ISLAMABAD: Pakistan has introduced a new tax targeting multinational digital companies with significant user bases in the country but little to no physical presence, marking a major shift in how foreign tech firms are taxed.
The Digital Presence Proceeds Tax Act, 2025, which took immediate effect, aims to address tax base erosion caused by the current international tax framework, which relies on outdated physical presence rules. The law asserts that foreign digital businesses generating revenue from Pakistani users must now pay taxes on those earnings.
Key Provisions of the Law
- Tax Scope: The law applies to foreign vendors with a “significant digital presence” in Pakistan, including companies selling digital services, e-commerce platforms, and online marketplaces.
- Tax Rate: A yet-to-be-specified rate will be imposed on proceeds from digital transactions involving Pakistani users.
- Collection Mechanism: Payment intermediaries—such as banks, financial institutions, and payment gateways—must deduct the tax before remitting funds abroad.
- Reporting Requirements: Digital platforms must submit quarterly statements detailing transactions and tax collections.
Who is Affected?
A foreign company is deemed to have a “significant digital presence” if it meets criteria such as:
- Conducting more than five transactions with Pakistani users in a financial year.
- Billing in Pakistani currency or using local payment methods.
- Engaging in sustained marketing targeting Pakistani consumers.
Enforcement & Penalties
- Non-compliance: Failure to deduct or remit taxes will result in penalties, including default surcharges tied to the Karachi Interbank Offered Rate (KIBOR) plus 3%.
- Suspension of Remittances: Payment intermediaries must block funds to foreign advertisers who evade taxes for more than 120 days.
Why This Law?
The government argues that traditional tax rules fail to capture value generated by digital businesses through user data and online engagement. The new tax seeks to ensure “equitable taxation” until a global consensus on digital taxation is reached.
Critics, however, warn that the law could lead to double taxation and discourage foreign investment. The Federal Board of Revenue (FBR) will oversee implementation, with customs authorities ensuring tax compliance on cross-border digital transactions.
The move aligns Pakistan with other nations implementing Digital Services Taxes (DSTs) amid stalled international tax reforms. Further details, including the exact tax rate, will be outlined in the Act’s schedule.