MoF seeks tax exemption on $2.5 billion foreign loans

The Finance Ministry has sought tax exemption on foreign commercial loans of over $ 2.5 billion raised during the last one year, mostly from UAE banks, sources close to Finance Advisor told Business Recorder.
Giving the details, the sources said, under the Rules of Business, 1973, the Finance Division is responsible for arranging finances, including foreign exchange, to meet the current and development expenditure needs of the country and to maintain a sustainable balance of payment position. Raising foreign exchange on commercial terms from the international market is one important avenue for this purpose.
The Finance Division has executed the following financing agreements of $ 2.3825 billion since April 2019: (i) Master Murabaha Agreement- Dubai Islamic Bank- $ 225 million;(ii) Accession Facility Agreement-Credit Suisse- $ 50 million;(iii) term facility Master Murabaha and Accession Agreement- Emirates NBD- $ 500 million;(iv) Term Facility Agreement-Citibank-$ 150 million;(v) Term Facility Agreement- Credit Suisse - $155 million;(vi) Master Murabaha Agreement - Dubai Islamic Bank-$ 195 million;(vii) Master Murabaha Agreement- Ajman Bank- $ 157.5 million;(viii) Master Murabaha Agreement- Dubai Islamic Bank- $ 250 million and ;(ix) Term Facility Agreement- China Development Bank-$ 700 million.
Additionally, a trade financing facility of $ 200 million from Standard Chartered Bank is expected to be finalized in the coming weeks.
Rule 16 (1)(d) of the Rules of Business , 1973, stipulates placing of loan agreement before the federal cabinet for approval. Further these foreign commercial loans are offered on the condition that taxes applicable in Pakistan will not be borne by the lenders.
The option with the government is to either bear the cost of these taxes or grant exemption. Clause 75 of part 1 of the second schedule to the Income Tax Ordinance, 2001 empowers the federal government to grant exemptions on profit payments on money borrowed under a loan agreement.
The financing agreements were executed after clearance from the Ministry of Law and Justice. Similarly, the facility of $ 200 million will be executed once cleared by the Ministry of Law and Justice and after completion of codal formalities. The Federal Board of Revenue (FBR) has no objection to the proposal for granting tax exemption in respect of profit payments on foreign financing facilities.
The Finance Division has sought approval of federal cabinet of following proposals: (i) ex-post facto approval under Rule 16(1)(d) of the Rules of Business, 1973 for foreign financing facilities and ;(ii) tax exemption under clause 75 of part 1 of the second schedule to the Income Tax Ordinance, 2001 on profit payments accrued on these financing facilities.