Pakistan, China divided over tax exemptions

Published: March 10, 2016
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According to the CPEC Energy Projects Cooperation Agreement, both countries were bound to settle the issue of tax exemptions within six months of signing the agreement. PHOTO: FILE

According to the CPEC Energy Projects Cooperation Agreement, both countries were bound to settle the issue of tax exemptions within six months of signing the agreement. PHOTO: FILE

ISLAMABAD: 

Differences persist between China and Pakistan over Beijing’s demand to grant tax exemptions to its commercial banks on income they will earn by extending loans under the $46 billion investment package, which Islamabad estimates may cost at least $2 billion in revenues.

Under the November 2014 China-Pakistan Economic Corridor (CPEC) Energy Projects Cooperation Agreement, both the countries were bound to settle the issue of tax exemptions within six months of signing the agreement, according to official documents.

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The issue remained unresolved due to Beijing’s insistence to expand the scope of exemptions and its reluctance to accept Pakistan’s demands, said an official privy to the negotiations. Both the sides have held multiple rounds of talks.

Article 3 of the CPEC energy cooperation agreement stipulates, “tax exemption of interest income accruing from commercial loans by ICBC (Industrial and Commercial Bank of China) and other Chinese commercial banks for projects identified under this agreement will be considered and negotiated under the processes and protocols for making amendments and modifications in the Avoidance of Double Taxation Agreement.”

The agreement covers $34 billion of energy projects but China also wants similar tax benefits for $11 billion worth of infrastructure projects, said the sources.

What the laws state

Under the prevailing laws, non-resident Pakistanis making profits by investing here are required to pay a certain amount in taxes. The government currently charges 10% income tax on profits earned by institutions by giving loans.

China demanded that insurance income should also be exempted from tax. Beijing sought to include China Export & Credit Insurance Corporation among the list of institutions whose income would be exempted from tax, sources said.

However, the government refused to accept the demand as insurance income was not covered under the treaty. The Federal Board of Revenue charges 5% tax on insurance income.

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China also sought exemption from taxes on machinery imports for infrastructure and other projects. The government did not accept the demand as it required amendments to the Income Tax Ordinance 2001, said the sources.

Under the CPEC agreement, China would fund $46 billion worth of projects in energy and infrastructure sectors. It is not yet clear how much of the amount will be in the form of loans. Apart from this, financing arrangements for many projects are yet to be finalised.

However, the sources said tax exemptions would cost at least $2 billion to the exchequer over a period of 15 to 20 years. Final calculations will be possible only when financing agreements of all projects are finalised.

They said Pakistan was willing to give tax exemptions on interest income on the condition that the amount project owners would pay in interest would not be treated as an expense. This will be treated as part of income and will be subject to the tax levy.

This had been conveyed to the Chinese authorities and their response was awaited, said the sources.

Expectations

“Negotiations are going on and an agreement is expected to be reached in the next round of talks,” said Dr Mohammad Iqbal, the FBR spokesman.

Tax exemptions eat up Rs665b in revenues

The initial draft for amending the tax treaty that China forwarded to Pakistan was ambitious, said another official. To give effect to the tax exemptions, both sides have to amend the 1989 bilateral treaty on Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income.

During the last meeting, consensus was reached on outstanding issues, said Minister for Planning and Development Ahsan Iqbal while talking to The Express Tribune.

Published in The Express Tribune, March 10th, 2016.

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Reader Comments (15)

  • iAskCPEC
    Mar 10, 2016 - 10:11AM

    Countries and Local state and provincial Govts have given tax credits to new investments from some portion of the tax for a fixed time period. The credits reverses or removed after that time. But that credits is only given if the effected population and their land get as much benefit in return thru employment, developments investments and trade and business deals equals or more than the amount of tax the investor is asking credit on. This is a very tricky area and almost goes like a hawkers deal at the end of day. Here both parties downplay their own urgency and need and exaggerate opponents’ to get the best deal. But care must be taken to not waste time in useless arguing that goes nowhere. Because every passing minute or hour or day itself creat a loss in the money the parties are fighting about. Even though China thinks Pakistan could benefit a lot from the concrete pavement. But it must know it will take atleast two to three decades before Pakistan get in a position to really benefit from driving on it. Because except as driving belt there is not much Pak will get rich from its presence. EthicaLLY CHINA SHOULD OFFER ITSELF TO PAY ATLEAST THE INCOME TAXES IF NOT MUCH OF A PRODUCTION OR MANUFACTURING IS OFFERED BY HER. PAK AND CHINA BOTH KNOWS HOW MUCH INDUSTRY AND DEVELOPMENT WE HAVE GOTTEN FROM CHINA and what financial benefit Pak is going to get from it. PAk can live without it but China can’t.Recommend

