The Federal Board of Revenue (FBR) has once again emphasized the need for tax deduction on payments made to non-residents under Section 152 of the Income Tax Ordinance, 2001, for the Tax Year 2026. Businesses, companies, and individuals in Pakistan who deal with foreign entities must follow these rules carefully to prevent penalties and legal issues.
With more attention being given to transactions between countries, the FBR aims to improve transparency and stop lost revenue from payments made outside of Pakistan.
Section 152 of the Income Tax Ordinance, 2001, outlines the rules for withholding tax on payments to non-residents for services, contracts, royalties, technical assistance, and other business-related arrangements.
Any person who makes such payments is obligated to deduct tax at the source before sending money abroad.
This rule applies whether the payment is made directly or through an intermediary, and regardless of whether the non-resident has a permanent presence in Pakistan.
According to FBR guidelines for Tax Year 2026, tax must be deducted from payments made to non-residents for the following:
– Business contracts and projects
– Technical, managerial, or consultancy services
– Royalty and license fees
– Commission and professional services
– Import of services
– Profit on debt and investment returns
These rules apply to companies, Associations of Persons (AOPs), partnerships, and individuals involved in taxable activities.
The applicable tax rate for non-residents depends on:
– The type of payment
– Whether there is a Double Taxation Agreement (DTA) in place
– How the income is classified under Pakistani tax law
In most cases, tax is deducted under the final tax regime (FTR), meaning the non-resident does not owe additional taxes.
However, failing to deduct or deducting incorrectly can result in penalties for the person making the payment.
Double Taxation Treaties (DTTs) are agreements between Pakistan and other countries that help avoid double taxation.
If a DTT exists, lower tax rates or exemptions may apply, but only if proper documentation is provided, such as:
– Tax residency certificate (TRC)
– Detailed contracts and invoices
FBR has stressed that treaty benefits will only be allowed if all legal requirements are met.
The person making the payment acts as a withholding agent under Section 152.
They must:
– Deduct tax at the correct rate
– Pay the tax by the due date
– Report the transaction in withholding tax statements
– Keep proper records for audit purposes
Not following these requirements can lead to penalties, additional charges, and disallowance of expenses.
FBR has focused more on non-resident payments due to concerns about underreporting and non-compliance, especially in fields like IT services, consultancy, and digital services.
The emphasis for Tax Year 2026 is part of FBR’s broader effort to improve tax enforcement and expand the tax base.
For businesses, it is important to review contracts, check tax treaties, and ensure that tax is deducted correctly under Section 152.
Seeking professional tax advice is strongly recommended to avoid costly errors and ensure full compliance with FBR regulations.
In summary, as Pakistan’s tax system continues to develop, following the rules for withholding tax on payments to non-residents has become more important than ever.
Understanding FBR’s guidelines on non-resident tax deductions will help businesses run smoothly, avoid penalties, and maintain good financial practices in Tax Year 2026.
