A Brief Primer on Taxation & Real Estate in Pakistan

Spotlight
23 August 2016
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Taxlinked (TL): What are some of the tax benefits available to foreign companies looking to expand into Pakistan?

Inamullah Ansari (IA): Pakistan’s existing tax regime and facilitating investment policy is being used to attract investments. The tools used for this purpose include: 1) Tax credits; 2) Tax concessions; 3) Tax treaties for foreign direct investment; 4) Reduction in customs duties, and; 5) Special allowances for depreciation and capital expenditure.
 
Tax Holidays are available to promote: 1) Specific areas; 2) Specific projects; 3) Specific industries; 4) Foreign direct investment, and; 5) Group relief and group taxation.
 
Reduction in Corporate Tax Rate
 
Corporate income tax has been reduced from as high as 65% to 32% at present and will be further reduced to 30% for tax year 2017. Rate for small companies has been reduced to 25%. This year, the paid-up capital limit for small companies has been enhanced to 50m from 25m.
 
Promoting Specific Industry
 
Efforts have been made to promote the following industries: Housing sectors; Software exports; Power generation; Transmission line projects; Halal meat production units; Coal mining projects in Thar; Cellular mobile phone manufacturing, and; LNG terminal operators and terminal owners.
 
For example, income power generation projects are exempt from tax-no sunset clause. Tax on dividend to shareholders is 7.5% against 15% standard rate exempt from minimum tax on turnover.
 
Coal mining projects also benefit from tax breaks and other benefits. These include: 1) Exemption from minimum tax on turnover; 2) Income of coal mining projects exempt from tax; 3) Input tax adjustment allowed to power producing units using Thar coal; 4) Import of coal-mining machinery & equipment for Thar coal free of sales tax, and; 5) Exemption from withholding tax from dividend received by shareholders for 30 years.
 
LNG terminal operators and terminal owners are exempt from income tax for five years. They are also exempted from minimum tax on turnover and alternative corporate tax. Exemption from income tax for 10 years in respect of profits and gains derived from a transmission line project has been set up between July 1, 2015, and June 30, 2018.
 
In terms of the housing sector, deductions are allowed for interest paid on loan and the supply of bricks and crushed stone is exempt from sales tax up to June 30, 2018.
 
Other exemptions are available to software exports, Halal meat production for 4 years if they get certification, and cellular mobile phone manufacturing for 5 years if certified by PTA.
 
Promoting Specific Area/Zones
 
There are several Special Economic Zones (SEZs) in Pakistan. These include: Enterprises / industrial undertakings in the Special Economic Zones Gawadar Zone / Baluchistan / Malakand / Gilgit-Baltistan for local fruit processing, KPK / Baluchistan for new industrial undertakings, Larkana Industrial Estate.
 
Promoting Specific Projects
 
China Pakistan Economic Corridor (CPEC) offers multiples exemptions. A tax exemption on interest paid to Chinese financial institutions providing funding to these CPEC projects is under active consideration for which negotiations are underway between the Federal Board of Revenue and China’s State Administration of Taxation (SAT).
 
Furthermore, there is a five-year income tax exemption to projects that have been declared as ‘Pioneer Industry’ by the Economic Coordination Committee of the Cabinet. These include the following projects: the Biaxially Oriented Gwadar Port, Terephthalate, Polyethylene Terephthalate (BOPET) and Biaxially Oriented Polyethylen. Income from Gwadar Port operations derived by China Overseas Ports Holding Company Limited is exempt for a period of twenty-three years.

Promoting Foreign Direct Investment
 
In order to promote FDI, Pakistan has: 1) Reduced corporate tax rate of 20% if invested by at least 50% foreign equity, and; 2) Provided an exemption from withholding tax on purchase of immovable property if invested in a scheme by Federal or Provincial Government in the foreign exchange remitted from outside Pakistan through normal banking channels.
 
