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ISLAMABAD: The Government is reportedly finding an innovative mode to reduce Withholding Tax (WHT) for Chinese IPPs to avert International Monetary Fund (IMF) reaction, well informed sources told Business Recorder.

This proposal, sources said, has been floated by the Federal Board of Revenue (FBR), after refusing to reverse Withholding Tax (WHT) on CEPC IPPs to 7.5 per cent from raised threshold of 25 per cent. Power Division, which wad been raising this issue for the last several months, indicated its agreement with FBR’s “innovative idea.”

Under Finance Act, 2019, tax rate on dividends was jacked up across the board for all exempt corporations to eliminate mega tax policy distortion under IMF prescription. According to FBR, Pakistan being in the IMF Program, reduction in tax rate on dividends is not likely to go well with the upcoming 7th Review Mission, and the government may be coerced to reversing it. “In case it is an absolute must to bail out the Chinese IPPs, Article 10 of Pakistan-China Double Taxation Agreement (DTA) could be re-negotiated to reduce the tax rate for dividends from 10% to 7.5% on a fast-track, which would not trigger IMF reaction,” the sources quoted FBR as commenting on a summary of Power Division to be presented before the ECC.

Sharing the background, sources said, to attract private investments in Pakistan’s power sector, Government of Pakistan (GoP) has promulgated many power policies, namely Power Generation Policy (PGP) 1994, PGP 2002 and PGP 2015.

At the time of promulgation of all these PGPs, the dividend income of shareholders from IPPs was taxable at the rate of 7.5% which must have been one of the basis upon which investment decisions were made by the investors.

Overdue receivables, rising coal rates: IPPs under CPEC may default, warns CPECA

The sources said, in case of IPPs processed under PGP 1994 and 2002, the Withholding Tax on dividends at 7.5% is covered as pass through item under Power Purchase Agreement (PPA) and/ or Nepra’s tariff determination.

Conversely, for IPPs processed under PGP 2015, WHT on dividend is not a pass though item as per their tariff (majority are under CPEC framework). Under Finance Act 2019 certain provisions pertaining to tax on dividend in Income Tax Ordinance 2001 have been amended as a result of which rate of WHT on dividend has been increased from 7.50% to 15% or 25% (whichever is applicable).

Subsequent to amendment in the Ordinance, various investors, particularly CPEC IPPs, have raised concerns before PPIB that they have made substantial investments in various projects on the presumption that the tax on dividend will remain 7.5% and now increase in the tax rate would lead to arbitrary reduction in rate of return for investors. Such change in dividend taxation would affect the investor confidence and would be unfavourable for future investment in the energy sector.

A similar concern has been conveyed by the CPEC authority, whose Chairman has stated that the change in the Income Tax Ordinance, 2001 will damage the investor confidence and will affect GoP’s credibility, resulting in hampering further investment from China for CPEC phase 2 in a variety of sectors.

Pak-China Relations Steering Committee in its third meeting held on October 20, 2021, discussed the request of various project sponsors for reversal of WHT on shareholder’s dividends (25% to 7.5%) and directed the Power Division to submit a summary to the ECC. Accordingly, Power Division circulated a draft summary for the ECC proposing an amendment in the Ordinance to address the concerns of the investors, particularly CPEC IPPs, for views and comments of FBR, Finance Division, Law and Justice Division and Nepra.

The FBR has not supported the proposal in the summary circulated by the Power Division.

In its detailed response, the FBR has stated that tax rate on dividend was increased across the board for all exempt corporations to eliminate tax distortions.

FBR has further elaborated that IPPs income under PGP 2015 is already exempt from tax which costs Rs 95 billion to GoP per annum.

FBR has highlighted that revenue implication of proposed reduction in tax rate would be Rs 58 billion annually only in respect of 12 IPPs currently operational and this will substantially increase when more IPPs go into production. The Finance Division had decided to adopt the comments of FBR.

Power Division argues that after considering the view point of FBR and given that the WHT reduction entails an implication of Rs 58 billion annually in respect of operational IPPs only as explained by the FBR and considering that the PPAs signed with these IPPs under PGP 2015 stipulate that all present and future federal, provincial, municipal or other lawful taxes applicable to the project are to be borne by IPPs; the Power Division agrees to the view point of FBR with respect to continuation of the revised rate of WHT and not amending the Ordinance.

However, considering the importance of the interest of Chinese IPPs, the FBR has hinted at re-negotiating the relevant Article of Pak-China Double Taxation Agreement (DTA).

Copyright Business Recorder, 2022

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