ISLAMABAD:
Pakistan has assured US-based Google that it will be exempt from the newly imposed 5% digital tax, and parts of the company’s income will be taxed at even two-thirds reduced rates, further reducing the country’s earnings from foreign firms operating locally.
The clarification, given by the Federal Board of Revenue (FBR) to the tech giant, has raised questions about the effectiveness of the new tax law, indicating that the government may have not fully considered the implications before enacting the Digital Presence Proceeds Act 2025 last month.
The government enacted the Digital Presence Proceeds Act in June to enhance tax collection from offshore companies with significant digital presence that were not paying taxes on their earnings.
Sources said tax authorities assured the company that “Google is not the target of the Digital Presence Proceeds Tax Act” and that the legislation is designed to address only those with significant digital presence but no physical or registered presence in Pakistan.
This assurance was sent electronically to Kyle Gardner, Google’s representative for government affairs in South Asia.
Google has a significant business presence in Pakistan and provides services for online advertising, search engines, cloud computing, communication, and entertainment. It is also the single largest contributor of digital service tax payments.
In contrast, firms like Meta, Amazon, Microsoft, and Netflix contribute little to the over Rs1 billion in total income tax collected from tech giants, according to FBR officials.
The tax authorities assured Google that since it has a branch office in Pakistan, it will not be liable to pay the 5% tax on its income due to its legal status as “a tax resident under relevant tax laws of Pakistan.”
FBR spokesman Dr Najeeb Memon was not available for comments.
The new law states that it will not apply to any payment for digitally ordered goods where such payment is effectively connected with a branch office of the foreign vendor in Pakistan, and the goods are supplied from within Pakistan. It also excludes digitally delivered services received in Pakistan and rendered through a branch office of the foreign vendor.
“Since you are operating through a registered branch, your operations fall squarely within this exemption. Similarly, the digital services tax provisions of the income tax law do not apply to tax residents of Pakistan,” stated the FBR communication with Google.
The enactment of the Digital Presence Proceeds Act had created ripples in Pakistan, particularly among YouTube users.
Before the new budget, Google was paying 10% income tax under Section 152 of the Income Tax Ordinance, which the government increased to 15%. However, surprisingly, the government has also shown a path for Google to pay only 5% income tax instead of 15%.
Authorities further stated that even if any of Google’s operations are conducted from outside Pakistan, the applicable rate under the Digital Services Tax and the Digital Presence Proceeds Act has been reduced to 5% instead of the 15% rate the company had perceived.
According to the FBR, if a person is subject to the Digital Presence Proceeds Tax, then tax under Section 152 of the Income Tax Ordinance shall not be deducted on the same transaction.
“This safeguards Google against any double taxation. In fact, Google’s applicable tax rate has now been reduced from 10% to 5%, given that the Digital Proceeds Act imposes a 5% rate compared to the 15% withholding tax rate under the Income Tax Ordinance,” the government assured Google.
Going a step further, the government has offered Google full income tax exemption if it shifts its local branch office to a Special Technology Zone (STZ).
Under Clause 123EA of the Second Schedule of the Income Tax Ordinance, 2001, profits and gains derived by zone enterprises under the STZ Authority Act are fully exempt from income tax until 2035.
The law was intended to tax digitally delivered services provided over the internet or electronic networks, where delivery is automated with minimal or no human involvement. These include services such as music, audio and video streaming, cloud computing, software, telemedicine, e-learning, online banking, architecture, research, consultancy, and digital accounting services.
