Pakistan – Gearing up to attract foreign investment

Pakistan – gearing up to attract foreign investment

At a 2-day conference, officials with Pakistan’s Board of Investment highlighted the country’s incentives for foreign investors. In other noteworthy developments, Pakistan’s High Court upheld the Federal Board of Revenue’s disclosure requirements for banks, and another High Court challenge was launched against a sales tax rate increase for petroleum products.

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Pakistan’s Board of Investment (BOI) hosted a 2-day conference in October 2014 for foreign companies registered with the BOI and those who intend to do business in Pakistan pursuant to a number of memoranda of understanding between Pakistan and other countries. The BOI highlighted the process of starting business in Pakistan, visa requirements and recently introduced incentives.

In addition to allowing complete foreign holdings and the ability to repatriate 100 percent of profits, a number of additional incentives have been provided through the tax law over the past 4 years, including the following:

  • 100-percent tax credit for 5 years on new industries, including corporate dairy farms, established by 30 June 2016 with 100-percent new equity raised through a new issue of shares against cash. Short-term loans and financing obtained for meeting that working capital requirement does not disqualify the taxpayer from claiming the credit.
  • 100-percent tax credit for new equity investment in an industry set up before 1 July 2011 for the purposes of expanding plant and machinery or undertaking a new project.
  • Credit for investment in plant and machinery for extension, expansion, balancing, modernization and replacement purposes in an industry up by 30 June 2015. The credit is 10 percent of the amount invested; however, where the investment is out of new equity, the credit is allowable at 20 percent of the amount invested to 30 June 2016.

In practice, due to internal security issues, it may take more than a few weeks or even months to receive clearance from the security agencies, which may delay the approval from the BOI for setting up a branch office.

A company can be set up with foreign shareholders and directors if an undertaking is made to the Pakistan Securities and Exchange Commission for carrying out necessary changes in the board and/or shareholders later if security advice so requires.

Banking transactions no longer sacrosanct

Pakistan’s High Court has dismissed the plea from banks for non-disclosure of banking information to the Federal Board of Revenue (FBR), as required by a legislative amendment brought in July 2013. This law makes it mandatory for the banks to provide online access to their central database and to submit regular information about:

  • monthly deposits exceeding 1 million Pakistani rupees (PKR; about 10,000 US dollars – USD)
  • monthly credit card payments exceeding PKR0.1 million
  • loans written off exceeding PKR1 million in a year
  • such other information as provided to the State Bank for curbing money laundering.

The banks challenged the law before the High Court on the grounds that the law violated banking secrecy requirements. However, the court did not support the banks’ view, and the banks are obliged to implement the law in letter and spirit.

This development follows the global trend toward more transparency and disclosure of financial transactions in order to prevent tax evasion and money laundering. As reported in an article in the November 2014 MESA Tax Update, Pakistan’s Board of Revenue and the Swiss Federal Tax Administration are re-negotiating the Pakistan-Switzerland tax treaty to allow access to information from Swiss banks on accounts maintained by wealthy Pakistanis. 

Sales tax rate increased for petroleum products

Pakistan’s government reduced domestic oil prices due to price declines in international markets, significantly affecting the amounts of sales tax and petroleum development levy that are collected on ad valorem basis by the FBR. To offset the impact of falling revenue collection, the sales tax rate for petroleum products sold after 31 December 2014 was increased to 22 percent (from 17 percent).

Members of the business community and general public criticized the move. The Finance minister explained that the decision was considered necessary to provide the government with some fiscal leeway. The rate increase is being challenged before the High Court. However, while the court’s decision is pending, the Board of Revenue is not restricted from collecting the tax at the new rate. 

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