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(1) Subject to the provisions of paragraph (2) of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

(2) Notwithstanding the provisions of paragraph (1), pensions paid and other payments made under a public scheme which is part of the social security system of a Contracting State or a political sub-division or a local authority thereof shall be taxable only in that State.

ARTICLE 18B
(ALTERNATIVE B)

(1) Subject to the provisions of paragraph (2) of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment may be taxed in that State.

(2) However, such pensions and other similar remuneration may also be taxed in the other Contracting State if the payment is made by a resident of that other State or a permanent establishment situated therein.

(3) Notwithstanding the. provisions of paragraphs (1) and 2, pension paid and other payments made under a public scheme which is part of the social security system of a Contracting State or a political sub-division or a local authority thereof shall be taxable only in that State.

94A. Scope
This Article deals with pensions and other similar payments (other than paid on account of the past services to the State to which paragraph (2) of Article 19 applies) and also social security payments. According to the OECD Model Convention, pensions paid in respect of private-employment are taxable only in the State of residence of the recipient. Exclusive right of the residence State was objected to by the developing countries as in their views pension is essentially in the nature of deferred compensation for services performed in the source country. Though the right of the residence State is conceded, the source State was also given right if the payer is permanent establishment situated in, or is the resident of, that State. If pension and payments are made under a public scheme as a part of social security system of the source State, income is taxable in that State alone and the residence State has no right to tax it. Thus the taxability of income as pension is judged with reference to (1) the residential status of the recipient, (paragraph (1) of Article 1 8A and 1 8B); or (2) to the residential status of payer (paragraph (2) of Article 18B); or (3) to the source of payment, viz, public scheme (paragraph (2) of Article 18A and of paragraph (3) of Article 18B). Provisions as (1) and (3) are dealt with in Article 18A and those as in (1), (2) and (3) in the alternative Article 18B.

Right of residence State to tax income as pension - According to paragraph (1) of this Article, pension paid in respect of past employment is taxable only in the State of residence of the recipient, the exception being the Government pension dealt with in paragraph (2) of Article 19.

Generally the agreements with Pakistan provide for taxation by the country from which the payments flow or where the source of such payments exists (for example, see agreements with Austria, Belgium, Denmark, Greece, Sweden, France, FGR). The source is determined sometimes with reference to the residence of the payer as in the case of agreement with Canada. Some others provide for taxation by the country of which the recipient is resident (see agreement with Sri Lanka, Hungary, Indonesia, Korea, Malaysia, Libya, Mauritius, Singapore and Turkey). Agreement with Canada provides that pension arising in a State is taxable only in that State; and that it is deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State.

Right has been given to both the States in agreement with Italy. Agreement with Kenya gives right to the source State, with some limitations, viz., in case the resident State also levies tax, the tax levied by the source State has not to. exceed five per cent of the pension or the amount of the tax chargeable in the resident State, whichever is lower. The Article deals with pension or other similar remuneration and hence these expressions require some discussion.

95. Pension
Pension is a periodical payment of money for past services. It is closely akin to wages in that it consists of payments provided by an employer, is paid in consideration of past service and serves the purpose of helping the recipient meet the expenses of living. It is neither a bounty nor a matter of grace depending upon the sweet will of the employer. It creates a vested right in the pensioner for payment for past services rendered. The said right vests in the pensioner because of the past employment. The said past employment is in continuation of the relationship of employer and employee, which existed prior to the retirement of the pensioner. It is paid to an employee following his retirement from service due to age or disability, or to the surviving dependents of an employee entitled to such pension in consideration of past services. Thus, the right to pension of an employee on his retirement, or of his widow or of orphan child on his death flows from the past employment of the employee. It flows as part of the consideration of the contract of employment and not de hors, or independent of, the contract or employment. The benefit of pension is in the nature of deferred wages. It is, therefore, closely akin to wages. The characteristics of pension as understood now-a-days can be summed up as follows.

- The pension is neither a bounty nor a matter of grace depending upon the sweet will of the employer.

- The pension is not an ex gratia payment but it is a payment for the past services rendered.

