Absent where global tax rules are written

Pakistan’s tax diplomacy has not kept pace with the redistribution of taxing rights

International tax rules are being rewritten in New York, and Pakistan is again in danger of arriving after the bargain has been struck. On August 28, 2026, the South Centre published its proposals following the fifth negotiating session on the United Nations Framework Convention on International Tax Cooperation. They concern the Convention and its early protocols on cross-border services and tax disputes. For Pakistan, this concerns who may tax income earned from its consumers, users, data and markets.

The intervention is especially significant because Pakistan is one of the South Centre’s 54 member states. It offers Islamabad a ready-made platform for defending source-country interests. Nexus factors should operate disjunctively: any relevant factor should be sufficient to create a taxing right. 

The location of users and the place where data is generated should matter, not merely where data is later stored. Fair allocation of taxing rights is an objective in itself, not an appendage to the avoidance of double taxation.

The proposed services protocol goes further than the Organisation for Economic Co-operation and Development’s narrow, stalled Pillar One. It would cover cross-border services broadly, including automated digital services, rather than a tiny group of the largest multinationals. 

It recognises gross-basis withholding as workable, requires rules for attributing revenue to users and data, and addresses value extracted without direct local payment. Existing treaties should not extinguish these rights. The South Centre proposes automatic priority for the protocol or mandatory treaty alignment through a UN fast-track instrument.

This is the gap Pakistan has tried unsuccessfully to fill through improvised domestic legislation. Section 101(3A) and (3B) of the Income Tax Ordinance, 2001, inserted through the Finance Act 2024, treats significant economic presence as a business connection. 

In 2025, Parliament enacted a five percent Digital Presence Proceeds Tax on foreign vendors. However, statutory regulatory order, SRO No. 1366(I)/2025 rendered it inoperative for the relevant foreign supplies from its intended commencement. The statute remained while its tax was withdrawn in substance before collection. In 2026, the FBR moved towards rules for income earned from Pakistani social-media audiences.

These measures share a structural defect. Domestic law may proclaim digital nexus, but most Pakistani tax treaties still require a permanent establishment based on physical presence. Under section 107 of the Income Tax Ordinance, 2001, treaty obligations prevail over inconsistent domestic rules, subject to specified anti-avoidance provisions. 

A unilateral charge cannot compel another country to recognise Pakistan’s taxing right or grant relief. A multilateral protocol modifying existing treaties can solve what Finance Acts and SROs cannot.

Pakistan’s history with the OECD’s two-pillar project should have taught this lesson. Pakistan has been a member of the Inclusive Framework on Base Erosion and Profit Shifting, but it was one of only four members—along with Kenya, Nigeria and Sri Lanka—that did not join the October 2021 two-pillar statement. It also withheld approval from the July 2023 outcome statement. Refusal was not necessarily irrational. 

Pillar One’s Amount A applied only to groups with revenues above EUR20 billion and profitability above 10 percent, then reallocated only 25 percent of residual profit. In return, market countries were expected to remove digital services taxes and similar measures. Pillar Two’s 15 percent minimum tax relied on rules so complex that administrations with limited capacity could scarcely model their revenue consequences.

The real failure was not saying no. It was failing to publish a reasoned national position, quantify alternatives and organise a coalition. Kenya and Nigeria moved from dissent to engagement. Nigeria became technically visible in the UN negotiations; Kenya enacted a domestic minimum top-up tax that completed the OECD’s transitional qualification process in 2026. Pakistan neither improved the OECD bargain nor led at the UN.

The cost of passivity under Pillar Two is no longer theoretical. Where a multinational’s effective tax rate in Pakistan falls below 15 percent because of exemptions, special zones or other incentives, a qualified domestic minimum top-up tax would allow Pakistan to collect the difference. Without it, the parent or another implementing jurisdiction may take that top-up under the Income Inclusion Rule or Undertaxed Profits Rule. 

Pakistan thus bears the fiscal cost of the incentive while another treasury can receive the corrective tax. The headline corporate rate of 29 percent does not answer this problem because the global rules examine an effective rate computed under their own tax base.

Pakistan has also failed to sign the multilateral instrument for the Pillar Two Subject to Tax Rule. The STTR was designed principally for developing countries and permits a source state to recover limited tax on specified intra-group payments taxed below a minimum nominal rate in the recipient state. 

Pakistan was listed among the developing jurisdictions for which the rule was intended, but it is absent from the present list of signatories. This is an extraordinary omission for a country whose treaty network permits substantial payments for interest, royalties and services to leave at reduced rates.

The OECD project itself now demonstrates why developing countries require an independent negotiating strategy. Amount A has not entered into force. Pillar Two advanced across numerous jurisdictions, but the United States declared the earlier global deal without effect domestically in January 2025. 

In January 2026, more than 145 jurisdictions accepted a revised arrangement accommodating the US system. Rules drafted as universal can be altered when a powerful state insists; countries that merely wait are offered compliance manuals, not influence. The UN process is an opening, not a guaranteed victory. 

During the fifth session, the African Group, India, Brazil and Indonesia placed detailed positions on record. Developing countries want source taxation based on users, consumers, payments, performance and data; many capital-exporting countries prefer physical presence, bilateral treaties and the arm’s-length principle. 

Developing countries also resist mandatory arbitration that can transfer sovereign disputes to expensive private adjudication, while supporting mutual agreement procedures, transparency and capacity building.

Pakistan made a useful general statement at the organisational session in February 2025. It called for an equitable system, simple rules, taxation where economic activity occurs and General Assembly decision-making. Those principles were correct. 

A declaration is not a negotiating brief. In the public fifth-session material reviewed, Pakistan’s detailed position is not visible alongside sustained interventions by the African Group and India. The FBR has published no revenue study, treaty map or consultation paper on the zero drafts.

Islamabad should act before the sixth session. The finance ministry and Federal Board of Revenue (FBR) must establish a permanent international tax policy unit—not another administrative directorate—with economists, treaty lawyers, transfer-pricing specialists and data analysts, linked to the foreign office, commerce ministry, State Bank and provinces. It should publish a national position on the Convention and both protocols for scrutiny by Parliament’s finance committees.

Second, Pakistan should undertake a treaty-by-treaty exposure study. It should identify where permanent-establishment clauses defeat significant economic presence, quantify outbound payments protected by reduced treaty rates, model receipts under alternative gross withholding rates and determine which treaties should be listed under a UN fast-track instrument. 

The same exercise must estimate Amount A gains, Pillar Two exposure, the yield of a qualified domestic minimum top-up tax and the value of signing the STTR instrument. Without numbers, slogans about taxing the digital economy are fiscal theatre.

Third, Pakistan should use the South Centre institutionally. Membership should mean commissioning technical assistance, co-sponsoring textual proposals and building positions with the African Group, India, Indonesia and other source jurisdictions. 

Pakistan’s strongest negotiating case lies in a broad services protocol; user- and data-based nexus; simple gross-basis collection with a net-basis option; binding treaty alignment; protection against mandatory arbitration; and funded capacity building. These are not ideological demands. They respond directly to the limits of Pakistan’s law and administration. 

Pakistan routinely seeks billions from the International Monetary Fund while neglecting the forums where the future distribution of the international tax base is decided. This contradiction must end. 

A country cannot complain that digital and multinational profits escape its jurisdiction while remaining technically inaudible when the legal rules governing those profits are negotiated. 

The South Centre has supplied a coherent developing-country agenda. Pakistan should now turn membership into authorship—before it is again asked to implement rules written by others.

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Dr. Ikramul Haq, Advocate Supreme Court, writer, literary critic, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.