ISLAMABAD:
In a major concession to the United States for striking a trade deal, Pakistan on Wednesday exempted 5% tax, which it had imposed a month ago on foreign tech firms and online platforms on supply of digitally ordered goods and services.
However, the tax exemption is not specific to only the US tech companies. All the foreign firms will benefit from the decision, which has been taken on the demand of the US administration, a senior official of the Federal Board of Revenue told The Express Tribune.
The FBR, the nation’s tax collecting authority, notified the waiver on Wednesday, the day Finance Minister Muhammad Aurangzeb was in Washington to further bilateral trade talks.
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“In exercise of the powers conferred by section 15 of the Digital Presence Proceeds Tax Act, 2025, the federal government is pleased to direct that the Digital Presence Proceeds Tax shall not apply to digitally ordered goods and services supplied from outside Pakistan, by any person, which are chargeable to tax under the said Act,” according to the FBR notification.
It further added that the tax will be waived off with effect from the first day of July 1, 2025 — the day the new law and fiscal year 2025–26 budget became effective.
A Pakistani delegation is currently in the US to settle the outstanding issues that are hampering the bilateral trade deal. It is the second visit by the Pakistani team in less than two weeks, aimed at securing the trade deal that can address the US concerns and to a greater degree protect Pakistan’s commercial interests.
The sources said that during the last round of trade talks held between Pakistan’s Finance Minister and the US Secretary of Commerce, Howard Lutnick, the US had raised the issue of the 5% tax imposed in the budget, which was hurting the US tech giants.
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The waiver will cause billions of rupees in tax losses to Pakistan. The Finance Ministry sources said that to address any concern by the International Monetary Fund, the US authorities may directly speak to the Fund. The US is the single largest shareholder of the IMF, having little over 16% stakes.
The government had imposed the 5% digital proceeds tax on the grounds that the cross-border e-commerce by foreign vendors remained largely untaxed in Pakistan due to tax treaty limitations requiring a permanent establishment for income taxation.
The FBR had apprised the National Assembly Standing Committee on Finance that the tax base of market jurisdictions’ erosion was occurring as foreign businesses used digital platforms to sell goods and services without physical presence.
Many countries have introduced Digital Services Taxes (DST) to reclaim taxing rights based on significant digital presence, especially for services, and accordingly Pakistan proposed to tax both digitally supplied goods and services.
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The standing committee had also been briefed that the digital advertisement of foreign vendors i.e., Temu in the Pakistani market by platforms such as Google would be taxed in consistency with Pakistani taxing rights.
Under the new law, payment intermediaries — including banks and financial institutions — were required to collect tax on digital payments made to foreign vendors supplying goods or services into Pakistan. They are also required to quarterly report the revenue collected from international e-commerce providers.
The Express Tribune reported on July 19th that Pakistan had assured the United States-based Google that it will be exempted from a 5% new digital tax and parts of the company’s income will be taxed even at two-thirds reduced rates.
The government had enacted the Digital Presence Proceeds Act in June to enhance tax collection from the offshore companies that had significant digital presence but were not paying taxes on their earnings.
This month, the tax authorities assured the company that “Google is not the target of the Digital Presence Proceeds Tax Act” and the legislation has been designed to cover specific cases of significant digital presence where no physical or registered business presence exists in Pakistan.
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Google has significant business presence in Pakistan and provides services for online advertising, search engine, cloud computing, communication, and entertainment. It is also the single largest contributor of digital service tax payments.
Companies like Meta, Amazon, Microsoft, and Netflix will also be the beneficiaries of the tax exemption. The enactment of the Digital Presence Proceeds Act had created ripples in Pakistan, particularly among the YouTube users.
The government had introduced the digital presence proceeds law to tax digitally delivered services provided over the internet or electronic networks, where the delivery is automated and required minimal or no human intervention, including music, audio and video streaming services, cloud services, online software application services, services delivered through online interpersonal interaction i.e., tele-medicine, e-learning etc, online banking services, architectural design services, research and consultancy reports, accounting services in the form of digital files, or any other online facility.
