MINISTRY OF FINANCE AND ECONOMIC AFFAIRS(Finance Division)

NOTIFICATION
Islamabad, the 3rd December, 1989
INCOME TAX

S.R.O. 1175 (1)/89. - Whereas the diplomatic notes annexed herewith have been exchanged between the Islamic Republic of Pakistan and the United States of America for the purpose of the avoidance of double taxation on income derived from the operation of ships:
NOW, THEREFORE, in exercise of the powers conferred by Section 14(1) of the Income Tax Ordinance, 1979, (XXXI of 1979) the Federal Government is pleased to direct that all the provisions of the said Exchange Notes shall be given effect to in Pakistan.
Annexure

EXCHANGE NOTES BETWEEN THEISLAMIC REPUBLIC OF PAKISTAN AND THE UNITED STATES OFAMERICA CONCERNING THE RECIPROCAL EXEMPTION OF SHIPPINGENTERPRISES FROM PAYMENT OF INCOME TAX.
EMBASSY OF THE UNITED STATES OF AMERICA, ISLAMABAD No. ECON/144826th July, 1989.

"The Embassy of the United States of America presents its compliments to the Ministry of Foreign Affairs of Pakistan and has the honour to propose that the two governments conclude an agreement to exempt from income tax, on a reciprocal basis, income derived by residents of the other country from the international operation of ships.
The terms of the agreement are as follows:
The Government of the United States of America in accordance with sections 872(B)(I) and 883(A)(I) of the Internal Revenue Code of 1986, agrees to exempt from tax gross income derived from the International operation of ships by individuals who are residents of Pakistan (other than US citizens), companies registered in Pakistan, and other Pakistani enterprises (other than corporations organised in the United States) to the extent that the income of such enterprises is subject to tax by Pakistan to individual residents of the United States and to corporations organised in the United States (which are not subject to tax by Pakistan on the basis of residence). In the case of a Pakistan company or enterprise, the exemption shall apply only if the company meets the ownership or public trading, requirements of Section 883 (C) of the Internal Revenue Code. For purposes of such ownership requirements, the Government of Pakistan will be treated as an individual resident of Pakistan.
The Embassy of the United States of America considers that this note, together with the Ministry's reply note confirming that the Government of Pakistan agrees in these terms, constitute an agreement between the two governments. This agreement shall enter into force on the date of the Ministry's reply note and shall have effect for United States tax with respect to taxable years beginning on or after January, 1, 1987.
Either Governments may terminate this agreement by giving written notice of termination through diplomatic channels.
The Embassy of the United States of America takes this opportunity to renew to the Ministry of Foreign Affairs of Pakistan the assurances of its highest consideration.
I
MINISTRY OF FOREIGN AFFAIRS GOVERNMENT OF THE ISLAMIC REPUBLIC OF PAKISTAN ISLAMABAD. No. 2(3) IT-2/7727th July, 1989.
"The Ministry of Foreign Affairs of Pakistan presents its compliments to the Embassy of the United States of America and with respect to section 872 (B)(I) and 883 (A)(I) of the Internal Revenue Code of 1986, which, subject to reciprocity, grants tax exemption to foreign shipping enterprises operating in international traffic, has the honour to agree .as follows:
Under Clause (141) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979, income of a foreign enterprise derived from operation of ships in international traffic may be exempted from payment of tax in Pakistan on a reciprocal basis.
The Government of the Islamic Republic of Pakistan, therefore, confirms the principle of reciprocity by stating that, subject to the grant by the United States Government of exemption from tax on the income derived by shipping enterprises carried on by resident of Pakistan from the operation of ships in international traffic, individual residents of the United States and corporations organised in the United States (which are not subject to tax by Pakistan on the basis of residence) deriving income from the operation of ships in international traffic shall be exempt from income tax in Pakistan. The proposed tax exemption will be applicable to the income of United States shipping enterprises derived on or after the first day of January, 1987.
The Ministry of Foreign Affairs of Pakistan, therefore, confirms that the contents of the United States note are acceptable to the Government of the Islamic Republic of Pakistan and that this note, together with the note of the Government of the United States, constitute an agreement between the two Governments.
The Ministry of Foreign Affairs of Pakistan avails itself of this opportunity to renew to the Embassy of the United States Government the assurances of its highest consideration.
MUHAMMAD TARIQAdditional Secretary.
C. No. 2(3) IT-2/7.