No WHT exemption to foreign institutional investors: FBR

The Federal Board of Revenue (FBR) has proposed that no exemption whatsoever from withholding tax under Eighth Schedule (Capital Gains Tax) of the Income Tax Ordinance 2001 is available to foreign institutional investors either on the basis of avoidance of double taxation treaties or for any other reason. Through an SRO.1021(I)/2014 issued here on Wednesday, the FBR has proposed amendments in the Income Tax Rules, 2002.

The FBR has specified that in case of Foreign Institutional Investors, provisions of the said Eighth Schedule and these rules shall be applicable on capital gain derived from July 1, 2014. For the removal of doubt, it is clarified that no exemption whatsoever from withholding tax under Eighth Schedule or under these rules is available to Foreign Institutional Investors either on the basis of avoidance of double taxation treaties or for any other reason, proposed rules said.

According to the FBR rules, the Commissioner shall not accord prior approval, unless the taxpayer is a filer. Provided further that the Commissioner shall not accord prior approval, in case of foreign institutional investor, where capital gains is not exempt under the tax treaty with the country where the investor is resident.

The FBR said that the notwithstanding anything contained in these rules, for the purpose of computation of capital gains and collection of tax thereon with respect to foreign institutional investors, the date of acquisition and disposal, the consideration received and cost of acquisition shall be determined in the laid down manner. For the purpose of computation of capital gains, securities held on June 30, 2012 shall be deemed as having held for a period of more than two years and the cost of such securities shall be deemed to be the market price (day-end price) of the securities, as on June 30, 2012. Where securities have been acquired or disposed of between July 1, 2012 and June 30, 2014 (both days inclusive), the cost of acquisition and consideration received for disposal shall be determined in the following manner: In case of market-based transactions, the transaction price of the securities; in case of transactions other than market-based transactions deal price provided by the stock exchange and in all other cases, the market price (day-end price).

The rules said that where physical securities are deposited on or after July 1, 2014 in an account maintained with Central Depository Company of Pakistan Limited, date and cost of acquisition shall be taken into account as follows:- The actual date of acquisition and market price (day-end price) prevailing on such date shall be taken into account for computation of capital gains tax, where such securities are acquired after April 23, 2011 and the cost of such securities and date of acquisition shall be deemed to be the market price (day-end price) of the securities, as on April 23, 2011, where such securities are acquired on or before April 23, 2011 and in all other cases, where actual or deal price is not known to NCCPL, the market price (day-end price) shall be taken into account for computation of capital gains tax.

The rules further stated that the CGT shall be charged to the settlement account of the person settling the underlying trade and such clearing member shall be responsible to collect and deposit with NCCPL, CGT computed on such transactions. On the issue of disposal of bonus shares, the FBR said that effective from July 1, 2014 for computation of capital gain tax, the cost of bonus shares would be the price prevailing on first day of book closure (ex-bonus price). Subsequently, when such bonus shares are disposed of, such cost will be taken for computation of capital gain and tax thereon. Similarly, the cost of old shares would remain same before and after bonus shares are issued, and when the old shares are disposed of, such cost will be taken for computation of capital gain and tax thereon, even if these are sold prior to the crediting of bonus shares in the shareholder”s account, but after the date of entitlement of bonus shares.

Explaining the free of payment transactions (transactions executed outside Pakistan), the FBR said that certain foreign institutional investors holding shares may sell through negotiated deal at a price agreed with the buyer outside Pakistan eg a strategic sale and purchase of shares to acquire or dispose of controlling shares. Such transactions are reported to respective clearing member of foreign institutional investors to transfer the shares from seller account to buyer account. In such transactions, respective clearing member does not know the transaction price and merely transfers shares from one account to other on the instructions of its foreign client. Respective clearing member receiving the instructions from foreign institutional investors shall be responsible to report such transactions in the negotiated deal market at the relevant stock exchange through a stock broker in the manner prescribed by such stock exchange. The price reported as selling price or the market price (day-end price of the date of transaction), whichever is higher, shall be taken into account to compute capital gain on the basis of holding period of such securities, FBR rules added.

