Amendments to tax laws vital to get foreign loans

ISLAMABAD: In order to get multimillion dollars project loans from international lenders, Pakistan will have to introduce amendments to the legislation on the taxation of cross-border transactions to align its tax laws with best practices.

Pakistan will have to revise all its bilateral Avoidance of Double Taxation Treaties with 66 countries by bringing in amendments.

“The FBR will approve and submit proposed amendments to the legislation on the taxation of cross-border transactions to the cabinet which will align legislation with international standards and best practices, including G20 and OECD’s Base Erosion and Profit Shifting (BEPS),” official sources confirmed while to The News here on Saturday.

Members of the OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) agreed on Oct 8, 2021, to the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. The Two-Pillar Solution will ensure that multinational enterprises (MNEs) will be subject to a minimum tax rate of 15%, and will re-allocate the profit of the largest and most profitable MNEs to countries worldwide.

To date, 136 out of 140 members of the Inclusive Framework have joined the Two-Pillar Solution establishing a new framework for international tax and agreed to a Detailed Implementation Plan (“Implementation Plan”) that outlines implementation of the new rules by 2023. Pakistan has yet to join it.

The latest progress report of July 2022 indicates the development of rules for the implementation of the Two-Pillar Solution. The substance of these rules must be fully stabilised before the development and completion of a Multilateral Convention (“MLC”), to be signed and ratified by Inclusive Framework members. The MLC will include binding rules on the allocation of taxing amounts, elimination of double taxation, marketing and distribution safe harbor, a simplified administration process, exchange of information, and the tax certainty process.

The Two-Pillar Solution provides for the removal of existing unilateral measures and the prevention of new measures, such as Digital Services Taxes (“DSTs”) and other similar rules.

An official said that two pillar programmes had been launched by OECD in 2021. Out of 140, 136 countries had signed this programme but Pakistan didn’t. This initiative aims at imposing a minimum tax of 10% on multinationals having annual turnover above 20 billion Euros. Each country in whose territory the turnover of the multinational (with global turnover of 20 billion Euros or more) exceeds one billion Euro is to get a share of this minimum tax. Why Pakistan didn’t sign it when 136 countries did so is a mystery that only the previous FBR chairman could explain. If Pakistan now decides to sign it, some legislation will have to be made

Previously, the BEPS action plan had 15 actions for which legislation had been largely made till 2018 only some minor changes might be required

Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. Conservative estimates indicate $100-240 billion revenue loss incurred annually due to BEPS.

Pakistan has made considerable progress on Actions 6, 13 and 14.The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) under Action 6 was signed by Pakistan in 2020 and has come into force from April 2021. The MLI allows jurisdictions to swiftly implement measures to strengthen existing tax treaties to protect governments against tax avoidance strategies that inappropriately use tax treaties to artificially shift profits to low or no-tax locations.

The MLI entry into force will bring about important changes to the Double Taxation Treaties with 66 countries covered by the MLI.

However, under Action 5, at its April 2022 meeting, the Forum on Harmful Tax Practices (FHTP) concluded the export regime on IT in Pakistan as potentially harmful due to ring-fencing implications and lack of substantial activities requirements. The next meeting of FHTP will assess if this regime is actually harmful after further review.