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ARTICLE 15
DEPENDENT PERSONAL SERVICES
(1) Subject to the provisions of Articles 16, 18 and 19,
salaries, wages and other similar remuneration derived by a resident of a Contracting
State in respect of an employment shall be taxable only in that State unless the
employment is exercised in the other Contracting State. If the employment is so exercised,
such remuneration as is derived therefrom may be taxed in that other State.
(2) Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of
a Contracting State in respect of an employment exercised in the other Contracting State
shall be taxable only in the first-mentioned State if:
(a) The recipient is present in the other State for a period or periods not exceeding in
the aggregate 183 days in the fiscal year concerned; and
(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the
other State; and
(c) The remuneration is not borne by a permanent establishment or a fixed base which the
employer has in the other State.
(3) Notwithstanding the preceding provisions of this Article, remuneration derived in
respect of an employment exercised aboard a ship or aircraft operated in international
traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the
Contracting State in which the place of effective management of the enterprise is
situated.
86. Scope
This Article deals with salaries, wages and other remuneration in respect of an
employment. Independent personal service has been dealt with in Article 14, and dependent
personal service in this Article. Exceptions relate to remuneration of top managerial
officials of companies, pensions, and remuneration in respect of Government service, which
have been dealt with respectively under Articles 16, 18 and 19. The rule regarding
taxation of income from employment, other than pension and remuneration of directors and
top managerial officials, is contained in paragraph (1) of this Article. It is generally
taxable in the State of which the person is resident. But if the employment is exercised
in the other Contracting State and the remuneration is derived from such exercise, it is
taxable in that other State.
87. Employment - Meaning of
To decide the jurisdiction, it becomes necessary to find the meaning to the expression
'employment' in the context of this Article and also when and where it could be said to
have been exercised.
The expression 'to employ' has been considered in Ellis v. Joseph Ellis & Co. It does not mean generally to find actual
employment; it rather means to retain and pay a person whether employed or not but if
employed then to be employed in the work only in respect of which contract is made.
Medical advisers may be employed at a salary to be ready in case of illness; members of
theatrical establishments, in case their labour should be needed; household servants in
performance of their duty when their masters wish; in these and other similar cases, the
requirement of actual service is distinct from the employment by the party employing. In
an agreement to 'retain and employ', 'employ' means only to 'retain' in the service 'and
is mere tautology'.
The expression, however, must depend upon the context of the particular provision in which
the expression appears. It was held in England that an engineer appointed by a local
authority to supervise the execution of works but not subject to the local authority's
supervision, is nevertheless an 'employee' within the meaning of section 40(1) of the
Local Government Superannuation Act, 1937.
In Chamber's 20th Century Dictionary, 'employ' has been indicated to mean to occupy the
time or attention of. 'Employment' means an act of employing. In the Concise Oxford
Dictionary, 'employee' means a person 'employed for wages. 'Employ' thus means use of
services of persons. It comprehends a whole-time servant or a part-time engagee. The amplitude of the expression 'employee' and
'employer' covers cases of a consultant or a technician. Remuneration received from an employer cannot be confined only to
salary received by him, though it is generally be taken salary.
The concept of employment involves three ingredients, viz.,
(a) employee, (b) employer, and (c) contract of employment. The employer is one who
employs, i.e, one who engages the service of other persons. The employee is one who works
for another for wages. The employment is the contract for service between the employer and
the employee whereunder the employee agrees to serve the employer subject to his control
and supervision. The test which is uniformly applied to determine the existence of
relationship of employer and employee is whether the employer has the right to control in
respect of the manner in which the work is to be done.
The four indices of a contract for service are the
following:
- The master's power of selection of his servant.
- The payment of wages or other remuneration.
- The master's right to control the method of doing the work.
- The master's right of suspension or dismissal.
- The master's right to control the method of doing the work is the decisive element in
the relationship.
