Covers SFD-funded projects worth USD 160 million in earthquake-affected areas of AJK and KP
By Staff Reporter
ISLAMABAD: Pakistan has granted a foreign donor’s contractors a PKR 2.5-billion tax exemption as part of bilateral treaty obligations, Independent Pakistan can report.
The grantees executed projects worth USD 160 million in earthquake-affected areas of Azad Jammu and Kashmir and Khyber-Pakhtunkhwa for the Saudi Fund for Development (SFD).
This is a country-specific exemption, granted retrospectively to Kingdom of Saudi Arabia. The Kingdom has thus become the second country after China to be granted this kind of tax exemption.
The exemption covers all kind of taxes and duties on the completion of a portfolio of 29 projects aggregating to USD 160 million being executed by the SFD.
A summary to this effect, forwarded by Economic Affairs Division, has been accorded approval by the Economic Coordination Committee of the Cabinet meeting under Chairmanship of Federal Minister for Finance Miftah Ismail.
The SFD is a vehicle for Saudi Official Development Assistance (ODA), both loan and grant. In Pakistan, it is providing assistance for various projects in the areas of energy, health, education, and infrastructure.
SFD’s financing for loan projects is SAR 1,515 million (USD 404 million) and for grant projects is SAR 861 million (USD 229.6 million).
The portfolio covered by the exemption comprises of 13 development projects, nine of them grants and four loans, not including ‘Provision of Oil Facility on Deferred Payments from Saudi Fund for Development’.
Recently, SFD has raised concerns against taxation in future Saudi funded projects, on the basis of outstanding taxation issues in the project “The Kingdom of Saudi Arabia Grant for Participation in the Reconstruction Program of the Earthquake Affected Areas in the Islamic Republic of Pakistan”.
It was an approved grant of SAR 600 million, equivalent to USD 160 million for 29 earthquake-affected areas of AJK and KPK.
The SFD awarded the contracts to contractors and consultants through international competitive bidding in 2017. The payments to the consultants and contractors were made directly by SFD and such transactions are not routed through government channels. The FBR had levied 2.5 billion income tax for 2018 and 2019 on the contractor of the project.
The exemption comes pursuant to bilateral treaty obligations. A MoU signed between KSA and Pakistan included a tax exemption clause that said no withdrawal was to be made in respect of “taxes levied by, or in the territory of Republic of Pakistan on goods or services, or on the importation, manufacture, procurement, or supply thereof”.
The MoU cross-references SFD’s General Conditions Applicable to Loan Agreements, which enunciates, “any [SFD] funded amount shall be paid freely of all restrictions imposed under the laws of the borrower or laws in effect in its territories”.
It further says, “The amount of loan also shall be paid without deduction and free of any taxes levied by the borrower, and such taxes, if any, shall be paid by the borrower”.
An SFD delegation visited Pakistan during March 2022 to sign the Debt Service Suspension Initiative (DSSI) agreements I, II and III worth USUSD 846 million. However, they made the DSSI signing conditional upon an amicable resolution of the taxation issue meaning thereby exemption to the SFD portfolio.
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