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On February 17, Hong Kong and Pakistan signed a comprehensive double taxation agreement (CDTA), which sets out the allocation of taxing rights between the two jurisdictions and will aid the assessment of tax liabilities arising out of cross-border economic activities.
Hong Kong's Secretary for Financial Services and the Treasury, K C Chan, said: "This is the 37th CDTA that Hong Kong has signed with its trading partners. … I have every confidence that the economic and trade connections between the two places will be bolstered." It was also said its signing "signifies the Government's sustained efforts in expanding Hong Kong's CDTA network, in particular with economies along the Belt and Road."
In the absence of a CDTA, the profits of Hong Kong companies doing business through a permanent establishment in Pakistan may be taxed in both places if the income is Hong Kong sourced. For Pakistani companies, the income earned in Hong Kong is subject to both Hong Kong and Pakistani tax.
Under the new agreement, double taxation will be avoided in that any Pakistani tax paid by Hong Kong companies will be allowed as a credit against the tax payable in Hong Kong on the same profits. Similarly, for Pakistani companies, the tax paid in Hong Kong will be allowed as a deduction from the tax payable on the same income in Pakistan.
The CDTA also provides that Pakistan's withholding tax rates for Hong Kong residents on royalties and on fees for technical services (both currently at 15 percent) will be capped at 10 percent and 12.5 percent, respectively. Pakistan's withholding tax rate for Hong Kong residents on dividends (currently at various rates up to 25 percent) and interest (currently at various rates up to 17.5 percent) will be capped at 10 percent.
Hong Kong airlines operating flights to Pakistan will be taxed at Hong Kong's corporation tax rate, and will not be taxed in Pakistan; and profits from international shipping transport earned by Hong Kong residents that arise in Pakistan, currently subject to tax there, will enjoy a 50 percent reduction.
The new agreement has also incorporates an article on the exchange of tax information, which will enable Hong Kong to add to the fulfillment of its international obligations on enhancing tax transparency and combating tax evasion.
The CDTA will come into force after the completion of ratification procedures on both sides.
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