Following is the text of the SRO issued here on Wednesday: S.R.O. 1021(I)/2014.- The following draft of certain further amendments in the Income Tax Rules, 2002, which the Federal Board of Revenue proposes to make in the exercise of the powers conferred by sub-section (1) of section 237 of the Income Tax Ordinance, 2001 (XLIX of

2001), is hereby published for the information of all persons likely to be affected thereby, as required by sub-section (3) of said section and notice is hereby given that the draft will be taken into consideration by the Federal Board of Revenue after seven days of its publication in the official Gazette. Any objection or suggestion, which may be received from any person, in respect of the said draft, before the expiry of the aforesaid period, shall be considered by the Federal Board of Revenue.

DRAFT AMENDMENTS In the aforesaid Rules,- (1) in rule 13N, (a in sub-rule (2), for the full stop, at the end, a colon shall be substituted and thereafter the following new proviso and Explanation thereto shall be added, namely:-

“Provided that in case of Foreign Institutional Investors, provisions of the said Eighth Schedule and these rules shall be applicable on capital gain derived from the first day of July, 2014.

Explanation.- For the removal of doubt, it is clarified that no exemption whatsoever from withholding tax under Eighth Schedule or under these rules is available to Foreign Institutional Investors either on the basis of avoidance of double taxation treaties or for any other reason.”;

(b in sub-rule (3), for the letters “NCPPL”, the letters “NCCPL” shall be substituted;

(c) in sub-rule (15), for the words “showing computation of”, the word “verifying” shall be substituted; (d) in sub-rule (17), after figure “13O”, the words “along with the evidence of obtaining prior approval of Commissioner under rule 5 of the said Eighth Schedule” shall be added and thereafter the following new provisos shall be added, namely:-

“Provided that the Commissioner shall not accord prior approval, unless the taxpayer is a filer: Provided further that the Commissioner shall not accord prior approval, in case of foreign institutional investor, where capital gains is not exempt under the tax treaty with the country where the investor is resident.”;

(e) in sub-rule (23), after the word “acquisition”, occurring for the first time, a comma, and the words “, except in the case of foreign institutional investors,” shall be inserted; and (f) after sub-rule (23), the following new sub-rule shall be added, namely:-

” (24) Notwithstanding anything contained in these rules, for the purpose of computation of capital gains and collection of tax thereon with respect to foreign institutional investors, the date of acquisition and disposal, the consideration received and cost of acquisition shall be determined in the following manner, namely:- (a) for the purpose of computation of capital gains, securities held on the 30th June, 2012 shall be deemed as having held for a period of more than two years and the cost of such securities shall be deemed to be the market price (day-end price) of the securities, as on the 30thJune 2012;

(b) where securities have been acquired or disposed of between the 1stJuly, 2012 and the 30thJune, 2014 (both days inclusive), the cost of acquisition and consideration received for disposal shall be determined in the following manner, namely:-

(i) in case of market-based transactions, the transaction price of the securities; (ii) in case of transactions other than market-based transactions deal price provided by the stock exchange; and

(iii) in all other cases, the market price (day-end price); (c) where physical securities are deposited on or after the 1st July, 2014 in an account maintained with Central Depository Company of Pakistan Limited, date and cost of acquisition shall be taken into account as follows:-

(i) the actual date of acquisition and market price (day-end price) prevailing on such date shall be taken into account for computation of capital gains tax, where such securities are acquired after April 23, 2011; and (ii) the cost of such securities and date of acquisition shall be deemed to be the market price (day-end price) of the securities, as on the 23th April 2011, where such securities are acquired on or before April 23, 2011; and

(iii) in all other cases, where actual or deal price is not known to NCCPL, the market price (day-end price) shall be taken into account for computation of capital gains tax.”; (2) in rule 13O,- (b) in Part-II, in the Table, for the fourth column, the following shall be substituted:-

