SAARC’s Avoidance of double taxation

CBR’s new member of Direct Taxes – Salman Nabi will place Pak viewpoint at Saarc moot going to be held from October 26 to 28, 2004 in Kathmandu, Nepal. SAARC countries would soon see a multilateral treaty for limited purposes to promote economic activities within the region. Multilateral treaties have been negotiated, although their impact so far has been modest. In the past, the Nordic nations have entered into a multilateral agreement on matters of tax administration. In addition, the OECD and the Council of Europe have also sponsored a Multinational Convention on Mutual Administrative Assistance on Tax Matters.

The General Agreement on Tariffs and Trade [GATT], as renegotiated in 1994, and the General Agreement on Trade in Service, both of which were consolidated as part of the Agreement Establishing the World Trade Organisation in 1994, contains some important provisions relating to income taxation, primarily designed to prevent the use of income tax provisions as disguised trade barriers or as export incentive.

In the light of the above referred facts negotiation and any agreement in Kathmandu may either be within tight bands of GATT or if outside the bands of GATT, it may have a life of three months. However this article is an endeavour to assess the special treaty issues being the agenda of the meeting – non-discrimination, treaty shopping, resolution of disputes and administrative cooperation.


In general, there is no significant legal restriction on a country’s jurisdiction to tax. Consequently, a country might well consider taxing non-residents more harshly than residents. In fact, however, most countries generally treat non-residents in the same way as residents on the unequal treatment of non-residents are the possibilities of retaliation and of discouragement of investment by non-residents. However, this is not the case of Pakistan who has a clear investment policy by non-residents except section 152 of Income Tax Ordinance, 2001.

In the SAARC moot, the most important type of legal protection against the discrimination for tax purposes is the non-discrimination article of multilateral tax treaties. The most important point to note is that even the non-discrimination provision of GATT essentially provides that tax discrimination is to be dealt with in accordance with bilateral/multilateral tax treaties.

The typical non-discrimination article of a tax treaty prohibits the contracting states from imposing tax consequences on the citizens or residents of the treaty partner that are less favourable or more adverse than the tax consequences imposed on their own citizens or residents.

The treaties do not define discrimination or non-discrimination. In general, discrimination means distinguishing between persons adversely on grounds that are unreasonable, irrelevant or arbitrary. Conversely, non-discrimination means equal, functionally equivalent or neutral treatment.

Article 24 of OECD and UN Model Treaties prohibits discrimination against foreign nationals and non-residents in several respects.

  1. Article 24(1) prohibits discrimination on the basis of nationality. This provision is primarily important with respect to legal entities.
  2. Article 24(3) prohibits discrimination against non-residents carrying on business in a country through a PE. Such non-residents must be treated no less favourably than residents of the treaty country carrying on the same business. Income Tax Ordinance, 2001 has already embraced this fundamental principle.
  3. Article 24(4) requires countries to allow the deduction of amounts paid by residents of a country to residents of the treaty partner on the same basis as amounts paid to residents of the first country. In effect, this provision affords protection against discrimination indirectly because the direct beneficiaries of the legal protection are domestic enterprises. CBR needs to give some thought to the Head Office expenditure rules but section 105 is a beautiful example of this fundamental principle. Some commentators argue that thin capitalisation rules may constitute a violation of this aspect of a non-discrimination article and CBR needs to give some thought to section 106 if it agrees with such commentators.
  4. Article 24(5) ensures that corporations, partnerships, and other entities resident in a country, whose capital is owned or controlled by residents of the treaty partner must be treated no less favourable than domestically owned or controlled enterprise. Once again direct protection is afforded to resident entities.

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