The US-Pakistan tax treaty and foreign tax credit
The US-Pakistan treaty does more practical work than most treaties a Pakistani will encounter, because both countries are genuinely taxing. There is real tax on both sides to allocate.
What a treaty does
It allocates taxing rights between two states for each category of income, sometimes exclusively, more often not, and sets out how relief is given where both may tax.
The usual result is not exemption. It is that the source state taxes at a capped rate and the residence state gives credit for it, so you pay approximately the higher of the two rates rather than both in full. Worth having, and different from what "avoidance of double taxation" suggests.
Reduced US withholding
The most immediately useful application for a Pakistani earning from the United States is reduced withholding on passive income — dividends, interest, royalties.
The claim is made on the W-8BEN for an individual or W-8BEN-E for an entity, at the time, by completing the treaty section: the treaty country, the article relied on, and the reduced rate.
Leave it blank and the default rate applies even though you were entitled to less. Recovering the excess afterwards requires a US filing, which is far more effort than three lines on a form you were completing anyway.
Note that certain treaty claims require a US taxpayer identification number. This is one of the few legitimate reasons a non-resident might genuinely need an ITIN — but establish whether your claim requires it before applying.
We prepare the schedules and bookkeeping, and a licensed US professional signs where the law requires it.
Avail our US tax desk servicesCredit in both directions
The credit mechanism runs both ways depending on your residence.
A US person with Pakistani rental income is taxed in Pakistan on that income and generally on worldwide income in the United States, claiming credit for the Pakistani tax. A Pakistani resident with US-source income does the reverse.
Either way the claim is evidence-driven: the foreign computation, proof of tax actually paid, and a consistent characterisation of the income across both returns. Where the two returns describe the same income differently, the credit claim is where that inconsistency surfaces.
The tie-breaker
Where both countries treat you as resident under their domestic rules, the treaty applies its tests in order: permanent home available to you, then centre of vital interests, then habitual abode, then nationality, then mutual agreement.
These are applied to facts. Someone with a family home, spouse and children in Lahore who works in New York on a temporary assignment has a different profile from someone who has relocated permanently with their family — regardless of which answer either would prefer.
The order that works
- Determine domestic residence in both countries for the year.
- If both claim you, work the tie-breaker on the actual facts.
- Identify the article that applies to each income stream separately.
- Make withholding claims on the W-8 at the time of payment.
- Keep evidence of every foreign tax paid, contemporaneously.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
Questions people also ask
Does the treaty mean I only pay tax in one country?
No. It allocates taxing rights and provides mechanisms for relief. In most cases both countries retain some right and one gives credit for the other, so you pay roughly the higher of the two rates rather than the sum.
How do I claim reduced US withholding?
On the W-8BEN or W-8BEN-E, at the time, by completing the treaty section identifying the country, the article and the rate. It is not applied retrospectively.
Do I need a US taxpayer number to claim treaty benefits?
Certain treaty claims require one, which is among the genuine reasons a non-resident might need an ITIN. Establish whether your specific claim requires it before applying for a number you may not need.
Can I claim credit in Pakistan for US tax paid?
Potentially, through the foreign tax credit mechanism, provided you hold evidence of the tax paid and a coherent position on characterisation. Assemble the evidence at the time of filing, not afterwards.
What if both countries treat me as resident?
The treaty tie-breaker decides, applying permanent home, centre of vital interests, habitual abode and nationality in order. It runs on facts, not on preference or on which answer suits you better.
Send the tax year and the transaction or filing involved, and we will tell you what is actually required.
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