Group Relief
 
In line with the international tax law, Pakistan provides relief if within a group of companies. The major advantage is absorbing or setting off losses of associates against their own income. Inter-corporate dividend and inter-corporate interest is also exempt for companies qualifying for group taxation.
 
Tax Credits
 
Tax credits for investment in new industrial undertakings is 100% and in existing industrial undertakings between 10 and 20%.

Expansion projects involving 100% new equity by existing companies equals 100%. Tax credits for employment generation are also available. Tax credit equal to 1% (subject to a maximum of 10%) for every 50 new employees.
 
Tax Incentives Under Tax Treaties
 
Through a wide treaty network (around 70 tax treaties in force), Pakistan offers following incentives to foreign investors: 1) Avoidance of double taxation; 2) Despite changes in domestic tax law, certainty of tax rates on passive income; 3) Certainty of non-discrimination and mutual agreement procedure in case of conflict, and; 4) Preferential tax rates for income from dividend, interest, royalty and fee for technical services.
 
Special Allowances for Capital Expenditure
 
In addition to normal and initial depreciation, if an industrial undertaking is set up in specified rural and underdeveloped area, a first year allowance equal to 90% is allowed instead of a 25% initial allowance. Similarly, 90%-accelerated depreciation is allowed instead of 25% initial allowance for alternate energy projects.
 
Sales Tax
 
Exemption from sales tax & customs duty on import is available for: Plant, machinery & equipment for fruit processing in Gilgit-Baltistan, Baluchistan and Malakand Division; Plant, machinery & equipment for Industries in FATA, and; High efficiency irrigation equipment and greenhouse farming equipment.
 
Computerized Clearance System (WeBOC) rolled out to more than 90% of the imports/exports computerized clearance through the Red Channel (40%), Green Channel (27%) and Yellow Channel (33%).
 
Concessions / Exemptions of Customs Duty
 
The following sectors enjoy concessions/exemptions from customs duty under 5th Schedule to the Customs Act:
 
Serial Nos Sectors
1 Agricultural machinery.
2 Machinery and equipment for grain handling and storage facilities.
3 Cool chain machinery and equipment.
4 Machinery and equipment for initial installation, balancing, modernization, replacement or expansion of desalination plants, coal firing system, gas processing plants and oil and gas field prospecting.
5 Machinery equipment apparatus imported by Hospital and Medical Institutes.
6 Machinery, equipment, materials, and capital goods meant for mineral exploration phase.
7 Machinery, equipment, materials, and capital goods meant for mine construction phase or extraction phase.
8 Coal mining machinery, equipment, and spares including vehicles imported for Thar Coal Field.
9 Machinery, equipment and spares meant for initial installation, balancing, modernization, replacement or expansion of projects for power generation through oil, gas, coal, wind and wave energy including under construction projects, which entered into an implementation agreement with the Government of Pakistan.
10 Machinery, equipment and spares meant for initial installation, balancing, modernization, replacement or expansion of projects for power generation through gas, coal, hydel and oil including under construction projects.
11 Machinery, equipment and spares meant for initial installation, balancing, modernization, replacement or expansion of projects for power generation through nuclear and renewable energy sources like solar, wind, micro-hydel bio-energy, ocean, waste-to-energy and hydrogen cell, etc.
12 Machinery and equipment meant for power transmission and grid stations including under construction projects.
13 Machinery, equipment and other education and research related items imported by technical institutes, training institutes, research institutes, schools, colleges and universities.
14 Machinery, equipment, raw materials, components and other capital goods for use in buildings, fittings, repairing or refitting of ships, boats or floating structures imported by Karachi Shipyard and Engineering Works Limited.
15 Machinery, equipment and other capital goods meant for initial installation, balancing, modernization, replacement or expansion of oil refining, petrochemical and petrochemical downstream products including fibers and heavy chemical industry, cryogenic facility for ethylene storage and handling.
16 Machinery and equipment imported by an industrial concern.
17 Machinery and equipment for marble, granite and gem stone extraction and processing industries.
18 Machinery, equipment and other project related items for setting up of power generation plants, water treatment plants and other infrastructure related projects located in an area of 30 km around the zero point in Gwadar.
19 Effluent treatment plants.
20 Items with dedicated use of renewable source of energy like solar, wind, geothermal etc.
21 Items for promotion of renewable energy technologies.
22 Plant, machinery, equipment and specific items used in production of bio-diesel.
23 Plant, machinery and equipment imported for setting up fruit processing and preservation units in Gilgit-Baltistan, Balochistan and Malakand Division.
24 Specialized vehicles imported by the Construction Companies.
25 Plant, machinery and production line equipment used for the manufacturing of mobile phones.
 
