent ruling by the Appellate Tribunal Inland Revenue (ATIR) has clarified that rental income and capital gains earned by Pakistani residents from the United Arab Emirates (UAE) and the United Kingdom (UK) are exempt from taxes in Pakistan. This decision follows tax treaties between Pakistan and these countries.
In its ruling, the ATIR reviewed two earlier decisions that were contradictory. It chose to follow the first decision, which was favorable to taxpayers. The tribunal ruled that income like. rental earnings and capital gains should be taxed in the country where the income is generated, not where the recipient lives.
The case involved a Pakistani taxpayer who had declared foreign income, including rental income and capital gains, as exempt in their tax return. The tax officer disagreed and issued a notice, claiming the income should be taxed in Pakistan. The officer also suggested that a tax credit for foreign taxes paid could be applied.
However, the taxpayer argued that the tax treaties between Pakistan, the UAE, and the UK clearly, assigned taxing rights to the country where the income originates. The officer, however, stated that both countries, the one, where the income comes from and the one where. the taxpayer lives had rights. to tax the income.
As the taxes amounted to over Rs 20 million, the taxpayer appealed to the ATIR. In its ruling, the tribunal referenced the Supreme Court’s principles of interpretation. The ATIR pointed out that the tax officer had misunderstood key parts of the tax treaties.
The ATIR clarified that the phrase “may be taxed” used in the tax treaties should be understood in context. It explained that it applied to cases like this one where the UAE has not taxed rental income. It also stressed that if “may be taxed” allowed both countries to tax the income. it would make other treaty provisions unnecessary, which is not the case.
The ATIR rejected the tax officer’s reliance on a later decision from another ATIR bench that had ruled differently on UAE rental income. The tribunal emphasized that one division bench must follow the decisions of another unless a higher court overturns them.
Tax consultant Shahid Jami commented that tax treaty agreements are often signed without fully. considering Pakistan’s interests. He explained that the UAE has not imposed taxes on these incomes, and the treaty’s provisions should take precedence. over other interpretations.
