U.S. income tax treaty with Pakistan

Treaty documents and protocols

The IRS lists one document for Pakistan, the 1957 income tax treaty. There is no protocol, amending convention or technical explanation. The only other instrument in the PDF is a Protocol of Exchange signed May 21, 1959, which records the exchange of ratifications and changes no article. The U.S. Senate gave its consent subject to a reservation that the second sentence of Article XV(1), about a deemed Pakistan tax credit, would not be ratified.^[1][2]

The convention was signed at Washington on July 1, 1957 and entered into force on May 21, 1959. The PDF heading and the proclamation give January 1, 1959 as the first effective date for U.S. taxable years, while IRS Table 3 lists January 1, 1960.

Convention article structure

The convention text has twenty articles. Their titles cover taxes and definitions; permanent establishment and associated enterprises; shipping and aircraft income; dividends and exemptions; royalties; and government employees.^[2]

The remaining titles address pensions and annuities, personal services, professors or teachers, students or trainees, government banks, double taxation, mutual assistance, limitations on treaty effect, territorial extension, entry into force and termination.^[2]

The convention labels Article XVI Mutual Assistance, Article XVII Limitations on Effect of Treaty and Article XX Termination. Article VI concerns dividends, Article VII exemption of dividends and Article VIII royalties.^[2]

Dividends, interest and royalties

Article VI sets a maximum United States tax rate of 15 percent on dividends from a U.S. corporation to a Pakistan company when the company has no U.S. permanent establishment and owns shares carrying more than half the voting power in the paying corporation.^[2]

Article VI also describes a Pakistan super-tax reduction for dividends paid by a qualifying Pakistan company to a U.S. corporation. The U.S. corporation must have no permanent establishment in Pakistan, qualify as a public company under the article, and own more than half the voting power of a Pakistan resident company engaged in a specified industrial undertaking. The reduction is one anna in the rupee.^[2]

Article VII states that dividends paid by a Pakistan resident company are exempt from U.S. tax, except when the recipient is a U.S. citizen, resident or corporation. Dividends paid by a U.S. corporation are exempt from Pakistan tax, except when the recipient resides in Pakistan.^[2]

Article XIV addresses interest for the State Bank of Pakistan and Federal Reserve Banks. It states that the State Bank is exempt from U.S. tax on interest from U.S. sources, and Federal Reserve Banks are exempt from Pakistan tax on interest from Pakistan sources.^[2]

Under Article VIII, qualifying royalties that arise in one country and are paid to a resident of the other country are exempt from tax in the country where they arise, as long as the recipient has no permanent establishment in that country. Royalties or rentals from motion picture films do not qualify. If a royalty is more than fair and reasonable consideration for the rights, only the portion equal to that consideration is exempt.^[2]

Residence and dual residence

Under Article II, an individual or fiduciary qualifies as a U.S. resident for convention purposes if resident in the United States for U.S. tax purposes and not resident in Pakistan for Pakistan tax purposes. It separately defines a Pakistan resident, excluding U.S. citizens and U.S. corporations, by residence for Pakistan tax and nonresidence for U.S. tax.^[2]

The convention defines the resident of either contracting state by reference to these U.S. and Pakistan definitions. The convention contains no separate rule for resolving residence when a person is resident in both countries.^[2]

Information exchange

Article XVI, Mutual Assistance, has the countries' taxation authorities exchange information that is available under their laws in the normal course of administration and is needed to carry out the convention, prevent fraud or administer the covered taxes. The information is to be treated as secret and disclosed only to persons concerned with assessing and collecting the covered taxes, and no trade, business, industrial or professional secret or trade process is to be disclosed.^[2]

The article also permits the authorities to consult and communicate directly. A taxpayer claiming double taxation contrary to the convention may present the facts to either country's taxation authority; if the claim merits consideration, the authorities are to seek agreement on the matter. This is a 1957 formulation and is narrower than the exchange articles in later U.S. treaties.^[2]

Limits on treaty effect

The convention contains Article XVII, titled Limitations on Effect of Treaty. It addresses treatment of one country's citizens or nationals who reside in the other country, stating they may not face taxes or connected requirements that are different, higher or more burdensome than those applied to residents who are citizens or nationals of that other country. The article defines citizens and nationals to include legal persons, partnerships and associations created under each country's laws, and states exceptions concerning personal allowances and specified Pakistan tax rules.^[2]

U.S. citizens and the saving clause

The 1957 convention has no article titled as a saving clause, and its table of articles lists none. Article XVII, Limitations on Effect of Treaty, is a non-discrimination rule and does not address how a country taxes its own citizens. Instead, some articles carry their own carve-outs for U.S. citizens. Article VII exempts dividends paid by a Pakistan company from U.S. tax except where the recipient is a citizen, resident or corporation of the United States, and Article II excludes U.S. citizens from the definition of a resident of Pakistan.^[2]

How these provisions apply to a particular U.S. citizen depends on the wording of each article.^[2]

Questions and answers

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.