- It is a social welfare measure rendering socio-economic justice to those who in the key day of their life ceaselessly toiled for the employer on an assurance that in their old age they would not be left in the lurch.

Pension, therefore, means a pension, whether contributor, or not, of any kind whatsoever payable to or in respect of any person and includes retired pay so payable, a gratuity so payable, and any sum or sums so payable by way of the return, with or without interest therein or any other addition thereto, or subscription to a provident fund.

Pension is both a remuneration for past services, and a social welfare measure. It serves the purpose of helping the recipient meet the expenses of living.

95.1. Pension as defined in the agreements - The definition of the word 'pension' wherever appeared in the agreement is in no way different from the concept as discussed in the preceding para. Payment made periodically in consideration of past services or employment is generally understood to be pension [see agreements with Belgium, Mauritius, Norway, Sri Lanka, Sweden, Thailand]. Besides consideration of past employment, compensation for injury is also taken to mean pension (see agreements with Austria, Denmark, France, Mauritius, Norway, Sri Lanka, Sweden). The word 'injury' denotes any harm whatever illegally caused to any person in body, mind, reputation or property. Injury is thus a wrongful action or treatment harm or damage. This word has relation only to acts which are wrongful and not to lawful acts. Wherever there is an invasion of a legal right, the person in whom the right is vested is entitled to bring an action and may be awarded damages although he has suffered no actual cramage.

Every injury imports a damage, though it does not cost the party one farthing; a damage is not merely pecuniary, but an injury imports a damage, when a man thereby hindered of his right. Compensation for the injury suffered by a person is defined to mean pension in some of the aforesaid agreements.

96. Other similar remuneration
Remuneration is term of much wider import than 'wages' and includes 'recompense', 'reward' or 'payment'. The word 'other' should receive an ejusdem generis interpretation and therefore, 'other similar remuneration' may refer to wages or payment which partakes of the character of pension, such as annuities paid in respect of past employment or compensation for injury. Some agreements have specifically mentioned pension as including annuity (see agreements with Belgium, Denmark, France, Indonesia, etc.) or have specifically covered annuity under the agreement (see agreements with Greece, Kenya). Agreement with Norway even mentions alimony.

96.1. Annuity- The expression 'annuity' has been defined-in agreement with Belgium as to mean a stated sum, payable periodically at stated times, during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate or full consideration in money or money's worth. Other agreements contain similar definition (see Austria, Denmark, France, Indonesia, Kenya, Mauritius, Norway, Singapore, Sri Lanka).

'Annuity' means sums payable in respect of a particular year; yearly grant. An annuity is a certain sum of money payable yearly either as a personal obligation of the grantor or out of property. The hallmark of an annuity, according to Jarman on Wills (p; 1113) is (1) it is money; (2) paid annually; (3) in fixed sum; and (4) usually it is a charge personally on the grantor. The expression 'annuity' has assumed a legal term owing to judicial interpretation and not its popular and dictionary meaning. In order to constitute an 'annuity', the payment to be made periodically, should be a lured or predetermined one and it should not be liable to variation depending upon or on any ground relating to the general income of the fund or estate which was charged for such payment. A fixed amount paid annually out of property in lieu of previous obligation is an annuity.

In ordinary sense, it means the purchase of income, but in all circumstances it is not so. The annual payments are sometimes loosely called 'annuity' when they are in fact annual installments of capital. The nature of annuity is finally determined by the circumstances that the obligation is to pay a capital sum and instalments are merely a method of effecting payments.

96.2 Alimony - Alimony is the means. of living, maintenance, an allowance made to a woman for her support by a man pending or after her legal separation or divorce from him; the allowance ordered by the Court to be made to a wife from her husband; estate for her support in a pending matrimonial suit. On any petition for divorce or nullity of marriage, or for judicial separation or restitution of conjugal rights, the court may make such interim orders for the payment of alimony to the wife as the court thinks just. It takes the form of money payment payable weekly or monthly.

The agreement with Norway provides that alimony received by a resident of Norway and paid by a resident of Pakistan is not taxable in Norway, to the extent such payments are not deductible for the purpose of Pakistani tax.

