ICAP Proposes a 30% Digital Tax for Foreign Companies

The Federal Board of Revenue (FBR) has received a recommendation to introduce a 30 percent digital tax in Budget 2019-20.

The Institute of Chartered Accountants of Pakistan (ICAP) has suggested in its budget proposals that the FBR should impose a digital tax from the next year as the Organization for Economic Cooperation and Development (OECD) is also considering taxing the digital economy.

The institute recommended introducing a 30% digital tax initially until a proper mechanism is put in place. The digital tax would be for the non-resident companies that are not established in Pakistan and the tax will be levied on the earnings from advertisements in Pakistan.

It further underlined that policies should be devised keeping the best practices from other countries in view. These policies should be implemented with special treatment for companies establishing businesses in Pakistan.

Companies with No Stakes in Pakistan

The institute pointed out that international social network and retail websites like Facebook, Alphabet, and Apple are generating massive revenues from consumers and corporates in Pakistan by the way of:

• Advertisement on their websites.
• Sharing data with the corporates in Pakistan and with corporates and governments outside Pakistan.

“Despite all the revenues collected from consumers in Pakistan, these companies are not adequately taxed as they are not established within the country,” said the ICAP.

These companies are also shrinking Pakistan’s local tech industry by taking over the majority of the local advertisements while they are not interested in investing in Pakistan.

On the other hand, companies like Ali Pay are investing in Pakistan and have put their money in tech companies like ‘Telenor Bank’ and ‘Daraz’.

These companies should be incentivized while the non-resident companies should be charged with high taxes, as they do not have stakes in Pakistan even though they make significant profits from the country.

“This will also encourage local software service providers to get registered and earn from local advertisements,” stated the ICAP.

It further proposed the identification of tax leakage areas/sectors with an easy-escape tax net. Moreover, it said that an effective and efficient collection platform is needed to replace the cash economy through digitization, e.g., Jazz Cash or Easy Paisa or with a state platform.

The institute further recommended that banks, insurance companies, and branchless banking networks should help recover the taxes. The FBR, along with other institutions, should also organize tax education campaigns in urban and rural areas.