PAKISTAN DIGITAL TAX FAR REACHING PROPOSAL

Pakistani Senate Standing Committee on Finance approved last May a government proposal for a 5% tax to be imposed on revenues coming from “fees for offshore digital services”, which affect any payment to a non-resident person for digital services, including:

• Online advertising and digital advertising space;
• Providing a facility or service for uploading, storing, or distributing digital content, such as digital text, audio, or video;
• Collecting or processing data related to users in Pakistan;
• Providing a facility for the online sale of goods or services
• Any other on-line facility.
Pakistan Government has expressed several times intentions for taxing the income of tech-digital giants and move to a fully BEPS aligned situation. Other strong measures in the Bill text are related to that vision (On MNEs substance, PE and CFCs).
If the bill is finally approved, it will provide effect from July 1st, 2018.
Important to highlight that Banks will be required to collect the tax on gross amount of fee remitting outside for the payment of digital services billed from offshore.

DET3 Comments
We can label this tax as an LPF measure (Level the playing field), because the summary of the 18/19 Public Budget refers to it as “Taxation of Offshore digital services: Availing current loopholes in tax legislation to avoid payment of tax in Pakistan by non-residents whereas residents are taxable” that reach wider levels than India Equalization Levy.
Also compared to the current EU Targeted proposal for a DST (Digital Services Tax) the Pakistan digital tax scope is going much further than covering digital advertising, data flows and sharing economy. Cloud services and even web maintenance services could fall in scope as well as likely the commission of trading physical products through digital market-places.
Interesting to see that after the Europe wording fine-tunnings about the definition terms referring to a “Digital Platform” versus what was finally named a “Digital Interface” in the Directives drafts, Pakistan is opting for a term like the “on-line facility”.
The closing remark about any “other on-line facility” leaves the scope of transactions as something broad and very generic, quite open for today’s “Everything as a Service” economy. Some publicly available info from their Tax Administration around these topics even suggest that service fees for transport-delivery, travel bookings, or employment contracted through an on-line facility could fall in the tax.

We’ll keep a close eye into this initiative evolution, because of the precedent it could place.

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