ISLAMABAD, Oct 10: Pakistan and Japan on Friday ratified convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on incomes between the two countries.

This new convention, which will come into effect on November 9, 2008, has improved the regulations of the existing convention signed in 1959 with a view to promoting mutual investment between Pakistan and Japan.

The diplomatic notes for ratification of the convention were exchanged here by Japan’s Ambassador Extraordinary and Plenipotentiary to Pakistan Chihiro Atsumi and Member (direct taxes) Federal Board of Revenue Irfan Nadeem.

The agreement was signed by representatives of the two countries on January 23, 2008.

Based on the international model income tax treaty, the new convention revises the taxation formula for business income and royalties paid in the respective countries and contains extensive revision of the existing convention for the first time in 49 years.

The main features of the revised convention include tax exemption for government-owned banks and financial institutions as well as exemption on remuneration to students and business apprentices from 360,000 Japanese yen to 1,500,000 yen.

According to the convention, permanent establishment in the case of building site has been agreed at six months; delivery from a warehouse will be considered as PE; dividend in case of holding companies having 50 per cent share for six months will be taxed at 5 per cent; holding company with 25 per cent voting share at 7.5 per cent and all other taxes at 10 per cent in the source country.

The convention also calls for royalty at source country to be taxed at 10 per cent while fee for technical services will be taxable at 10 per cent in the source country.

Speaking on the occasion Member direct taxes said the convention would provide safeguards against double taxation on the income of the residents from the two countries besides promoting economic cooperation, investment and bilateral relations between them.

He said the convention will also provide adequate certainty in respect of taxation rules applicable to cross-border business transactions, dividends, interests, royalties and fee for technical services. Taxpayers of both countries would also get relief from double taxation increasing as a consequence of expanded trade between the two nations.

Ambassador Atsumi said the new convention was a significant step in facilitating competitiveness of the Japanese and Pakistani companies and incorporating the bilateral taxation relations between the two countries into a modern tax convention framework.

He said the updated convention marked a significant step as viewed in the light of Pakistan’s status as a gateway to Central Asia and the Middle East.