Tax incentives to non-resident companies: Cabinet decides to reconsider ECC decision

The federal cabinet has decided to reconsider a decision of the ECC about tax incentives to non-resident companies investing in local debt market, after one of the cabinet members raised objections on the decision. On September 4, 2019 the ECC approved a summary of the State Bank of Pakistan regarding sweeping tax concessions for non-resident companies to attract their investment.
However, on September 17, 2019 while ratifying the ECC decisions of September, 4, 2019, a view was expressed that foreign investors in the local debt market should not be given any concessions which were not available to the local investors. The Cabinet directed the Minister for Maritime Affairs, Ali Zaidi to discuss with the Advisor on Finance and Revenue, Dr. Hafeez Shaikh, the matter relating to tax concessions to non-resident companies investing in the local debt market and share the outcome with the Prime Minister's office.
On September 4, 2019 Finance Division, had stated that the existing foreign exchange framework of the country allows non-residents to invest in debt securities and Government securities through Special Convertible Rupee Accounts (SCRAs) maintained with banks in Pakistan. SCRAs are funded through foreign exchange received from abroad and converted into PKR in Pakistan for investment. There is no restriction on repatriation of funds from SCRAs which gives comfort to non-resident investors for investing in the local debt market.
The tax structure for non-residents investing in debt securities is, however, complex with different tax regimes with multiple rates, penal transaction charges for non-filers and complex tax filing processes being key regulatory and structural impediments to foreign investment in the local debt market.
To simplify this tax regime and ease conditions for non-resident companies investing in the country's debt market, the State Bank of Pakistan has recommended certain revisions to the existing tax laws governing non-resident companies having no permanent establishment in Pakistan.
The following revisions, according to the State Bank of Pakistan, will help promote demand for such securities, deepen the country's capital markets and reduce the cost of debt for the government and increase foreign exchange inflows and reserves: (i) capital gains tax be subject to withholding at reduced rate of 10 percent for non-resident companies having permanent establishment in Pakistan on disposal of debt securities and government securities including treasury bills and Pakistan Investment Bonds acquired through SCRAs.
The tax withheld on capital gains shall constitute final discharge of tax liability; (ii) no distinction be made in terms of filer or non-filer for non-resident companies having no permanent establishment in Pakistan investing in debt securities; (iii) exemption from deduction of 0.6 per cent transactions tax under sector 236P(advance tax on banking transactions otherwise than through cash) of the Income Tax Ordinance, 2001 on transactions in SCRAs that are linked to the tax status of non-resident companies having no permanent establishment in Pakistan; (iv) exemption for non-resident companies having no permanent establishment in Pakistan from payment of advance tax under section 147 on capital gains from payment of super tax under section 4 B of the Ordinance ibid; and (v) dispensation from the requirements of registration under section 181, filing of returns under section 114, and filing of statements of final taxation under section 115 of the Ordinance ibid for non-resident companies having no permanent establishment in Pakistan in respect of Pakistan source income emanating solely from capital gains or profit on debt from investment in debt securities and government securities including treasury through SCRAs. Federal Board of Revenue (FBR) has concurred to these proposed changes in the tax regime governing non-resident companies, having no permanent establishment in Pakistan, investing in local debt market.
Changes were made to facilitate some foreign commercial banks, mainly Citi Bank, to invest in the government's securities. These banks had also invested in the Egyptian government debt when SBP Governor Dr Reza Baqir was the country head of the International Monetary Fund (IMF) in Egypt.