Offshore supply contractors in AJK under CPEC: ECC set to approve tax exemption

ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet is all set to approve exemption in taxes for offshore supply contractors in AJK under China Pakistan Economic Corridor (CPEC), informed sources told Business Recorder.

China Three Gorges Corporation as Main Sponsor is developing 1,124 MW Kohala Hydropower Project (KHCL) in Azad Jammu & Kashmir (AJ&K) while China Gezhouba Group Company Limited as main sponsor is developing 700.7 MW Azad Pattan Hydropower Project (APPL) which is located in AJ&K and Punjab. Both projects are also part of CPEC initiative and are near to achieve the Financial Closing as per the deadlines specified in their respective LoS.

Both companies raised issue that at the time of promulgation of the Policy for Power Generation Projects 2002, execution of offshore supply contracts, submission of tariff petitions to Nepra and issuance of Letter of Support (LOS) by PPIB, there was no tax leviable on payments made to the Offshore Supply Contractor (OSC). However, the Finance Act, 2018 broadened the definition of Permanent Establishment (PE) that brought OSC within ambit of tax where such contract is part of cohesive business operations undertaken by its associated companies.

Further business income of non-resident person was also classified as a Pakistan source Income irrespective of whether or not the title of goods passed 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 PE.

The Finance Act, 2019 added 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% Withholding Tax (WHT') as minimum tax on EPC Offshore Supply Contract, which was reduced to 1.4% through Finance Bill, 2020 but the tax so withheld is not "final" and "fixed".

Accordingly, a summary of February 15, 2021 titled "Tax on Payments to the Offshore Supply Contractor was tabled for consideration of Economic Coordination Committee (ECC) of the Cabinet with following proposal: "The rate of withholding tax on value of offshore supply contract of an independent Power Producer shall be 1% provided, PPIB has issued Letter of Support for the project, (v) 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. Such 1% tax shall be full and final liability of the offshore supply contractor.

The ECC of the Cabinet considered the summary and constituted a committee constituted a committee under the Power Division, Secretary, Law & Justice Division, Member FBR and Managing Director PPIB lo deliberate on the issue in holistic manner and submit recommendations thereon to the ECC for consideration. In compliance of ECC decision, three committee meetings were held. The committee members deliberated the matter comprehensively and agreed on the strategic importance of the projects, due to their location in the sensitive area of AJ&K, KHCL being largest investment IPP implemented in Pakistan/AJ&K, etc. The Committee members also agreed that there is a need to process these CPEC projects swiftly, particularly KHCL in order to claim water rights of Pakistan on the river Jhelum. Further, this issue is creating bottleneck in achieving Financial Closing for these projects.

As agreed during the third meeting, the Power Division has submitted the following recommendations of the committee are for consideration of ECC: (i) the rate of withholding tax on value of offshore supply contract of an independent power producer located wholly or partly in territories of AJ&K shall be 1% provided PPIB has issued Letter of Support for the project, its EPC Contract has been executed and submitted to NEPRA for EPC stage tariff determination prior to the enactment of Finance Act 2018 , offshore supply contract arrangement of offshore supply contractor having permanent establishment in Pakistan falls under the purview of cohesive business arrangements as contemplated under Income Tax Ordinance 2001 and such 1% tax shall be full and final liability of the offshore supply contractor."

Copyright Business Recorder, 2021