Payments and deals: IFC requests Dar to allow WHT exemption

The International Finance Corporation (IFC) has approached Finance Minister Ishaq Dar seeking withholding tax exemption on the payments made or transactions carried out by the IFC, through an amendment in the Second Schedule of the Income Tax Ordinance 2001 along with an exemption certificate from withholding tax provisions from July 1, 2014.

Sources told Business Recorder here on Wednesday that Senior Manager IFC has requested the Finance Minister on the issue of exemption from withholding tax provisions.

According to the IFC, the withholding provisions of the Income Tax Ordinance have been expanded and a number of new sections have been introduced, which require a revisit of the exemptions provided earlier. Recently, the IFC has disposed of its investments in shares of certain listed companies and has earned capital gains. As per section 233AA of the Income Tax Ordinance which has been inserted via the Finance Act, 2012, and the Eight Schedule to the Ordinance read with Rules 13N to 13P of the Income Tax Rules, 2002, National Clearing Company of Pakistan Limited (“NCCPL”) is required to collect/withhold tax from all such transactions as per rates provided in the First Schedule to the Ordinance. Accordingly, NCCPL has intimated IFC of its aforesaid withholding obligations and shown its intention to do so.

It said that since IFC is currently facing intended collection of tax by NCCPL and it anticipates to have many more similar transactions involving capital gains on disposal of shares, it is therefore requested that an exemption certificate be issued to IFC exempting it from the aforesaid withholding provisions of section 233AA of the Ordinance and the Eight Schedule to the Ordinance read with Rules 13N to 13P of the Income Tax Rules, 2002. This exemption certificate may be made valid from July 1, 2014 till the appropriate change is made in the law. The request for issuance of exemption certificate is being made directly for the reason that IFC’s status of being incorporated via an act of law is different to other entities/companies, having tax number.

It further said that since the amendment in the Second Schedule to the Income Tax Ordinance was made in 2008, a number of new sections have been introduced which require tax to be withheld). Since these sections are presently not included in Clause (67) referred above, it is proposed that this Clause may be substituted with the following:

“The withholding provisions as contained in the Ordinance shall not apply in respect of payments made to or transactions carried out by International Finance Corporation established under the International Finance Corporation Act, 1956 (XXVIII of 1956).”

If this amendment is made, it will not only enable IFC to remain exempt from the existing withholding provisions of the Ordinance but will also ensure that IFC would be exempted in future as well, in the event further withholding provisions are introduced in the Ordinance, it added.

Giving background of the case to the Finance Minister, the IFC said that Rana Assad Amin, Special Secretary, Ministry of Finance and the IFC had a meeting about the applicability of the withholding provisions on capital gains tax from sale of shares contained in the Income Tax Ordinance, 2001 (“Ordinance”) on IFC came under discussion.

About the IFC’s taxability, it said that the provisions of section 5 of the International Finance Corporation Act, 1956 (“IFC Act”) state that the provisions of Article VI of the Agreement set out in the Schedule shall have the force of law in Pakistan.

Article VI of the Schedule refers to section 5 of the IFC Act. It is titled as “Status, Immunities and Privileges” of IFC and contains various sections. Section 9 of the Schedule to the IFC Act – titled as “Immunities from Taxation,” provides as follows –

(a) The Corporation, its assets, property, income and its operations and transactions authorised by this Agreement shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty.

(b) No tax shall be levied on or in respect of salaries and emoluments paid by the Corporation to Directors, Alternates, officials or employees of the Corporation who are not local citizens, local subjects, or other local nationals.

No taxation of any kind shall be levied on any obligation or security issued by the Corporation (including any dividend or interest thereon) by whosoever held which discriminates against such obligation or security solely because it is issued by the Corporation.

Secondly, if the sole jurisdictional basis for such taxation is the place or currency in which it is issued, made payable or paid, or the location of any office or place of business maintained by the Corporation.

Moreover, no taxation of any kind shall be levied on any obligation or security guaranteed by the Corporation (including any dividend or interest thereon) by whosoever held which discriminates against such obligation or security solely because it is guaranteed by the Corporation; or if the sole jurisdictional basis for such taxation is the location of office or place of business maintained by the Corporation.”

It is clear from the above that IFC is exempt from all kinds of taxes in Pakistan by virtue of IFC Act, which has already been accented to by the President of Pakistan, granting the force of law in Pakistan.

Exemption Provided Under the Income Tax Ordinance, 2001:

Considering the above, via the Finance Act, 2008 an amendment was brought in Clause (66) of Part I to the Second Schedule whereby sub-Clause (xxi) was inserted therein exempting IFC from tax in Pakistan. A corresponding amendment was also brought in Part IV of the Second Schedule ibid, granting exemption from certain withholding provisions of the Ordinance by introducing Clause (67) which says: “The withholding provisions of sections 150, 151, 152, 153 and 233 shall not apply in respect of payments made to the International Finance Corporation established under the International Finance Corporation Act, 1956 (XXVIII of 1956).”

All sections under which withholding of tax could apply to IFC at that time were included therein, it added.