Raw materials / inputs for the manufacturing of the following items are importable at concessionary rate of customs duty under SRO 565(I)/2006:
 
Serial Nos Description of Goods to Be Manufactured
1 Powder coatings.
2 Chrysotile cement pipes, sheets & fittings.
3 Aluminum pre-sensitized printing plates.
4 Article of stationary.
5 Artificial leather industry.
6 Diapers and sanitary napkins.
7 Disposable/auto disable syringes.
8 Electrical capacitors.
9 High-pressure laminate (Formica) and low pressure laminates.
10 Manufacture or formulation of agricultural pesticides.
11 Metallic yarn / powder.
12 Stearic acid/ distilled fatty acid (DFA).
13 Printing ink.
14 Seamless pipes.
15 Sugar mill, cement plant, plant for industrial, chemical, thermal, hydel power plants, fertilizer plants, etc.
16 CRC or GI sheets/coils.
17 Agriculture diesel engines (single cylinder of 3-36 HP).
18 Fans.
19 Liquid food packaging industry for dairy and juices.
20 Flexible packaging laminates industries excluding cigarettes industries.
21 Gypsum board.
22 Gum base.
23 Butyl acetate.
24 Transformers.
25 Electric motors.

Exports Facilitation
 
There is a Duty & Tax Remission for Export (DTRE), which offers the following: 1) No hassle of payment of duty and refund; 2) Availing of the scheme on voluntary basis, and; 3) Imports without duty and taxes for export sector.
 
Export Processing Zones offer the following benefits: 1) Goods imported into and exported from the Export Processing Zones are exempt from duty/taxes; 2) Boosts industrialization and augmenting country’s exports, and; 3) Creates facilities for investors to setup export oriented units.
 
Furthermore, a manufacturer-cum-exporter may establish a manufacturing bond and import raw material used for the manufacture of goods without payment of duty/taxes.
 
Small and Medium Enterprises (SMEs) & Export Oriented Units (EOUs) Schemes envisage exemption from customs duties on goods including machinery. Temporary Importation Schemes, meanwhile, entails suspension/exemption from duties/taxes against securities on import of accessories used for manufacture and export of goods.
 
Duty drawback is also available. Repayment of customs duties on the importation of inputs used in production of goods exported out of Pakistan applies to: WeBOC, E-Services, Registration, GST Return Filing, Refunds Processing, Withholding Statements, Income Tax Return Filing and Tax Exemption Certificates.
 
Other services include: FBR Helpline, Taxpayers Guidance, Tax Facilitation Centers, Tax Awareness Campaigns, Establishment of Helpdesks, Taxpayer Facilitation KIOSKs For Return Filers and e-Registration is optional & can also file manually.
 
However, instead of visiting tax office, taxpayer can easily prepare and submit application electronically without leaving his office or home.
 
There are quick and detailed guides available on web e-filing of returns mandatory for salaried taxpayers, corporate taxpayers, association of persons, GST registered persons and optional for remaining tax payers.
 
Refund Processing
 
It is compulsory for every taxpayer to claim refund electronically. If a refund is to be claimed, the Return is also filed electronically along with refund application. The entire process from filing of application to issuance of refund is online.
 
