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  • Jan 6th, 2007
  • Comments Off on Presumptive tax for Khalifa Point refinery likely: draft agreement submitted to government
The government is likely to allow presumptive tax regime (PTR), replacing the corporate income tax, for the project of coastal refinery at Khalifa Point by International Petroleum Investment Company (IPIC) of Abu Dhabi in joint venture with Pak Arab Refinery Limited (Parco).

The rate of presumptive tax may be fixed at 0.75 percent of net value of exports throughout the operational life of this refinery. Sources told Business Recorder on Friday that the IPIC/Parco has submitted the draft implementation agreement to the Ministry of Petroleum and Natural Resources and Central Board of Revenue (CBR) for smooth execution of the project.

Under the draft agreement, non-Pakistan residents, or foreign contractors, their personnel, agents, sub-contractors and service providers would not be subject to any federal/provincial tax.

The draft agreement says that the guarantee for financing of the new coastal refinery would be shared in proportion with the equity holding of the joint venture partners. The government would facilitate installation of supporting infrastructure, including sub-marine and product pipelines and power supply.

Pakistan will provide, at least 1000 acres land, at Khalifa Point, owned by State Petroleum Refining and Petrochemical Corporation (Perac) to project sponsors for setting up of the coastal refinery project on free-hold lease without charging any rent for the period of the refinery till it remains operational for the proposed new oil refinery project.

The land will be provided only for setting up of the refinery project and not for any other purpose. In case of closure of refinery operation, for any reason, the land will automatically be transferred to the government without any cost. For so long as petroleum products prices in Pakistan are regulated, the petroleum product pricing mechanism for the coastal refinery for domestic sales shall be no less favourable than prices derived by application of the import parity formula as envisaged in the Petroleum Policy of 1997.

According to the 'agreement', there shall be no restriction on import of crude oil, and the coastal refinery shall be free to import crude oil after lifting local crude oil, if so allocated. The crude oil imports shall be exempted from customs duties and taxes (all other incidental charges associated with the import shall, however, to be applicable).

Crude oil imports and importation of any other feedstock or consumables necessary to commission and/or operate the coastal refinery will be exempt throughout the operational life of the coastal refinery from all duties, taxes, imposts, surcharges and or any levy imposed by any government, regional or other authority in Pakistan.

The coastal refinery shall be free to export all petroleum products surplus from the local market to any buyer for any destination in the international market at internationally competitive prices and sell products in Pakistan deficit in the domestic market to any marketing company or they can set up their own company and the gas oil (HSD) marketed locally will be supplied through White Oil Pipeline Project system for which necessary pipeline connection has to be provided by the joint venture investment partners.

The joint venture partners will arrange foreign exchange at their own arrangement for import and purchase of local crude oil, according to the equity holding.

The government will ensure continuous and reliable supply of entire electricity, water and, if required, fuel gas requirements of the coastal refinery throughout its operational life. The pricing of these utilities shall be negotiated and agreed between the parties within six months of the date of execution of the 'agreement'.

Incentives under EPZA rules may be confirmed by Ministry of Industries, Production and Special Initiatives and it will be made part of the 'agreement'.

The coastal refinery will be designed to have the capacity to produce about 60 percent middle distillates; and the product specifications for domestic as well as export markets will be not less than Euro-III specifications. It will be required to optimise its own operations and thus be responsible for its margins. There will be no guaranteed return on investment for the coastal refinery.

The 80/20 rule (which requires export of 80 percent of total production to foreign countries) applicable for industries established under EPZA rules will not be applicable for the coastal refinery project.

Pakistan and Abu Dhabi agree that the project would benefit Parco, a co-sponsor, in the capacity of project operations and maintenance managers since it has extensive experience in project implementation, petroleum pipeline, refining and distribution.

It is, therefore, agreed that Parco will be the project manager and will operate and maintain the coastal refinery:

-- IPIC shall be entitled throughout the term of its participation in the coastal refinery and its ownership of shares in the project company, to repatriate and export outside Pakistan all income and capital gains accruing to it directly or indirectly from the coastal refinery without taxation consequences in Pakistan of any nature whatsoever (whether of corporate, capital gains or revenue nature) or any foreign currency/exchange controls.

-- The company shall be entitled to receive all income and capital gains accruing to it directly or indirectly from the coastal refinery in freely convertible funds, at the commercial rates of exchange then prevailing.

-- The company can sell any third party acceptable to Pakistan such acceptance not to be unreasonably withheld or delayed at any proportion, or all of its shareholding in the project company and its corresponding participation in the coastal refinery and to receive all proceeds arising from its sale of shares in the project company without any form of withholding or other taxation, whatsoever (whether of corporate, capital gains or revenue nature) or any foreign currency/exchange controls, and in freely convertible funds, at the commercial rates of exchange then prevailing.

Copyright Business Recorder, 2007


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