An agent is to be distinguished on the one hand from a servant and on the other hand from
an independent contractor. A servant acts under the direct control and supervision of his
master and is bound to conform to all reasonable orders given to him in the course of his
work. An independent contractor, on the other hand, is entirely independent or any control
of interference and merely undertakes to produce a specified result employing his own
means to produce that result. An agent, though bound to exercise his authority in
accordance with all lawful instructions which may be given to him from time to time by his
principal, is not subject to the direct control or supervision of the principal. An agent
as such is not a servant. But the converse may not be true. A servant may for some
purposes be his master's implied agent. The extent of the agency depends upon the duties
or position of the servant. For ascertaining whether a person is a servant or an agent of
another, a rough and ready test is whether under the terms and conditions, governing their
mutual relationship a supervisory control is exercised by the latter in respect of the
work entrusted to the former. But this test is not universal in its application. In
determining whether a relationship of employer and employee exists, due regard must also
be had to the nature of the particular business, the terms of the engagement and the
nature of the duties to be Performed by the person in respect of whom the question has
arisen as to whether he is an employee.
The aforesaid principles could well be applied in the case of a director of a company to
find out the nature of relationship between the two. A managing director may have a dual
capacity. He may both be a director as well as an employee. In the capacity of a managing
director he may be regarded as having not only the capacity as persona of a director but
also has the persona of an employee or an agent depending upon the nature of his work and
the terms of his employment. Where he is so employed, the relationship between him as the
managing director and company may be similar to a person who is employed as a servant or
an agent, for the term 'employed' is facile enough to cover any of these relationships.
The nature of his employment may be determined by the Articles of Association of company
and/or the agreement, if any, under which a contractual relationship between the director
and the company has been brought about whereunder the director is constituted an employee
of the company. If such be the case, his remuneration will be assessable as salary. In
other words, the question whether or not a managing director is a servant of the company
apart from his being a director can only be determined by the Articles of Association and
terms of his employment. It is
pertinent to mention that under the Income Tax Ordinance, 1979 all directors of companies,
whether employed or not, are chargeable to tax for their salary under section 16 i.e.
income under the head 'salary' by virtue of section 16(2)(e). The definition of
"employee" has been artificially expanded to bring into its arebit a managing
director or any other director in relation to a company. So even if "salary" by
a director of a company is not by virtue of employment but office yet under the Income Tax
Ordinance. 1979 it is chargeable to tax under section 16 and not under section 30 - which
is 'the case in the Indian Income Tax Act where 'salary' other than by virtue of
employment in the case of directors is chargeable to tax under the head "income from
other source" i.e. section 56 of the Indian Income Tax Act, 1961 [parallel to section
30 of the Income Tax Ordinance, 1979].
88. Salary, wages and other similar remuneration
What is subject-matter of Article 15 is the salary, wages and other similar
remuneration derived by a person in respect of employment. What these expressions
constitute require discussion in the context of the Pakistani Income Tax Ordinance.
88.1. Salary- Section 16 of the Ordinance enumerates the income
which shall be chargeable to income-tax under the head 'Salary'. The sine qua non or
prerequisite for charge under the head 'Salary' is that the origin of income is the
employer or former employer and the person making the payment does it in his capacity as
employer. If any payment has to be regarded 'salary' within the meaning of section 16, it
must be due from an employer.
The exact language of section 16 is as under:
"Salary.- (1) Tim following incomes shall be chargeable under the head
"Salary", namely :-
(a) any salary due to the assessee from an employer in the income year, whether paid or
not; and
(b) any salary (including arrears or. advances of salary) paid to the assessee in the
income year by an employer:
Provided that where any salary is included in the total income on the basis that
it has become due to an assessee, it shall not be included again on the basis that it is
paid.
