ISLAMABAD, Jan 23: Pakistan and Japan have signed a new treaty for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income to promote mutual investment.

The new treaty will replace the old convention for the avoidance of double taxation signed in 1959 at the request of the leading Japanese companies. The treaty also revised the taxation formula for business income and royalties paid between the two countries.

Chairman Federal Board of Revenue (FBR) M Abdullah Yousuf and Ambassador of Japan to Pakistan Siji Kohima signed the agreement on behalf of their respective countries. The signed convention will be put up to the cabinet for ratification to initiate the process of enforcement. Under the revised agreement a permanent establishment (PE) in the case of building site has been agreed at six months and delivery from a warehouse will be considered as PE.

As a result of new treaty, dividend in case of holding companies having 50 per cent voting share for six months, will be taxed at the rate of five per cent; holding companies with 25 per cent voting share at 7.5 per cent and all other cases will be taxed at the rate of 10 per cent in the source country.

Tax exemption for the government-owned banks and financial institutions has also been provided on reciprocal basis, which would mainly benefit the Japanese companies. Under the treaty royalty at source country will be taxed at 10 per cent; fee for technical services is taxable at the rate of 10 per cent in the source country.

Students and business apprentices’ exemptions on their remuneration have been increased from 360,000 yen to 1,500,000 yen under the revised treaty.

After detailed deliberations a consensus was achieved and the revised draft convention was initialled by the respective head of delegations on May 17, 2007 at Islamabad.

Speaking on the occasion the Japanese Envoy Seiji Kojima said the revised treaty was a significant step in facilitating competitiveness of the Japanese and Pakistani companies. He said the updated agreement was important for the future economic relations between the two countries and was of benefit to these business activities in the light of Pakistan’s pivotal role as gateway to Central Asia and the Middle East.

The new agreement will minimise a number of major disincentives to the expansion of international trade and investment between Japan and Pakistan by clearly allocating tax jurisdictions between the two contracting parties, he added.

He expressed the confidence that the existing very cordial relations between Japan and Pakistan would reflect in all fields, particularly in economic, trade and investment sectors. He said the manufacturing sector of Pakistan was of paramount importance and hoped that more Japanese investment would come in this sector.

FBR Chairman Abdullah Yousuf remarked that the convention would not only provide safeguards against double taxation on the income of the residents of both the countries but also promote economic cooperation, bilateral trade, investment and would further strengthen the existing bilateral economic relations between the two contracting states.

It will provide adequate certainty in respect of taxation rules applicable to the cross-border business transactions, dividends, interests, royalties and fee for technical services etc.