Pakistan and China renegotiate accord to avoid double taxation
Chairman Federal Board of Revenue (FBR) Tariq Bajwa has said that Pakistan and China are re-negotiating agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. On the conclusion of Public Accounts Committee (PAC) at the Parliament House here on Thursday, Bajwa told Business Recorder that the Pak-China convention on the avoidance of double taxation is being re-negotiated.
Meanwhile, Ministry of Foreign Affairs has also informed FBR and Ministry of Water and Power about the visit of team of experts from State Administration of Taxation (SAT) of China. Pakistan’s Ambassador in Beijing has conveyed that the SAT China intends to send a team of experts next week to start negotiations with FBR. Pakistani authorities would communicate suitable dates for receiving the Chinese team and commencement of negotiations urgently to Ambassador in Beijing under intimation to Ministry of Foreign Affairs.
According to the Pakistan’s Ambassador in Beijing, pursuant to Article 3 of the Agreement on the China-Pakistan Economic Corridor Energy Project Co-operation between the two governments, State Administration of Taxation (SAT) of China has formally approached the Embassy, for negotiations on amendment in the Avoidance of Double Taxation Agreement. For this purpose, SAT intends to send a team of experts next week to start negotiations with FBR. Chinese side would like to conclude the protocol during the forthcoming high level visit.
Deputy Director-General of the International Taxation Department of the State Administration of Taxation (SAT), China, an authorised representative of China’s Competent Authority has also informed about proposed amendments in the China-Pakistan Double Tax Treaty pursuant to Article 3 of the Agreement on the China-Pakistan Economic Corridor Energy Project Co-operation between the Government of the People’s Republic of China and the Government of Pakistan.
Chinese representative said that the negotiation is very high priority item for SAT and Chinese Ministry of Foreign Affairs have agreed to include the Protocol into the achievement package for the high-level visit next month, if it is ready for signing by then. The time is rather limited to achieve that goal. But considering we are basically materialising an already agreed-upon Article of an Agreement between our two Governments, and the changes the new Protocol is making are only a few, we do not expect the process to be long, he said.
Pakistan side should review the draft Protocol then kick start the face-to-face negotiation soon. It is expected that Protocol would be ready for signing during the high-level visit in the coming April, Deputy Director-General of the International Taxation Department of the SAT China added.
Following is the draft of the Third Protocol to the agreement between China and Pakistan for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income:
The Government of the People’s Republic of China and the Government of the Islamic Republic of Pakistan
Option A: Desiring to establish a favourable financing environment for the projects under the framework of the China-Pakistan Economic Corridor (hereinafter referred to as “the Economic Corridor Projects”) in pursuance of the Agreement on the China-Pakistan Economic Corridor Energy Project Co-operation between the Government of the People’s Republic of China and the Government of the Islamic Republic of Pakistan (hereinafter referred to as the (Energy Project Co-operation Agreement’), by concluding a Protocol to amend the Agreement between the Government of the People’s Republic of China and the Government of the Islamic Republic of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed at Islamabad on the 15th day of November 1989 (hereinafter referred to as “the DTA”), as well as the Second Protocol to the DTA, signed at Beijing on the 17th day of April 2007.
Considerations: We propose to draft the Protocol in such a way to cover the entire China-Pakistan Economic Corridor instead of only the energy part of the Corridor. We are aware that the Corridor consists of two parts, namely the energy project and the infrastructure project. Currently, only the Energy Project Co-operation Agreement has been put in place, whose Article 3 obliges the competent authorities of both parties to amend the DTA to provide income tax exemption on the interest derived by the industrial and Commercial Bank of China and other commercial banks. We foresee that the infrastructure part of the Corridor may likely follow similar financing arrangements. So we assume it is in both parties interest to include the whole Corridor into the Protocol, in order to avoid the necessity of negotiating another Protocol to cover the infrastructure part of the Corridor, Chinese side said.
Desiring to establish a favourable financing environment for the Energy Project of the China-Pakistan Economic Corridor (hereinafter referred to as “the Energy Project”) in pursuance of the Agreement on the China-Pakistan Economic Corridor Energy Project Co-operation between the Government of the People’s Republic of China and Government of the Islamic Republic of Pakistan (hereinafter referred to as the “Energy Project Co-operation Agreement”), by concluding a protocol to amend the Agreement between the Government of the Peoples Republic of China and the Government of the Islamic Republic of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed at Islamabad on the 15th day of November 1989 (hereinafter referred to as “the DTA”), as well as the Second Protocol to the DTA, signed at Beijing on the 17th day of April 2007.
Considerations: This version limits the scope of the Protocol to the Energy Project only.
Have agreed as follows:
Article 1: For the provisions of Article 1 of the Second Protocol, the Industrial and Commercial Bank of China and other Chinese commercial banks are included as “state banks” but only for the purpose of interest income they derive from loans to the Economic Corridor Projects/Energy Project.
Considerations: This Article expressly mirrors Article 3 of The Energy Project Co-operation Agreement. It provides IBC and other Chinese commercial banks with exemption for interest previously reserved exclusively for state banks as provided in the Second Protocol. But this treatment is limited to interest arising from loans related to the Economic Corridor Projects/Energy Project.
Article 2: Paragraph 3 Article 11 of the Agreement is applicable if interest is paid on loans directly or indirectly guaranteed or insured by the China Export & Credit Insurance Corporation and other Chinese financial institutions which are agreed upon from time to time by the competent authorities of both China and Pakistan.
Considerations: It is China’s recent treaty policy to seek its Treaty partner’s exemption of taxation on interest if the interest is paid on loans guaranteed or insured by the China Export & Credit Insurance Corporation or other state banks. The rationale behind is that this type of financing is supported by public funds and aimed at promoting international trade and supporting local development. This policy is also echoed by 7.6 of the Commentary on Article 11 of the OECD Model Tax Convention.
Article 3: The Contracting States shall notify each other through diplomatic channels that the procedures required by its laws for the entry into force of this Third Protocol have been complied with. This Third Protocol shall enter into force on the date of the receipt of the later notification. The provisions of this Protocol shall have effect on the interest related to the Economic Corridor Projects /Energy Project, including those arising before this Protocol takes effect.
Considerations: This Article is to ensure that the early participants of the Energy Project will not be left out of the interest exemption.
In Witness Whereof the duly authorised representatives of the two Governments have signed this Protocol in the Chinese and English languages at on 2015, both texts being equally authentic, draft of the proposed amendments in the said convention added.
