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Thursday October 28, 2021

Biggest corporate sector tax deal by OECD: Pakistan still undecided

October 12, 2021

ISLAMABAD: Amid major concerns over 136 countries’ biggest corporate sector tax deal orchestrated by the OECD, Pakistan will decide whether to join or not once the blueprints of multilateral conventions are finalized and offered for signature in 2022.

An official paper prepared for describing options for Pakistan in a recent deal brokered by the Organization for Economic Cooperation and Development (OECD) stated in clear terms that “Pakistan will decide whether to join or not once the blueprints of Multilateral Conventions for Pillar One and Pillar Two are finalized and offered for signature and ratification in 2022.

Pakistan, being a 230 million country, is an extremely important market jurisdiction, and by keeping our options open at the initial stage, are in a decent bargaining position going forward. We just need to be patient, keep engaged, and not buckle under pressure which is being purposely exerted.”

The agreement - the biggest corporate tax reform for more than a century orchestrated by the OECD - includes a 15 percent global minimum effective corporate tax rate, plus new rules to force the world’s multinationals to declare profits and pay more in the countries where they do business.

The number of nations prepared to sign up fluctuated on Friday, according to those close to the negotiations, with India agreeing at the last moment, and China and Brazil being also reluctant signatories. Only Sri Lanka, Pakistan, Nigeria, and Kenya held out.

The official paper prepared in consultation with the FBR’s input under the title “Pakistan’s Stance Minimum Corporate Income Tax - Two-Pillar Solution” stated that under Pakistan’s existing international taxes regime whereby Pakistan like other countries imposes Digital Service Tax (DST) on all E-commerce & digital economy payments, taxes global income of residents and source income of non-residents, imposes withholding taxes on payments to non-residents ranging between 10pc to 20pc on passive incomes e.g. interest and royalty.

The OECD-brokered consensus is comprised two pillars. Under the pillar one, the multinational companies (MNCs) having turnover of €20 billion and profit of 10pc are in its scope, allocation of 25pc of residual profit for all developing jurisdictions, a developing country entitlement only if an MNC reports €1 million from its market, elimination of all WH taxes (Withholding) on E-com & digital economy MNCs by developing countries and on top of it, E&P and banking sectors have been excluded from its purview.

Pakistan’s major concerns included that a limited number of MNCs would come on the touchstone of turnover, profitability, and derivation of turnover, allocation of 25pc is very less, removal of our sovereign tax would be a setback, exclusion of extractive industries lends credence to the fact that some other industries will be included, which are not defined and contours of the consensus are shrouded in mystery.

For pillar-two, Income Inclusion Rule (IIR) will force residence countries to tax MNCs at the minimum rate of 15pc concerns developed countries, Switch Over Rule (SOR) would replace exemption method by the credit method, Subject-to-Tax-Rule (STTR) will tax-related party payments at a minimum rate of 9pc.

Pakistan also has concerns that the IIR is not our issue as we already have a global income regime, credit method and more than a minimum tax of 15pc STTR rate is low, Pakistan already has a WH tax between 10pc to 20pc, STTR is limited in its operation and caters only to limited types of related party payments, whereas our position is that capital gains, shipping, air transport should have been included in its scope.