(2) For the purposes of sub-section (1) ,-
(a) "salary" includes-
(i) any wages;
(ii) any annuity, pension or gratuity;
(iii) any fees, commissions, allowances, perquisites or profits in lieu of, or in addition
to, salary or wages;
(b) "perquisite" includes-
(i) the value of rent-free accommodation;
(ii) the value of any concession in the matter of rent respecting any accommodation;
(iii) any sum payable by the employer, whether directly or indirectly, to effect an
insurance on the life of, or to effect a contract for any annuity for the benefit of, the
assessee, or his spouse or any dependent child;
(iv) the value of any benefit provided free of cost or at a concessional rate;
(v) any sum paid by an employer in respect of any obligation of an employee;
(c) "profits in lieu of salary" includes -
(i) the amount of any compensation due to, or received by, an assessee from his employer
at, or in connection with, the termination of, or the modification of any terms or
conditions relating to, his employment;
(ii) any payment due to, or received by, an assessee from a provident or other fund to the
extent to which it does not consist of contributions by the assessee and the interest on
such contributions;
(d) "employer" includes a former employer; and
(e) "employee", in relation to a company, includes a managing director or any
other director or other individual, who, irrespective of his designation, performs any
duties or functions in connection with the management of the affairs of the company.
'Salary', according to the Shorter Oxford English Dictionary means: ‘to recompense,
reward, to pay for something due’. In Jowitt’s Dictionary of English Law,
'salary' is explained as 'a recompense or consideration, generally periodically, made to a
person for his service in another person's business; also wages, stipend or annual
allowance'. In Strottd's Judicial Dictionary, the expression 'salary' is explained as
where the engagement is for a period, is permanent or substantially permanent in character
and is for other than manual or unskilled labour, the remuneration is generally called
'salary'. Conceptually, there is no difference between salary and wages, both being
recompense for work done or services rendered, though ordinarily the former expression is
used in connection with services of non-manual type, while the latter is used in
connection with manual services.
The essential ingredients that are to be satisfied for the purposes of the application of
the provisions enacted in section 16(1) are as follows:
- The payment must be related to the employment
- It must not be based on personal or extra employment consideration
88.2. Wages - Conceptually there is no difference between
salary and wages both being a recompense for work done or services rendered, though
ordinarily the former expression is used in connection with services of non-manual type
while the latter is used in connection with manual services. In fact, in the case of
salary, the recompense could be determined wholly on the basis of time spent on service or
wholly by the work done or partly by the time spent in service or partly by the work done.
In other words, whatever be the basis on which recompense is determined it would all be salary.
88.3. Other similar remuneration - Remuneration ordinarily
means reward, recompense, pay, wages or salary for services rendered. It is a term of much wider import than ‘wages’ and includes
'recompense', 'reward' or payment. The word
'other' when following an enumeration must receive an ejusdem generis interpretation and
in this context may mean the recompense for services rendered partaking of the character
of salary or wages. The use of the word 'similar' reinforces this interpretation.
89. Employment
If the source of income is the contract of employment and the amount is received for
rendering services in terms of that contract from the employer, the income is taxable as
salary. The location of payment or of the employee, or of the place of contract are of no
relevance, so far as the location of service is Pakistan. The salary is then said to have
been earned in Pakistan [section 12(1) of the Income Tax Ordinance, 1979]. The
determination whether the amount received represent salary and is taxable as such depends
on the relationship of the taxpayer with the person who pays the amount. There is no
liability on such amount under the head 'Salaries' unless the amount originates from the
contract of employment.
Where an income is derived from wages or salary the source has several factors. Personal
exertion may be involved in negotiating and obtaining the contract of employment in
performing the stipulated services and in obtaining payment for them. The source of wages
and salary consists of three elements of getting the job, doing it and getting paid for
it. Its location could be decided on the basis of predominance of the element over the
other. If the source of income consists substantially in the making of the contracts the
place where the contracts are made may be regarded as the only significant factor. If it
consists in first making contracts and then carrying them into effect in circumstances
such that both elements are substantial factors in the source, an apportionment must be
made. If the making of the contract is an insignificant factor, and the only substantial
is its performance the place of performance is the only relevant locus of source.
The work of persons or acts done by persons are the sources of income. Property and the
acts done are the only sources of income. If a person has rights over property or in
relation to property he may derive income from that property. If a person by himself or by
his servants or agents does work of some kind or acts in some way he may derive income
from that work or act. In the event of a
taxpayer deriving employment income the locality of the source of such income is where the
taxpayer performed his duties of employment since it is the performance of such duties
which produces the employment income.