Tax Exemption Certificates
 
From tax year 2013, any taxpayer who intends to remit a payment abroad without tax deduction, for any reason, has to apply for Exemption Certificate on-line and his application is processed electronically.
 
Other E-Services include WeBOC, electronic goods declaration for imports and exports and reduced time for clearance from number of days to hours.
 
Electronic Filing of GST Returns
 
Filing of Withholding Statements including Employers’ Statement can be done electronically. Besides, FBR Helpline provides assistance to public at large and taxpayers in particular by responding to their queries related to Federal Excise Duty, Customs Duty, Income Tax and Sales Tax. The purpose of FBR Helpline is to resolve the day-to-day problems, issues, clarifications or information and provide tax education. Complex tax situations and issues are referred to the tax policy wing. The online service is available on weekdays only.
 
Tax Facilitation Centers (TFCs)
 
There are only 18 RTOs and 3 LTUs in Pakistan. A taxpayer may have to travel a lot of distance to file his declarations, documents etc., in an RTO. Therefore, to facilitate them, around 80 TFCs have been established.
 
Tax Awareness Campaigns
 
These have been set up to: understand and resolve taxpayers issues; get feedback for improving upon FBR’s systems; create awareness of the amendments and changes and related tax issues, and; reach out to the taxpayers and their designated representatives in the chambers, associations, trade unions and tax bars, etc.
 
Help Desks and Kiosks
 
To facilitate filing of returns electronically, more than 200 kiosks have been established in different RTOs and LTUs. A number of help desks have also been established in certain Ministries, Parliament, Press Clubs, etc.

TL: What are your thoughts on the recent changes to the property tax in Pakistan and how do you think this will affect the real estate sector?

IA: There is no doubt that property market has slowed down since 1st July 2016, with many pending transactions, deals and transfers stopped, canceled or halted. Presently, buying a house as a working class person from your own earnings is beyond reach. This is due to the artificial price hike and everyone investing in real estate such that there were no other investment opportunities and ‘big guns’ made sure they manipulated the market according to their wishes. Real estate became a full-time business for many, some created monopolies to benefit only themselves ignoring the general public and enjoyed millions without any checks but this initiative from the government will bring a stop to that.

Everyone seeks profits out of investments but expectations should be practical. Real estate became a lottery ticket for a few and they were on a winning streak. I hope the price will settle down for a while to their original values and it will be business as usual.

Let’s Be Realistic
 
The government can do whatever it wants to while it is still in power but does it risk killing a profitable market from which it is indirectly earning handsome revenue? In the current scenario, sale and purchase activities of projects that the FBR, state bank, and land departments have data on have come to a halt. Pending deals have either been canceled or postponed because of the uncertainty.

Confusion is in the air with buyers running scared and sellers dominating the market. Pensioners and people who had invested in real estate to earn a halal living rather than stashing their wealth in banks are the most affected as property rates used to increase on a monthly basis while prices are now expected to go down along with the rentals. 

Anyhow, land never loses its value and will always be profitable. In the short-term some players in the property market may get hurt but in the long term as prices dip demand will grow and the market will mature and rebound.

Finance Minister Ishaq Dar has intervened in the issue of property taxes that has remained undecided until now, quickening a consensus on the matter of new property taxes wherein a conclusive statement was widely anticipated by existing and prospective stakeholders in the real estate market.

New developments in this sector include: 1) two major concerns regarding property valuation for taxation and capital gains tax have now been resolved, and; 2) FBR, not SBP appointed evaluators, will now determine the fair market value of 18 major cities while DC rates will be applicable to the smaller cities.
 
New Tax Rates
 
Slab rates for capital gains tax on properties bought on or after 1st July 2016 have now been devised as follows:
 
  • 10% if the holding period is less than one year;
  • 7.5% if the holding period is less than two years;
  • Exempt if the holding is longer than three years;
  • 5% if the holding period is less than between three years, and;
  • Properties purchased before the 1st July 2016 and with a holding period of three or fewer years will be subjected to a flat rate tax of 5%.
Moreover, a threshold for the application of withholding tax on the purchase of an immovable property has also been increased to Rs 4 million from Rs 3 million. New legislation will be implemented to bring the agreed upon changes into effect.

