According to a report in this paper the other day, six intending foreign investors described as non-resident companies have approached the Central Board of Revenue to seek advance ruling on the intricacies of various types of tax liabilities which they would be expected to incur after their direct investment in Pakistan.
The facility of advance ruling on tax matters has been offered by the government to foreign investors through a notification a few months ago in order to pave the way for these investors to make their own assessment of their future tax liabilities.
These applications would be processed by a high-level committee to be headed by the Chairman, Central Board of Revenue and comprising Member Direct Taxes and a Senior Joint Secretary of the Ministry of Law, Justice and Human Rights, as members. In keeping with the relevant Income Tax Rules of 2002, it is mandatory on the CBR to give its advance ruling in respect of the questions asked and points raised in the applications submitted by the non-resident companies.
However, the applications by the non-resident companies are required to be submitted in the prescribed format as spelt out in the relevant notification. It has been pointed out that the advance ruling by the CBR would be strictly applicable to the specific transaction proposed to be carried out by a non-resident company in a particular business or industrial sector as may be mentioned in the application. It has been further reportedly clarified by the officials of the CBR that the advance ruling would be valid only if the facts and the law remain unchanged over a period of time.
It will be observed that the aforesaid uncertainty about a possible change in the tax law or in the various incentives, which are now available to foreign investors, would only erode their confidence about continuity of policies and safety of their investment in the country. If seen in this context, the advance determination of the expected tax liabilities would hardly prove to be a dependable source of satisfaction in their decision to make investment in this country.
It may also be pointed out here that the income tax departments in Pakistan are well known for arriving at different interpretations of a given law to suit their whims. This attitude of the taxation officials is by and large supported by the discretionary powers they have been enjoying for the purpose of determining the tax assessments of a person or a company. The discretionary powers are also usually the source of rampant corruption.
Thus the pre-conditions which are likely to be attached with the advance ruling are seemingly designed to serve as an escape route for the taxation officials to find discrepancies in the future tax assessments of the parties concerned. As a result the advance ruling may be totally disregarded by these officials under one pretext or the other as has been found to be the common practice among the taxation officials.
In the light of the above, the question of assuring a prospective foreign investor of consistency in the country's taxation and other laws with a view to facilitating him in making a dependable projection about his rate of return in a proposed enterprise would remain unanswered.
It is well known that the foremost worry with an intending foreign investor is usually the uncertainty as to whether or not the relevant economic policies and the related tax laws would be maintained with a fair measure of consistency over a long term period.
The inconsistency in policies in Pakistan has been found to be historically the common irritant for the foreign investors including the existing multinational companies to put up with.
The SROs frequently issued by the CBR are cited as one of the major causes of inconsistencies in the taxation policies but these complaints have so far not given an importance for redressal by the finance ministry. It is true that a change in the taxation structure is at times a common feature in the overall economic management.
However, in a progressive course of planning, a change in the taxation structure is always supposed to reflect an improvement in the overall profitability of the private sector so that it could be encouraged to increase the level of investment.
It is therefore important that any change in the law should take effect prospectively and a CBR ruling given prior to the change in the law be accorded protection in the law. This is important if the change will work to the disadvantage of the investor.
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