In Lara Costs Adhom v. CIT, RawaIpindi,
the Lahore High Court observed:
"The suplementary agreement, dated 8th September, 1969, was executed in contemplation
of clause 11 of the earlier agreement, dated 16th August, 1966. It is unfortunate that the
learned Tribunal completely omitted to notice clause 8(c) of the supplementary agreement
which reads as under:-
During their stay in the Country of installation the personnel shall still be considered
employees of the contractor. The customer shall not be entitled to employ the personnel
for other works than we envisaged when the personnel were desptched or than has been
subsequently agreed upon between the contractor and the customer. Undertakings or
engagements made by the personnel shall not be binding without the written approval of the
contractor.
It is not undertandable as to how in the presence of this clear stipulation the
technicians could not be considered to be employees of the Swedish Company, while staying
in Pakitan. The other important clause, which has been kept out of consideration by the
Tribunal is clause 10 which provides that the responsibility for any damage occurring due
to carelessness of the erectors shall be that of Swedish Company. Clearly, if the
petitioners were not employees and were not acting for the Swedish company, there would be
no question of the liability for their acts falling upon the Swedish Company.
The agreement between Pakistan and Sweden, dated 18th March, 1957 which provides for
avoidance of double taxation is not disputed. According to Article 13 of this agreement
any individual, who is resident of Sweden is exempt from payment of tax in Pakistan on
profit or remuneration received by him in respect of services performed in Pakistan, if
his stay in Pakistan, does not exceed 183 days during an assessment year and secondly that
services are performed by him for and on behalf of the resident of Sweden. It is not
denied the stay of the petitioners in Pakistan was less than 183 days. In view of the
finding that they were performing services or and on behalf of Swedish Company, they
clearly qualify for exemption of tax under Article 13."
89.1. Place of employment is not relevant, if salary is earned or
received in Pakistan - For the purpose of the taxability of an amount under the head
'Salary' in Pakistan, the question hinges upon the answer whether such amount is earned in
Pakistan or whether the source of the receipt is Pakistan.
Whether the source is located where the duties of the employee are performed, where the
employment contract is made or where the payment for employment is made. For the purpose
of the expression 'income earned in Pakistan' the geographical source of income is
relevant for this expression. The expression 'earned in Pakistan' means income earned only
if the assessee has contributed to its accrual or arising by rendering service in respect
of which a debt is created in his favour.
In a case where the place of signing of an employment contract, performance of service and
payment are outside Pakistan, the source of employment of income derived by the employee,
while performing his services outside Pakistan, is outside Pakistan and the income earned
through this source is not the income earned in Pakistan. If, however, the person happens
to be Pakistani citizen and the payment originates from the Government irrespective of the
place of contract and/or the place of service being outside Pakistan, the amount becomes
chargeable under the head Salary' [section 12(1)].
As aforesaid the source of salary consists of three elements of getting the job, doing it,
and getting paid for it. Which of these is the most important element of the source in a
given case depends on its facts. Thus if the source consists substantially in the making
of contracts, the place where these are made be regarded as the significant factor. In
relation to a person (who is not a citizen of Pakistan), who enters an employment contract
in Pakistan, during the period when he is in Pakistan, he could be said to have property
(i.e. the employment contract) in Pakistan which generates income. Similarly when the
employment is accepted in Pakistan and the payment is made in Pakistan, though services
are rendered outside Pakistan, the income could be said to have been earned in Pakistan,
unless it can be established beyond doubt that the only factor relevant for the
ascertainment of the source of income is the place where the person renders service.
An individual is taxed in Pakistan under its domestic laws, on all salaries, wages,
emoluments, fee, commission, etc., received from an employer or former employer, under the
head 'Salary' if he has been in Pakistan in an
income year relevant to the concerned assessment year for a period or periods amounting in
all to 182 days, or 90 days and also for 365 days within the four preceding years. The
residence of the employer is irrelevant. Even in case of non-resident if his place of
service is Pakistan, his salary would be assessable in Pakistan. Income which falls under
the head 'Salary' is deemed to accrue or arise in Pakistan, if it is earned in Pakistan. Income payable for services rendered in
Pakistan is regarded as income earned in Pakistan.
