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ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has constituted a committee to resolve issues related to the offshore supply contractor, official sources told Business Recorder.

Power Division revealed that the China Three Gorges Corporation as main sponsor was developing 1124 MW Kohala Hydropower Project (KHCL) located on river Jhelum in Azad Jammu & Kashmir (AJ&K) while China Gezhouba Group Company Limited as main sponsor was developing 700.7 MW Azad Pattan Hydropower Project (APPL). Both projects were also part of CPEC initiative. PPIB issued Letter of Support (LoS) to KHCL on December 31, 2015 and to APPL on June 30, 2016 respectively and both hydropower projects were near to achieve financial closing as per the deadlines specified in their respective LoS.

Both companies had raised the issue that at the time of promulgation of the Policy for Power Generation Projects 2002, no tax was leviable on payments made to the offshore supply contractor. Accordingly, KHCL executed its Engineering Procurement and Construction (EPC) contracts on January 21, 2017 while APPL executed i.e. EPC contacts on June 11, 2017 without taking into account any tax on EPC Offshore Supply Contract (EOSC). Similarly, no such tax component was included in the tariff determinations of the projects. However, the Finance Act 2018 broadened tax net on Offshore Supply Contractor (OSC) through amendment in Geographical Source of Income Section 101(3) (e) by including business income of non-resident persons a Pakistan source income irrespective of whether or not the title of goods passes outside Pakistan, if the import is part of overall arrangement for the supply of goods, installation and construction which are undertaken or performed by the associates or its permanent establishment.

Similarly, Section 152(4B) inserted in ITO vide Finance Act 2019 provides that in case any payment constitutes part of an overall arrangement of a cohesive business operation it shall be made after deduction of 2.1 percent Withholding Tax as minimum tax on EOSC, provided that the credit of the tax so deducted shall be available to the permanent establishment of the non-resident accounting for overall profits arising on the overall cohesive business operation. However, vide Finance Bill 2020 such WHT has been reduced from 2.1 percent to 1.4 percent but the tax so withheld is not "final" and "fixed".

Power Division further informed that in light of the aforesaid amendments, the KHCL and APPL would withhold 1.4 percent income tax on value of EOSC and subsequently the OSC(s) of both companies shall be required to pay tax in respect of EOSC(s) as per applicable Corporate Income Tax Rate which was not payable at the time of signing the EPC contract and correspondingly was not part of the Nepra's tariff determination. This has exposed these companies to additional tax / cost.

The meeting was apprised that CBR AJ&K were willing to reduce the tax rate on EPC Offshore Supply Contract from the current 2.1 percent to 1 percent provided the same is amended by FBR. FBR was of the view that being final tax on EPC Offshore Supply Contract, the reduction of tax rate would be decided by the Chairperson FBR after due approval from competent authority.

This matter had also been included in Tripartite Agreement dated 25th of June 2020 executed between the Government of Pakistan, Government of Azad Jammu and Kashmir, and the Kohala Hydro Power Project. Power Division submitted the proposal for consideration of the ECC that "the rate of withholding tax on value of offshore supply contract of an Independent Power Producer shall be 1 percent provided, (i) PPIB has issued Letter of Support for the project, (ii) its EPC Contract has been executed and submitted to Nepra for EPC stage tariff determination prior to the enactment of Finance Act 2018 and (iii) offshore supply contract arrangement of offshore supply contractor having permanent establishment in Pakistan falls under the purview of cohesive business operation as contemplated under Income Tax Ordinance 2001. As such 1 percent tax shall be full and final liability of the offshore supply contractor.

On February 19, 2020, the ECC constituted a committee under the Chairmanship of SAPM on Power comprising SAPM on Revenue, SAPM on Petroleum, Secretary, Power Division, Secretary, Law & Justice Division, Member FBR and Managing Director, PPIB to deliberate on the issue in a holistic manner and submit recommendations thereon to the ECC for consideration.

Copyright Business Recorder, 2021