Why Govt. Wants to Tax Digital Giants Like Google, Facebook, Amazon On Earnings From Pakistan

“Money being repatriated from Pakistan (by tech giants) is higher than the quantum of foreign investment (flowing in)”

May 8, 2018 (BE2C2) — Pakistan has proposed 5% tax on digital revenues earned by U.S. tech giants like Google, Facebook and Amazon from the country, while also moving to bring offshore-controlled companies in its tax ambit. The move if successful would also tax Chinese digital earnings from Pakistan– Ali Baba for instance — China’s biggest E-commerce site keen to make local presence it announced last month.

The tax measures have been laid before the parliament as part of Budget 2018-19, which is currently being discussed by the Senate Standing Committee on Finance. While the standing committee rejected all such tax proposals, it will not deter the government from taxing the income of tech giants and other offshore-controlled entities, The Express Tribune reported.

The government wants to tax the digital advertising space along with hosting and maintenance of websites to tax the revenues of digital giants like Google and Yahoo, said Dr Mohammad Iqbal, Member Inland Revenue Policy of the FBR in a briefing to the standing committee.

The move comes as the country takes steps to broaden its digital ecosystem and enable it with financial inclusion of net users (mobile banking and online shopping, etc.).

If the proposal is passed by the National Assembly (its term ends this month), technology companies will have to pay 5% tax on money earned from user data or digital advertising in Pakistan, regardless of their bricks-and-mortar presence. The move also captures companies doing business in user data and online market places, such as Airbnb and Uber.

With the growth of ecosystem and financial inclusion, a huge opportunity would develop for faster and easier online payments, advertising revenue– these would be low hanging fruits for the global giants whose revenue model rests on penetration, engagement and monetization of net users presence on their platform, some experts said.

The new tax proposal is a departure from the current system under which companies are taxed on profits where they are headquartered, often in countries offering lower tax rates or no taxes.

Dr Musaddiq Malik, the PM’s spokesman and member of the Senate standing committee on Finance was bitter about such tax proposals that are aimed at taxing the income of foreign nationals or those Pakistani nationals who have offshore assets.

“It seems that the FBR has made the budget on the assumption that it can no more tax people in Pakistan and has decided to go after offshore jurisdictions,” said Dr Malik. Pakistan has one of the lowest tax-to-GDP ratio based on a very small number of taxpayers.

One Senator member of the standing committee thinks the move would affect the country’s biggest loan provider China and the Chinese state companies engaged in EPC contracts under CPEC.

Senator Mohsin Aziz said: “The budgetary proposals suggest that the FBR has concerns regarding foreign friends that are investing in Pakistan,” in a veiled reference to China.

The investment under the China-Pakistan Economic Corridor (CPEC) is exempted from all types of income tax, sales tax, customs duty and regulatory duty.

“Pakistan has to tax those who are earning billons of rupees from our country at the name of bringing foreign direct investment”, said Dr Mohammad Iqbal, Member Inland Revenue Policy of the FBR in his briefing to the standing committee. He said the money being repatriated from Pakistan (by tech giants) is higher than the quantum of foreign investment (flowing in).

Chinese government tops foreign loans and investment portfolio in Pakistan now and expected to remain so due to the CPEC, experts say.

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