Mineral incentive package on cards

A model of the package, drawn up by Wood Mackenzie, has incorporated reduced withholding tax rates on local goods and services – 4% for local goods and 8% for local services – together with deferral until mine production.The incentive package had been submitted to the Finance Division during the current year's budget but the inability to introduce a comprehensive programme at that time reflects major challenges in the way of….

The government plans to offer these incentives to foreign investors during the upcoming Mineral Forum scheduled for November 12-13.The prime minister had directed the Petroleum Division to develop and finalise the National Mineral Policy.

However, sources said the policy document was ready but without a corresponding fiscal package it may not achieve the desired objectives and address the key challenges facing the mineral sector.The Finance Division is the authority that can approve these fiscal packages, therefore the Petroleum Division has requested it to accord due importance and priority to the proposals and facilitate their early approval.

These measures may be announced at the Pakistan Minerals Investment Forum (PMIF).Sources told The Express Tribune that there was a proposal to grant a 30-year exemption from general sales tax (GST) on the import and local purchase and supply of goods and services for mining projects during the exploration and development phase until the commencement of commercial production.Another proposal says the exemption may continue after the commencement of production, particularly….

Furthermore, it is proposed that the withholding tax applicable to contractors and suppliers for mining projects may be reduced during the exploration and development phase and payment/deposit of such taxes may be deferred until the commencement of commercial production.The government has proposed that import duties on capital goods and project-related equipment for mining companies may be exempted during the exploration, development and construction phases.

The Wood Mackenzie model treats customs/import duty exemption as an important component of the fiscal package.A major proposal is to replace the conventional corporate income tax with a 1% presumptive tax on export proceeds together with a 0.5% development surcharge, aimed at providing a simple and predictable fiscal framework while encouraging investment.

The Wood Mackenzie analysis identifies corporate income tax treatment as the single largest driver of improvement in an investor's internal rate of return (IRR).The consultancy firm has proposed that appropriate fiscal stability clauses be incorporated to protect the fiscal terms applicable at the time of award of an exploration concession/agreement, broadly along the lines of the stability framework available to the oil and gas sector.

Fiscal stability is particularly important for mining because project development can span several years and investment decisions are made against long-term assumptions regarding taxation and government take.It has suggested that mining projects may be exempted from super tax for at least 30 years to improve project economics and maintain competitiveness with other mineral-producing jurisdictions.

Also, the withholding tax on dividends distributed by mining projects may be exempted for 15 years from commercial production.

Inter-corporate dividends within mining project structures are also proposed to be exempted to avoid tax cascading within project structures.The consultancy firm proposes that exploration losses may be carried forward perpetually for mining projects, recognising that exploration expenditure can precede commercial production by several years and may also be incurred on unsuccessful exploration programmes.

Additionally, losses from failed exploration projects may be adjusted against successful mining projects within the same mining group, subject to appropriate safeguards.It suggests that carry-forward depreciation allowance for mining projects may be allowed for 10 years after the commencement of commercial production.

Apart from that, accelerated depreciation up to 100% may be permitted for mining projects.In its model, Wood Mackenzie has highlighted a 10-year carry-forward for the depreciation allowance together with 100% accelerated depreciation, by increasing the standard depreciation rate from 15% to 30%.

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