96.3. Gratuity or provident fund or gifts - If the payment originates from the fact of a person having rendered services in the past, it is generally taxable as per provision of Article 18. But every remuneration may not partake of the character of pension or payment similar to it, according to domestic laws of the Contracting State. The characteristic of pension is the receipt of money from the former employer on account of past employment. But such payment is deemed 'salary' under the Pakistani Income Tax Ordinance, 1979. Pension or annuity has also been encompassed within the ambit of 'salary' besides wages, gratuity, etc. Since pensions or annuity are dealt with separately, whether other payments which are given on retirement or superannuation on account of past employment could be taken remuneration as resembling pension or when payment is made in appreciation of past employment whether it could be taken income or gift.

Amounts paid to employees on cessation of their employment as terminal benefits are taken to be salary under Pakistani Income Tax Ordinance, 1979. The retirement benefits like gratuity, provident fund and pension (known as triple benefits) are given as social security measures to protect the employee against loss of income due to unemployment arising out of incapacity to work because of invalidity, infirmity or old age. Though such payments (excepting pension) should normally fall within the expression 'other similar remuneration', these are taken to be salary, and are taxable as such if otherwise so taxable under the Pakistani tax laws. In such a case, it would be natural to consider the income as falling under Article 15, or under Article 19, as the case may be. The conflict could be resolved by mutual agreement, under Article 25.

If the consideration is past employment, the payment could be taken either salary or a gift, depending upon in what character the person has received the amount. It the voluntary payment is made in the circumstances, which shows that it is given by way of present or a testimonial on grounds of personal to the recipient in appreciation of the personal qualities of the concerned person and as a token of personal esteem for him it would amount to a gift; but if the payment is made substantially in token of an appreciation of the services rendered by him to the donor or as a reward for services or assistance rendered by him, then it cannot be considered to be a mere gift. It has, therefore, to be decided whether it is a personal gift or it is remuneration. If it is the latter, it will be subject to tax but if it is the former, it will not be taxed.

97. Payments under social scheme taxable in source State
Paragraph (2) of Article 18A and paragraph (3) of Article 18B deal with pensions paid and other payments made under public scheme-which is a part of the social security system. Such amount is to be taxed in the State of which such a social security system is part, notwithstanding the provision of the preceding paragraph(s) that is the right of the resident State to levy tax.

The Government of Pakistan have taken many social security and welfare schemes and enacted Acts to implement them, viz, Workmen's Welfare Act; Employees' State Insurance Act; Employees' Provident Funds and Benevolent Funds Act; Payment of Gratuity Act and many others. Even income-tax legislation is treated as a social welfare legislation.

Some of these Acts entitle a person or members of his family to receive payment for 'undeserved want' such as sickness, maternity, employment, injury, old age, unemployment, disability or even death. While some other are sources for financing the welfare schemes such as relief to the poor education, medical relief and promoting justice. These Acts and the schemes made thereunder seek to reduce the threat to the economic security of the individual, by attempting to reduce an individual's or a family's loss of income and welfare. This is done by providing cash benefits, compensations for the loss of income, medical and other assistance. Categories of economic insecurity are mainly three:

- Risk of physical inability to work resulting in loss of earning capacity and power and consequently income; for example, sickness, maternity, accidents, old age and death.

- Economic risk, primarily that of involuntary unemployment.

- Economic burden of large family.

All social security schemes originate from the concept of distribution of justice which connotes, inter alia, removal of economic inequalities, and rectifying the injustice resulting from dealings or transactions between unequals in society. Distribution of justice means a fair division of wealth among the members of society based on the principle 'from each according to his capacity, to each according to his needs' and it comprehends transfer of resources to increase total national welfare. If a social welfare programme is financed by a progressive taxation, the transfer is from the rich to the poor. If it is financed primarily by payments of workers and employers, the resources are transferred within the same class of persons, from the more fortunate to the less fortunate. All schemes which are used as instruments of distribution of justice may take the form of forced distribution of wealth as means of achieving a fair division of material resources among the members of society. The actual benefits may be distributed through old age, survivors and disability payments, unemployment compensation family allowances. Payments and alloances made under such public scheme of a Contracting State are taxable only in that State, and not in the resident State.

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