Withholding tax exemption on capital gains for foreigners withdrawn

KARACHI: Tax authorities have withdrawn withholding tax exemption on capital gains for foreign institutional investors, a notification said on Monday – a move unlikely to cut foreign portfolio investment into the stock market.
The Federal Board of Revenue (FBR), through the notification amending the rules for the purpose of computation of capital gains tax, clarified that no exemptions from withholding tax is available for foreign investors.
“For the removal of doubt, it is clarified that all foreign institutional investors shall be subject to the regime as laid down in Eighth Schedule and no exemption whatsoever from withholding tax under Eighth Schedule or under these rules is available to foreign institutional investors for any reason,” FBR said.
Broker Zafar Moti said the withdrawal of exemption may prompt sale of some risky assets by the foreign investors, “but, obviously the impact will not spill over to large cap shares, including cements, which are giving good yields.”
An estimated 25 to 30 foreign institutional investors invested $169.2 million in the equity market between July 2014 and January 2015, up 11.8 percent over $152.5 million during the same period last fiscal year.
However, portfolio investment dropped 47 percent in January 2015 to $16.6 million as compared to $31.4 million in January 2014.
The FBR had issued the draft amendments in November 2014, which are now incorporated to the Income Tax Rules, 2002 through SRO 161(I)/2015.
The notice said foreign institutional investor may apply to National Clearing Company of Pakistan Limited (NCCPL) for separate unique identification numbers (UIN) for each of its sub-funds under its umbrella.
“Where separate UINs have been obtained by foreign institutional investor for each of the sub-funds under its umbrella, capital gain or loss shall be computed separately for each sub-fund and loss under one UIN shall not be allowed to be set off against capital gain arising to another sub-fund with separate UIN,” it added.
For free of payment transactions (transactions executed outside Pakistan), the FBR said certain investors holding shares may sell through negotiated deal at a price agreed with the buyer outside Pakistan e.g. a strategic sale and purchase of shares to acquire or dispose of controlling shares.
“Such transactions are reported to respective clearing member of foreign institutional investors to transfer the shares from seller account to buyer account,” it said. “In such transactions, respective clearing member does not know the transaction price and merely transfers shares from one account to other on the instructions of its foreign client.”
The notice further said: “A clearing member receiving the instructions from foreign institutional investors shall be responsible to report such transactions in the negotiated deal market at the relevant stock exchange through a stock broker in the manner prescribed by such stock exchange or through reporting interface provided by NCCPL for this purpose.”