  • Brainy Bhaijan
    Mar 10, 2016 - 10:16AM

    So the cat is out of the bag now.
    Pakistanis should understand that the Chinese are neither our friends nor our enemies. They will do whatever generates the most revenue for them.
    Like little children, the Pakistanis love mixing business with baseless emotions.Recommend

  • Gypsy
    Mar 10, 2016 - 11:19AM

    Sweeter-than-honey friend will squeeze out the last drop of honey from Pakistan.Recommend

  • Feroz
    Mar 10, 2016 - 12:15PM

    Tax should be paid on profits earned not just by locals but also Foreign Corporations. Tomorrow if China refuses to pay Toll charges for using the roads it builds under CPEC, how will Pakistan recover the investment made ? How the dispute will be resolved will depend on the clauses for arbitration in the Agreement. All Agreements signed should be posted on the Government Website for the sake of transparency, else any Right to Information Act will remain merely a show piece.Recommend

  • bharat
    Mar 10, 2016 - 12:35PM

    Its wrong for the Chinese to expect so much.They are getting preference over other nations in Pakistan as suchRecommend

  • Milind
    Mar 10, 2016 - 1:22PM

    This is good news… Differences means the Pakistanis are also getting pragmatic rather than selling out to the Chinese… Once pragmatism rather than emotionalism becomes the cornerstone of Pakistani (or any other country) policy, all contentious issues are resolved.Recommend

  • Hari Om
    Mar 10, 2016 - 1:28PM

    “Iron Brother” China leverages Pakistan’s “Deeper than Indian Ocean” dependence on foreign investments to ensure Chinese companies can get “Higher than Himalayas” tax exemptions in order help these Chinese corporate entities milking “Sweeter than Honey” profits from Pakistan.Recommend

  • Farah
    Mar 10, 2016 - 2:23PM

    China proves (once again) that it has no need of this so called sweeter than honey friendship. It’s time pakistan should come out of its Chinese phobia and friendship like non sense. They are businessmen for God’s sake. Talk in a language they understandRecommend

  • Tyggar
    Mar 10, 2016 - 2:24PM

    What is a few billion dollars between friends, especially taller and deeper ones. After all China has done so much for Pakistan, such as supporting it in all wars against India Recommend

  • Pankaj
    Mar 10, 2016 - 3:18PM

    Chinese are greedy. There is a saying in Japan that Chinese keep on bullying you but once you give back tough response you will see typical Chinese smile of retreat.Recommend

  • Salim Khan
    Mar 10, 2016 - 3:20PM

    If anybody dealt with Chinese will know they will not loose even 5 cents. Even after giving them so many benefits, Chinese want more from Pakistan. We don’t need this exploitation. We have many countries to help and also if we improve our relationship with India we can save more than $20 billion every year. That means within 2 years we can build Pakistani infrastructure corridor on our own, that will be much better than CPEC. Recommend

  • curious2
    Mar 10, 2016 - 3:27PM

    Pakistan govt has said that CPEC is a Chinese investment … but this article implies that it’s really a loan? If it’s a loan — what are the terms? If it’s an investment what mechanism is in place that allows the investor to make money? CPEC remains a mystery.Recommend

  • AK
    Mar 10, 2016 - 6:51PM

    After the suffering in the name of “Afghan Transit Trade” for illicit import, the next one, much bigger and challenging, which might destroy Pakistan’s remaining industry will be good entering Pakistan in the name of “China Transit Trade”. Have we taken this into account????Recommend

  • HAROON RASHID
    Mar 10, 2016 - 9:37PM

    All of us know it well about the Chinese products supplied on deferred payments life cycle. Recent example of the Railway Engines supplied by Pakistan Railways, which were structural damaged of the engine chasis. The Chinese engineers, technicians visited after a month examined and mentioned that they will repair or fix the issue and that will be rolled out. What is important the revenue loss for the engine being out of service, the damage caused is nothing to be fixed. The whole engine should be replaced, with compensation for the defective engine supplied, with revenue, bank interest, and reputation damage caused to the Pakistan RAilway by the general public is irreversible. Ideally as per our relationship and cordiality the engines should be airlifted instantly, with compensation, and penalty given and be commissioned. Rather technicians will fix which un-fixable at all. The Bank of Japan has given an interest rate 0.5%. The Chinese friends should keep in mind the original IPR issue which is highly questioned by several international quarters. We should be given assurance that if the technology is borrowed do they have license, for copyright, patents.Recommend

  • HZR
    Mar 11, 2016 - 10:05PM

    @Gypsy:
    Chinese are known to be hard nosed businessmen and Pakistan should have realsied this long ago.The Chinese have a reputation for penny pinching and they have always been a successful business race.Recommend

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