(c) in Part-IV, for the figure “2012”, the figure “20 ” shall be substituted; and (3) in rule 13P, –

(a) in clause (m), in sub-clause (ii), for the words “Provisions of Eighth Schedule to the Ordinance shall not apply to the transactions of foreign institutional investor,” the words and letters “CGT shall be charged to the settlement account of the person settling the underlying trade and such clearing member shall be responsible to collect and deposit with NCCPL, CGT computed on such transactions” shall be substituted and thereafter the following new sub-clause shall be added, namely:-

“(iii) Example:

ABC Company, a foreign institutional investor, sells 20,000 shares of XYZ Company on its own behalf and on behalf of other investors as follows:

As illustrated above, foreign institutional investors (ABC Company) sold shares, on its own behalf and on behalf of other investors. Thus, capital gain tax shall be charged to the final settlement account of the person settling the underlying trade and such clearing member shall be responsible to collect and deposit with NCCPL CGT computed on such transactions. Further, IBD UIN of foreign institutional investor used as a transitional account shall be exempt from capital gain tax.

Similarly, for purchase transactions, final settlement account shall be used for the purpose of inventory maintenance of the clients of foreign institutional investors and inventory shall not be maintained for the IBD UIN of foreign institutional investor.”;

(b) for clause (q), the following shall be substituted, namely:-

“(q) Disposal of bonus shares

(i) Details of the transaction.-

A company issues bonus shares to its shareholders, which are subsequently sold by the shareholder in the market.

(ii) Tax treatment.-

Effective from July 1, 2014 for computation of capital gain tax, the cost of bonus shares would be the price prevailing on first day of book closure (ex-bonus price). Subsequently, when such bonus shares are disposed of, such cost will be taken for computation of capital gain and tax thereon. Similarly, the cost of old shares would remain same before and after bonus shares are issued, and when the old shares are disposed of, such cost will be taken for computation of capital gain and tax thereon, even if these are sold prior to the crediting of bonus shares in the shareholder”s account, but after the date of entitlement of bonus shares.

(iii) Example:-

A, being a client of a broker, has 4 shares of company A in his account. He acquired these shares on the 1stJanuary, 2012 at Rs 20 per share. On the same day ie 01-01-2012, the company declared bonus shares @ 25%, and date of entitlement of the shares was declared as 1-04-2012 and the shares were to be credited in the account of A on 15-5-2012. The market value (ex-bonus price) of these shares on 31-03-2012 is Rs 25 per share. He disposed of 2 shares on the 15thApril, 2012 at Rs 20 per share and the remaining 3 shares (including bonus share) @ Rs 20 on the 18thMay 2012.

The cost of acquisition is deemed to include 0.50% of the acquisition cost as incidental expenses incurred and sale proceeds are deemed to include 0.5% of the consideration as incidental expenses.

NCCPL shall collect CGT as per following example: (c) in clause (v), in sub-clause (ii), the expression “as calculated for Bonus shares in Example 1.17.3” shall be omitted; and

(d) after clause (y), the following new clause shall be added, namely:-

“(z) Free of Payment transactions (transactions executed outside Pakistan).

Certain foreign institutional investors holding shares may sell through negotiated deal at a price agreed with the buyer outside Pakistan eg a strategic sale and purchase of shares to acquire or dispose of controlling shares. Such transactions are reported to respective clearing member of foreign institutional investors to transfer the shares from seller account to buyer account. In such transactions, respective clearing member does not know the transaction price and merely transfers shares from one account to other on the instructions of its foreign client.

Respective clearing member receiving the instructions from foreign institutional investors shall be responsible to report such transactions in the negotiated deal market at the relevant stock exchange through a stock broker in the manner prescribed by such stock exchange. The price reported as selling price or the market price (day-end price of the date of transaction), whichever is higher, shall be taken into account to compute capital gain on the basis of holding period of such securities as illustrated in clause (d).”