If property income is concealed, the FBR can levy a tax rate of 35% if the value of the property is approximately Rs 10 million. However, this is still to be confirmed by the authorities.

A More Mature Real Estate Market
 
It is understood that these measures will turn the real estate’s informal sector into a regulated industry that will generate revenue for the government while regulating property transactions. It is also likely to remove any profit-motivated price hikes by property traders.
 
The real estate market is likely to progress as a result of the new suggested measures, allowing Pakistan’s property industry to mature while at the same time boosting the Exchequer. In the coming weeks, we will discuss in detail the implications for various affected groups when the law is enacted.

TL: Do you believe the Sales Tax Electronic System that has been recently implemented will be effective in raising tax revenue for the government?

IA: Yes, absolutely!

TL: The Punjab Revenue Authority recently requested that Facebook, Google and YouTube, among others, pay taxes on their advertising services. Facebook refused to cooperate saying their online services operate out of Ireland. What are your thoughts on this stalemate?

IA: This lease is now null and void because Facebook, Google and YouTube, mostly for awareness raising, have launched a media campaign in collaboration with DFID during current year.
 
Whereas print media campaign is launched every year, after the Budget is announced, to explain the new amendments and provisions in tax laws and to apprise taxpayers of their tax obligations.

TL: What are some of Pakistan’s most important Double Taxation Agreements?

IA: The Finance Bill 2016 proposes to enable the Federal Government to enter into a tax treaty or tax information and exchange agreement or multilateral convention or inter government agreement or similar agreement or mechanism for the avoidance of taxation or exchange of information for prevention of fiscal evasion.
 
This extension of eligibility has been made to enable the Federal Government to enter into arrangements with organizations, such as OECD, etc., in the matters of exchange of information relating to double taxation and prevention of fiscal evasion in addition to arrangements and agreements with other Governments. Under the present apparatus of international tax arrangements, all the Governments should have mechanisms for collating and exchanging information with other Governments and supranational bodies, etc.
 
Another important change has been proposed in this section whereby the information obtained through the aforesaid agreements or treaties shall remain confidential. Previously, such confidentiality was not applicable in case the information was required for certain specified purposes as laid down in section 216(3) which inter alia include SECP, SBP, Civil Courts, etc.
 
The rationale of removing the right of using such information as is presently contained in provision need to be examined as after the proposed amendment there could be restriction of the use of information by the relevant respective authorities in Pakistan.

TL: Any other thoughts you would like to share with our community?

IA: Direct foreign investment allows companies to accomplish several tasks like:
  • Cheap labor in Pakistan;
  • Infrastructure subsidies;
  • Research and development support;
  • Job training & employment subsidies;
  • Capability to increase total production capacity;
  • Low corporate tax and income tax rates in Pakistan;
  • Circumventing trade barriers, hidden and otherwise;
  • Tax concessions/exemptions to particular businesses;
  • Avoiding foreign government pressure for local production;
  • Special economic zones developed by the government of Pakistan;
  • Making the move from domestic export sales to a locally-based national sales office, and;
  • Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.   
Pakistan has a very liberal policy on repatriation for foreign direct investors; therefore, investing in Pakistan may give foreign direct investors the following added advantages. Remittance of royalty, technology and franchise fee is allowed to projects in social service, infrastructure, agriculture and international chains food franchise. Minimum share of the local (Pakistani) partner in a joint venture will be 60:40 for the service sector. However, 100% foreign equity can be owned for first 5 years.
 
The FBR (Federal Board of Revenue) will not question as to the source of investment; however, the FBR will only want to know whether the investor has paid requisite income tax on that specific investment. The FBR will not inquire into the source of the funds.
 
