Federal cabinet, which is scheduled to meet on Wednesday (today) with Prime Minister, Syed Yousaf Raza Gilani, in the chair, will approve tax exemptions for investors of OGDCL's Exchangeable Bonds (EB) of $750 million, documents available with Business Recorder reveal.
Official documents obtained from Privatisation Commission, disclose that pursuant to the Cabinet Committee on Privatisation (CCoP) decision of 8 March 2011, PC has been actively pursuing execution of EB and the transaction is aimed to be completed at the earliest possible.
In the meanwhile the Financial Advisory Consortium (FAC) led by Citibank, J.P. Morgan, and Credit Suisse and their Legal Counsel comprising Allen and Overy (International), Rizvi, Isa, Afridi and Angell (Domestic) have proposed certain tax exemptions to make the EB attractive for investors.
The proposed exemptions were reviewed by the GoP's legal counsel comprising Freshfields (International Law Counsel), Bhandari, Naqvi and Riaz (Domestic Law Counsel), and A F Ferguson' and Co (GoP's tax advisor). Consultation also took place with Finance Division. Following is a summary of the discussion: (a) as per precedent, international investors of GoP sovereign bonds, which are floated in the international market, are exempted from taxation on interest income derived from such bonds; (b) international investors, as per market practice, are also exempted from any tax emerging from capital gains on the trading of the bonds, where the bonds are listed internationally (eg OGDCL EB is scheduled to be listed on Singapore Stock Exchange); and (c) international investors also expect to be exempted from any tax on gain or income derived from settlement of the bond either in form of shares or cash in lieu of shares.
However, as per practice, international investors of the EB will remain subject to the following taxes: (i) dividend income on shares acquired after conversion of EB;(ii) capital gains on disposal of shares acquired in consequence of conversion of EB; and (iii) keeping the above analysis in view and after endorsement of Finance Division, the PC proposed to the Federal Board of Revenue to incorporate the following exemption into Part I of the Second Schedule of the Income Tax Ordinance:
"Any income derived by a non-resident from investment in OGDCL Exchangeable Bonds issued by the Federal Government for the removal of doubt it is clarified that such income shall include without limitation any coupon payment and gain on disposal and redemption of bonds." FBR, after examining the matter, intimated that as required under the provisions of sub-section (2) of Section 53 of the Income Tax Ordinance, 2001, only the Federal Government is competent to notify/accord approval to such exemptions.
In the meanwhile the FAC suggested an amendment to Income Tax Rules to deal with a special circumstance which is possible at the time of the conversion: "S.R.O.-(1)/2011-In exercise of the powers conferred by sub-section (1) of section 237 of the Income Tax Ordinance, 2001 (XLIX of 2001), the Federal Board of Revenue is pleased to direct that the following further amendments shall be made in the Income Tax Rules, 2002, the same having been previously published vide Notification No SRO.-(I)/2011 dated -June, 2011, as required by sub-section (3) of the said section, namely:-
In the aforesaid Rules, in Chapter-II, Part-III, Rule 13L, following amendments shall be made in para (d) "cost of acquisition", namely: The word "and" at the end of sub-para (iii) shall be deleted. The full stop at the end of sub-para (iv) shall be replaced by a semi colon and the word "and" shall be added. A new sub-para (v) shall be added, namely "in case of acquisition of shares in exchange for exchangeable bonds, the closing price of such shares on the date of such exchange".
The documents further reveal that GoP's tax advisor has supported the proposed exemption. The proposed amendment will seek to ensure the availability of exemption to potential capital gains (arising under the law in special circumstances) resulting from conversion which were even otherwise proposed to be given the under the originally drafted amendment.
Given the time constraint and the urgent nature of the transaction to close it at the earliest possible, the matter was placed before the CCoP in its meeting held on June 17, 2011. The CCoP approved the proposed tax exemptions in principle and directed their submission to the Prime Minister for final approval. Subsequently, the proposal was submitted to the prime minister who directed that the same may be placed before the next Cabinet meeting. Accordingly, the Cabinet was requested to approve the proposed exemptions as mentioned in Paras 4 & 6 of the summary, which are also supported by Finance Division and FBR.
Comments
Comments are closed for this article.