High corporate tax rates – a barrier for multinationals

KARACHI:

About 210 multinational corporations (MNCs) in Pakistan operating in sectors such as tobacco, oil, automobile, pharmaceuticals, banking and others contribute one-third of the total tax collection and contribute significantly to the national exchequer.

They also reinvest in their respective units or inject funds into some new ones. In addition, they invest around Rs 13 billion annually in Corporate Social Responsibility (CSR) projects to ensure provision of facilities to around 30 to 40 million people in healthcare, education, infrastructure and community development.

In line with Prime Minister Shehbaz Sharif’s aim to scale up foreign investment, MNCs have recommended that the government improve the ease of doing business, including simplifying and digitizing the tax framework.

This is part of the overall package of tax proposals by the Overseas Chamber of Commerce and Industry Investors (OICCI).

Pakistan has a complex tax structure with multiple taxes and tax regulators, which needs to be simplified. Also, corporate tax rates in the country are among the highest in the region and the world with the effective tax rate ranging from 39% to 52%. It sometimes acts as a barrier for new entrants and causes resistance to multinational companies operating in the country.

Pakistan’s tax to GDP ratio is low and should be addressed by broadening the tax base. Currently, only 3% of the population pays income tax, which is not sustainable for Pakistan’s economic development. Greater burden on the compliant sector can lead to disinvestment, as the country has already seen recently.

Finally, OICCI recommends that the government come up with a transparent and consistent policy framework without surprises, aiming to achieve annual foreign direct investment (FDI) of 3% of gross domestic product (GDP).

Smuggling and illegal trade harm the economy in terms of revenue reduction, market distortion and impact on investment due to the expansion of the informal sector. To stop smuggling and illegal trade, Pakistan should modernize its customs system using advanced IT and digitization techniques besides strengthening border controls.

The country should implement sophisticated valuation methods, increase transparency by making import/export data public, and strengthen international cooperation to combat counterfeiting.

There is also a need to enforce brand registration, impose strict penalties and develop task forces to eradicate illegal stocks. Introducing a tracking and tracing system for fast moving consumer goods (FMCGs) like tobacco, sugar, cement and other production lines is likely to help.

Finally, the Afghan transit trade agreement should be revised to harmonize tariffs, set import limits, and use vehicle detectors and scanners. The large-scale unpaid duty on petroleum products from a neighboring country has already been highlighted as a key challenge by the oil industry, which needs to be effectively addressed.

This has been a key element for many years, providing a huge opportunity to raise revenue and bring the informal sector into the tax net.

The impact of taxation should be fair across all sectors (industry, agriculture and services). The sector’s current share of tax revenue is greater than its share of GDP, while the reverse is true for agriculture and services.

Widening the tax net will need broad participation of all key stakeholders, including under-taxed and untaxed sectors which is likely to be quite challenging.

In addition, there is a need for a broad public information campaign to clarify misconceptions about the tax burden, impact and contribution compared to regional and peer economies.

Pakistani authorities are keen to see progress in the digitization of the Federal Board of Revenue (FBR) which will help achieve revenue mobilization targets.

Talking about the current situation and future prospects, OICCI Chairman and eminent banker Rehan Shaikh said that this is also reflected in OICCI’s latest surveys.

However, after the difficult last few years, the economic outlook has started to improve since the beginning of 2024, as shown by the recent positive change in market sentiment.

Looking ahead, in order to build on the recent optimism with the expected recovery in economic growth, the continued decline in inflation and the expected increase in domestic and foreign investment, the country needs to proceed with the well-known program of structural reforms.

The upcoming budget and the expected larger program of the International Monetary Fund (IMF) will start the process. Broad consensus among key stakeholders on the need for medium-term economic stability and structural reforms with an innovative and inclusive approach, led by public-private partnership, will lead to positive prospects.

Although some good progress has been made on this front, there are also several challenges in effectively spreading awareness as well as further mainstreaming intellectual property rights (IPR) in Pakistan.

Some of the key reasons for this include limited financial and human resources to ensure enforcement and create awareness, lack of prioritization compared to other economic or social challenges, and insufficient coordination between the Intellectual Property Organization (IPO) Pakistan and other relevant stakeholders, including relevant law enforcement agencies.

“For OICCI, this is an issue of critical importance as OICCI’s 2023 IPR Survey revealed that Pakistan loses up to Rs 800 billion annually due to IPR violations. As a chamber, we have actively supported the institutionalization and enforcement of intellectual property rights as it is an important factor for multinational companies wishing to launch new products or bring innovation to the market,” he said.

“More importantly, I also believe that this requires an ‘all sides approach’, which is to get all stakeholders, including IPO-Pakistan and other governmental and non-governmental organizations, to create a unified and coordinated approach to awareness of IP. OICCI has pioneered knowledge sharing on intellectual property rights by once again presenting in April 2024 the second edition of the handbook ‘Evolution of Intellectual Property Rights in Pakistan’ in collaboration with a leading IP law firm.’

The author is a staff correspondent

Published in The Express Tribune, June 10^u2024.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay updated and join the conversation.