The government is looking to reduce Withholding Tax (WHT) for Chinese Independent Power Producers (IPPs) to avert the reaction of the International Monetary Fund (IMF), reported the Business Recorder.
The proposal has been floated by the Federal Board of Revenue (FBR), after the board refused to reverse WHT on China-Pakistan Economic Corridor (CPEC) IPPSs to 7.5 percent from the raised threshold of 25 percent. Power Division has indicated that it is in agreement with FBR regarding the reduction of WHT.
Under Finance Act, 2019, the tax on dividends was increased to put a halt to the mega tax policy distortion as suggested by the IMF. The reduction in taxes may create problems for Pakistan in the IMF program as the 7th Review Mission is approaching, therefore, Pakistan is looking to find alternate ways to reduce the taxes on Chinese IPPs. The government might have to reverse its decision if it cannot find an alternative way to reduce WHT for the IPPs.
The government might rely on Article 10 of the Pakistan-China Double Taxation Agreement (DTA) which allows renegotiation to reduce the tax rate for dividends from 10 percent to 7.5 percent on a fast track. This method would not trigger an IMF reaction, according to the FBR sources.
At the time of promulgation of the aforementioned Power Generation Policies (PGPs), the tax rate for dividend income of shareholders from IPPs was 7.5 percent, based on which the investors took their investment decision.
For IPPs under PGP 1994 and 2002, the WHT stood at 7.5 percent whereas WHT for PGP 2015 is not a pass-through item as per their tariff (majority are under CPEC framework). Further, under the Finance Act 2019, tax on dividends in Income Tax Ordinance 2001 has seen some amendments which have led to WHT rising from 7.5 percent to 15 percent and then 25 percent.
The Power Division has been looking to reduce the WHT from 25 percent to 7.5 percent and has been asked to submit a summary by the Pak-China Relations Steering Committee. However, FBR has not supported the proposal in the summary circulated by the Power Division.
Nevertheless, FBR might budge given the importance of the interest of Chinese IPPs and renegotiate the relevant Article of the Pak-China Double Taxation Agreement (DTA).