SOHAIL SARFRAZ

ISLAMABAD: The federal government urgently needs to introduce an investment and business protection policy including a rational tax regime for the Multinational Companies (MNCs) to stop their exit from Pakistan and to control a looming economic threat to the country.

The primary objective must be to change the high import tariff protection policy to an export-oriented strategy for the MNCs.

“In a major development, the government is considering Federal Excise Duty as an unfriendly tax for the multinational companies operating in Pakistan. The multiplicity of indirect taxes would be ended for the highest taxpaying and compliant MNCs to provide a level playing field,” a senior government official said.

Presently, over 200 multinational companies play a vital role in driving commerce and industry and contribute more than one-third of the Federal Board of Revenue’s (FBR) total tax collection. Unfortunately, the exports of these MNCs remained negligible, even as they repatriate over USD1.5 billion in profits annually.

Data collected by Business Recorder revealed that ‘discriminatory’ tax policy, high corporate taxes, restrictions on profit repatriation, and a cumbersome regulatory environment are major reasons for the exit of some MNCs from the country.

Other negative factors included rupee devaluation, high inflation, and an inability to repatriate profits (USD1 billion in blocked dividends), inconsistent and unpredictable tax regimes, regulatory hurdles, and abrupt changes to import rules impacting raw material supply and operational inefficiencies, leading to the loss of formal, high-value manufacturing and service sector jobs. MNCs are global brands that validate a country’s business potential. Their departure damages Pakistan’s international reputation, experts said.

There is an urgent need for a national dialogue on the recent departure of major foreign firms including petroleum sector companies and pharmaceutical giants, etc. At the same time, there is a need to take urgent steps to save remaining multinational companies operating in the country.

The FBR must change the policy of special concessions under the SROs and high tariff protection. The MNCs must be facilitated with the export-oriented strategy to reward efficiency, innovation, and global competitiveness.

Finance Minister Muhammad Aurangzeb reportedly defended that some multinational companies have exited Pakistan as global companies often make strategic decisions based on their own priorities.

Contrary to this, facts are entirely different and show a different story.

During the last few years, nine multinational companies have exited or divested their operations in Pakistan.

Four of these were manufacturers – three pharmaceutical firms (Pfizer, Sanofi-Aventis, and Eli Lilly) and one consumer goods company (P&G). The remaining were service-sector players. Many multinational pharmaceutical companies have gradually divested, transferring operations or product registrations to local firms that now command over two-thirds of the domestic market.

Experts have pointed out that it is a reality that the heavy taxation, sudden changes in tax policy, blockage of refunds, seeking advances from the MNCs and harassment by the tax officials of the Federal Board of Revenue (FBR) has resulted in transfer of many companies from Pakistan to UAE.

Moreover, price controls and rigid regulations have made it harder for global firms to operate profitably, while local players have grown stronger, more agile, and more competitive.

Both the Overseas Investors Chamber of Commerce & Industry (OICCI) and Pakistan Business Council (PBC) have repeatedly recommended rationalization of tax rates for compliant and fully documented MNCs to increase tax collection.

Experts believed the gradual exit of the MNC from Pakistan appears to be a serious economic threat and not mere business realignment.

Referring to some existing multinational companies which are playing an indispensable role in Pakistan’s development at this point of crisis, sources quoted that companies like Coca-Cola and Nestle can be taken as positive case studies with investment, sustainability and their role in economic development of Pakistan. These MNCs are a vital conduit for Foreign Direct Investment (FDI), providing the essential capital Pakistan needs for growth, especially in a current-account-deficit-prone economy.

They introduce advanced technology and modern management practices, creating positive “spill-overs” that uplift local supply chains and domestic competitors.

They provide high-quality, formalised employment and contribute significantly to the national exchequer through a high tax multiplier as evidenced by the SDPI study, where Coca-Cola’s tax multiplier is high.

However, the astonishing part of the story is that threat of mini-budgets on multinational companies with increase in rates of indirect taxes like withholding taxes, federal excise duty and sudden changes in tax policy are disaster for the MNCs.

These big companies are working in a constant fear and uncertain environment of multiplicity of taxes which needs to be checked through a constant and stable tax policy.

The field formations of the FBR are also involved in seeking advances from the MNCs to meet the assigned ambitious revenue collection targets.

When contacted a top government official claimed that the digitization, automation and transformation plan of the FBR would end the harassment and corruption within the tax machinery.

The crux of the matter is that the government is now considering Federal Excise Duty as an unfriendly tax for the multinational companies operating in Pakistan. The government is well-aware that the multiplicity of taxes on MNCs needs to be ended and a simple low tax rate regime needs to be implemented for the compliant MNCs. In the beverage sector, the share of local companies increased from 8 percent to 24 percent as compared to 80 percent owned by two MNCs. Local companies need to flourish, but not at the cost of tax evasion.

Despite an increase in market share of local companies, the corresponding increase in tax collection is negligible during the past few years.

On the other hand, if the market share of MNCs increases there can be a major raise in tax collection from sectors such as beverage and pharmaceuticals, providing a reduction in tax rates and level playing field for the MNCs, they added.

The FED was imposed primarily to reduce the consumption of sugar, the structured beverage sector consume very nominal percentage of the total sugar produced and print the caloric value on its products.

Major consumption of sugar is by untaxed sector like confectionery, biscuits, and local sweet shops but there is no FED on this sector.

Few years back, the government revenue increased after reduction of the FED on few sector. The same tax policy would give relief to multinational companies for increasing revenue collection of the FBR.