Foreign investors are allowed to invest in industrial project on 100% equity basis without any permission from the government. There is no requirement for a No Objection Certificate from the provincial government. In addition to the manufacturing sector, foreign investment on a repatriate-able basis is allowed in services, infrastructure and social sectors with full repatriation of capital gains, dividends and profits.
 
The facility for contracting foreign private loans is available to all those foreign investors who make investment in the approved sectors. Foreign controlled manufacturing concerns are allowed to borrow on the domestic market according to their requirements.
 
Foreign controlled semi-manufacturing and non-manufacturing concerns can access loans equal to 75% & 50%, respectively, of their paid up capital including reserves. BOI’s (Board of Investment) approval is not required for foreign companies to open a bank account.
 
For the purposes of foreign investment in Pakistan, the Investment Policy of Pakistan has formed two broad groupings, i.e. manufacturing and non-manufacturing / service sector. Salient features of the Pakistan Investment Policy relating to the manufacturing and services sectors are as follows:
 
Manufacturing Sector
  • The amount of foreign equity investment must not be less than US $ 0.3 million.
  • The entity must be a company incorporated under the Companies Ordinance of 1984.
  • 100% foreign equity is permissible on the basis of repatriation of capital and profits (dividend). 
Service Sector
  • The amount of foreign equity investment must not be less than US $ 0.15 million.
  • The entity must be a company incorporated under the Companies Ordinance of 1984.
  • 100% foreign equity is permissible on the basis of repatriation of capital and profits (dividend). 
No Go Areas (Prohibited Areas)
 
The government of Pakistan prohibits the following areas for investment: High explosives; Arms and ammunition; Radioactive substances; Alcoholic beverages or liquor, and; Security printing, currency and mint.
 
Corporate Structures
 
Various corporate structures are available for setting up a place of business in Pakistan for which PAKandUAElawyers.Com, Tax & Corporate Law Advocates, can give you the optimum advice putting into perspective the current Pakistan Legislation and the individual person/companies position.
 
In terms of the investment policy of the Government of Pakistan, there are three ways whereby a foreign company may have its presence in Pakistan: 1) Liaison Office; 2) Branch Office, and; 3) Locally incorporated subsidiary.
 
State Bank of Pakistan (SBP) regulates remittances in and out of Pakistan under legislature. There is no restriction on inward remittances by SBP but any outward remittances whether it is royalty, technical fee or dividends have to have a prior approval from SBP, which the authorizing bank/agent would do on the company’s behalf.  Similarly, any contract for any such remittance needs prior approval of SBP. In case you require any assistance with the approval from SBP, do let PAKandUAElawyers.Com know and we will happily complete all the legal paper work and technical formalities.
 
The Foreign Private Investment (Promotion and Protection) Act of 1976 and the Furtherance and Protection of Economic Reforms Act of 1992 provide legal cover for protection of foreign investors/investment in Pakistan.
 
Furthermore, since Pakistan has entered into Bilateral Agreements on Promotion and Protection of Investment with more than 46 countries, these Agreements provide the following:
  • Non-discrimination between local investors and foreign investors;
  • The Contracting Parties shall encourage investments in their respective territories by investors of the other Contracting Parties;
  • Equal/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts or a state of national emergency;
  • Free transfer of investments and income deriving there from including profits, dividends, interest income, proceeds of sales or liquidation, repayments of loans, salaries, wages and other compensation, etc., and;
  • A dispute settlement mechanism to settle any dispute between the countries with respect to the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor of the other country.
PAKandUAElawyers.Com has successfully managed to assist many multinationals and foreign individuals to invest in Pakistan and form a place of business to that effect. PAKandUAElawyers.Com is currently dealing with various foreign direct investment projects in Pakistan including, but not limited to, the following sectors: Power, Information Technology, Real Estate, Development, Construction, Health, Services, Oil and Gas, Non-Manufacturing, Manufacturing, and Cosmetics & Toiletries.