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".
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