Thus, where an employee physically carries out his duties in Pakistan, the salary received
by him is taxable in Pakistan irrespective of the place of payment or of the contract. For
an amount to be taxed under the head 'Salary', the receipt must satisfy two tests. One, it
is salary and secondly it is earned in Pakistan. If any of these fails, the amount cannot
be taxed as salary.
Pakistan's double taxation agreements contain the general rule that income is not subject
to tax in the State in which the employment is exercised if-
(a) the recipient is present in the source country for a period not exceeding 183 days in
the fiscal year;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the
source country; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the
employer has in the source country.
If the exercise of employment is a State other than the employee's State of residence,
salary and wages earned by him will be taxable in the State of his residence, rather than
in the State of his employment, if the above conditions are satisfied. Thus if a Pakistani
employee, having his permanent place of abode in Pakistan, is sent to another State say
Canada by a Pakistani businessman with a Canadian branch his salary and wages would not be
taxable in Canada, unless any of the above conditions is not met. However this rule is not
applicable in respect of employment exercised aboard a ship or aircraft operated in
international traffic which shall be taxable of the enterprise by the Contracting State.
90. Exemption of income from the levy of tax in the source State
Paragraph (2) contains an exception to the rule as contained in paragraph (1). The
resident State would continue to have the right to levy tax irrespective of exercise of
the employment being located in the source State. The circumstances under which this
exception operates have been specified, that the presence of the recipient of income in
the State should be for a period shorter than 183 days in a fiscal year and the
remuneration is sourced by the employer who is not resident of that State, and is not
borne by a permanent establishment or a fixed base of the employer in that State. In case
the presence of the recipient extends beyond 183 days, or the employer is the resident of
the source State, or he has a permanent establishment or fixed base which has borne the
remuneration, the exception as contained in this paragraph becomes inoperative. Paragraph
(1) would still be operative, and the source State will have the right to levy tax.
90.1. Exemption of information tax - Exemption from income-tax
is granted in case when remuneration is received by an assessee as an employee of a
foreign enterprise for services rendered by him during his stay in Pakistan, provided the
following conditions are fulfilled:
- The foreign enterprise is not engaged in any trade or business in Pakistan
- His stay in Pakistan does not exceed in the aggregate period of ninety days in such
income year
- Such remuneration is not liable to be deducted from the income of the employer or
chargeable under the Ordinance.
There is, however, another possibility of exemption; a non-resident employee is resident
in a country with which Pakistan has a double taxation agreement. This possibility is
popularly known as 'I83-day rule'. Most of the agreements provide exemption
if:
(a) the recipient is present in Pakistan for a period or periods not exceeding in
aggregate 183 days in the fiscal year concerned; and
(b) the remuneration is paid by, or on behalf of, an employer who is not resident of
Pakistan; and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the
employer has in Pakistan.
There may be variations in individual agreements. But basically these conditions are
broadly found in each.
Thus there are two types of exemptions: one in respect of residents of the States
with which Pakistan does not have double taxation treaty (90-day rule), and the other in
respect of others, resident of those countries with which Pakistan has double taxation
agreement (183-day rule). The former exemption is an illustration of unilateral relief.
Paragraph (2) is an illustration of negotiated exemption.
The qualificatory conditions for exemption under the '90-day rule' or the '183-day rule'
refer to the recipient and his presence in the country. There is no reference to the
employer(s). So long as the stay of the recipient does not exceed the prescribed limit,
the income would continue qualifying for exemption, notwithstanding the source of
remuneration being one or more than one employer.
Employment for these rules would mean employment generally and not that it would be
confined to only one employment under one employer.
Remuneration in respect of employment aboard a ship or aircraft
91. Paragraph (3) is an exception to the rules contained in
paragraphs (1) and (2), and deals with remuneration derived in respect of an employment
exercised aboard a ship or aircraft operated in international traffic or aboard a boat
engaged in inland waterways transport. Such remuneration is taxed in the State in which
the place of effective management of the enterprise is situated. This paragraph follows
the pattern as set out in Article 8 of taxing income arising from the operation of ships
or aircraft, as also of any activity or asset relating thereto in the State of effective
management. The remuneration of a crew is no exception.
