ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has exempted Offshore Supply Contractors (OSCs) from taxes on strategic hydropower projects being developed in Azad Jammu and Kashmir (AJ&K) under the umbrella of China Pakistan Economic Corridor (CPEC), sources in PPIB told Business Recorder.

According to the PPIB, an attached organisation of Power Division which is providing one window facility to private power projects developers, China Three Gorges Corporation as main sponsor, is developing 1,124MW Kohala Hydropower Project (KHCL) in AJ&K while China Gezhouba Group Company Limited as main sponsor is developing 700.7MW 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 achieving the Financial Closing as per the deadlines specified in their respective LoS.

The sources said, 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 OSC. However, the Finance Act, 2018 broadened the definition of Permanent Establishment (PE) that brought OSC within the ambit of tax where such contract is part of a cohesive business operation undertaken by its associated companies.

Further business income of a 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 percent Withholding Tax (WHT) as minimum tax on EPC Offshore Supply Contract, which was reduced to 1.4 percent 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 percent provided PPIB has issued Letter of Support for the project, (i) its EPC Contract has been executed and submitted to Nepra for EPC stage tariff determination prior to the enactment of Finance Act 2018; and (ii) 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 percent tax shall be full and final liability of the offshore supply contractor.

The ECC of the Cabinet considered the summary and constituted a committee under the Power Division, Secretary, Law & Justice Division, Member FBR and Managing Director PPIB to deliberate on the issue in a holistic manner and submit recommendations thereon to the ECC for consideration.

In compliance with ECC decision, three committee meetings were held. The committee members deliberated on the matter comprehensively and agreed on the strategic importance of the projects, due to their location in the sensitive areas 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 submitted the following recommendations of the committee for consideration of ECC: “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 percent 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 percent tax shall be full and final liability of the offshore supply contractor."

The sources said PPIB's summary was presented to the ECC through Power Division on May 5, 2021.

The ECC discussed pros and cons of the proposal and approved it. However, the decision of the ECC will be implemented after the ratification of Federal Cabinet expected on May 18, 2021.

Copyright Business Recorder, 2021