Attitude toward Foreign Direct Investment
The GOP welcomes foreign investment and offers incentives to attract new capital inflows. Incentives are largely industry-specific and include tax breaks, tariff reductions, dedicated infrastructure, and investor facilitation services. In addition, there are separate incentives for designated special economic zones (SEZs). In 2013, the PML-N government introduced the 2013 Investment Policy which further liberalized investment policies in most sectors.
Net inflows of FDI peaked at $5.4 billion in fiscal year 2008 (Note: Pakistan’s fiscal year runs from July 1 to June 30). In FY 2015, net FDI was $850 million, roughly half of the prior year. The majority of FDI – $256 million – was in the financial sector, followed by $246 million in the upstream oil and gas sector and $201 million in the power sector. Analysts identified the security environment, a chronic energy crisis, and macro-economic instability as the biggest drivers for FDI’s decline.
Pakistan remains a profitable market for the fast-moving consumer goods sector in which multinational corporations have a robust presence. In other sectors, such as pharmaceuticals, challenging pricing policies have hurt profit margins, causing some multinational providers to exit Pakistan. Power generation companies have experienced an uptick in business activity, although renewable energy providers have not found the same success, despite Pakistan’s energy needs. Information and communications technology (ICT) is growing steadily, especially companies outsourcing services and software development. The franchising and healthcare sectors are also growing rapidly.
Foreign investors in Pakistan report that the wide array of federal and provincial taxes and tax regulations are difficult to navigate. For example, as detailed in World Bank’s Doing Business 2016 report, companies have to pay 47 different taxes in Karachi as compared to an average of 31.3 in other South Asian countries. These payments require an average of 594 hours per year to pay off. In addition, tax assessment procedures often lack transparency, something that has led to complaints of discrimination from foreign taxpayers. In some cases, multinationals have been asked make advanced tax payments against future earnings. Attempts to reform the tax system date back to the 1980s. Efforts, thus far have failed to deliver significant results, except for an increase in indirect (i.e. sales) taxes. Pakistan has one of the lowest tax-to-Gross Domestic Product (GDP) ratios in the world - approximately 11.0 percent in 2015 - and multinational corporations shoulder the largest portion of the tax burden.
Other Investment Policy Reviews
Pakistan improved its financial services commitments after signing the World Trade Organization (WTO) Financial Services Agreement in December 1997. Foreign financial services companies have the right to establish presences within Pakistan. Foreign banks are permitted to establish locally incorporated subsidiaries, provided they have the minimum global tier-one paid up capital of $5 billion or they belong to one of the regional organizations or associations to which Pakistan is a member (e.g. ECO or the South Asian Association for Regional Cooperation - SAARC). Absent these requirements, foreign banks are limited to a maximum 49-percent equity stake in locally incorporated subsidiaries. Foreign and local banks must submit an annual branch expansion plan to the SBP for approval. The SBP approves branch openings depending on the bank's net worth, adequacy of capital structure, future earnings prospects, credit discipline, and the need of the local population. All banks are required to open 20 percent of their new branches in small cities, towns, and villages.
Laws/Regulations on Foreign Direct Investment
The GOP provides the same treatment and legal protection to foreign and domestic investments in all sectors except defense and broadcasting. The 1976 Foreign Private Investment Promotion and Protection Act, Economic Reforms Act, and Investment Plan deal with the rights of foreign investors. The Foreign Private Investment Promotion and Protection Act provides that foreign investments will not be subject to higher income tax levels than similar investments made by Pakistani citizens. While Pakistan's law and economic policy does not discriminate against foreign investments, in most cases, execution of contracts remains problematic because of inefficiencies and lack of transparency in domestic courts.
As defined by the Companies Ordinance of 1984, the registration of companies in Pakistan is government by the Securities and Exchange Commission of Pakistan (SECP). Both foreign and domestic countries begin the registration process by identifying an available name with the SECP. (A link to the SECP’s Company Name Search tool can be found here). Once a name is chosen, and required fees are paid to begin the registration process, companies must supply requisite documentation regarding the proposed business. Typical documentation includes such items as: lists of corporate officers, location of company headquarters, and copy of company charter among other things. Every industry or a commercial establishment with five or more employees must be registered with Pakistan’s Federal Employees Old Age Benefits Institution (EOBI). In addition, companies need to apply for National Tax Numbers with the SECP, thus registering to pay income tax, and apply for a Sales Tax Number with Pakistan’s Federal Bureau of Revenue (FBR. Depending on the location of the company, they will also need register with provincial social security institutions as well as with provincial or district labor departments.
The company registration process can be challenging. According to the World Bank’s Doing Business 2016 rankings, Pakistan ranked 122 out of 189 countries in terms of the time it took to start a business. Starting a business in Karachi, for example, took 19 days on average as compared to 15.7 days on average in South Asia and 8.3 days in OECD high income countries.
Pakistan’s federal Board of Investment (www.boi.gov.pk), as well as provincial board of investment, can provide potential investors with guidance on the registration process.
In FY 2007, Pakistan eliminated tariff exemptions for certain manufacturing sub-sectors, specifically the value-added, priority, and high-tech industries. Currently, the manufacturing sector pays up to five percent customs duty on imported plants and machinery. Export-focused industries are entitled to duty-free import of raw materials. There is no minimum equity investment or national ownership requirement for investments in the manufacturing sector and the GOP allows 25 percent first-year depreciation for all fixed assets in this sector. The GOP also allows 25 percent of the cost of a plant and machinery to be counted as the first-year depreciation in infrastructure and social sectors.
The Companies Ordinance from 1984 regulates mergers and acquisitions. Mergers are allowed between international companies as well as between international and local companies.
Limits on Foreign Control and Right to Private Ownership and Establishment
In Pakistan’s 2013 Investment Policy, the GOP eliminated the minimum initial capital investment requirements for all sectors. There is no minimum requirement for the amount of foreign equity investment or upper limit on the share of foreign equity allowed, except in the airline, banking, agriculture and media sectors. Foreign investors in the services sector may retain 100 percent equity “for the life of the investment.” Pakistan allows foreign companies in the services sector to repatriate 100 percent of profits. To start a cellular network operation, investors need to obtain licenses from the Pakistan Telecommunication Authority. In the social and infrastructure sectors, 100 percent foreign ownership is allowed. In the agricultural sector, 60 percent foreign ownership is allowed. Corporate farming is permitted, though only companies incorporated in Pakistan can own farmland. There are no limits on the size of corporate farmland holdings, which foreign companies can lease for up to 50 years, with renewal options. The tourism, housing, construction, and information technology sectors have been granted “industry status,” which makes them eligible for lower tax and utility rates than businesses categorized as “commercial sector” such as banks and insurance companies. Only Pakistanis can invest in small-scale mining valued at less than Rs. 300 million (about $3 million).
From 2002-2007, Pakistan attracted significant foreign investment through the privatization of state-owned enterprises (SOEs) in the financial services and telecommunications sectors, though privatization stalled from 2008- 2013. Pakistan’s EFF with the IMF identified 31 SOEs for either partial or total privatization. During FY 2015 the GOP successfully offloaded its stakes in several banks and publicly-traded firms. However, in early 2016 due to significant political resistance the GOP postponed plans to privatize PIA, Pakistan Steel Mills (PSM), and several power generation and distribution companies. Pakistan allows foreign and local investors to purchase public shares of SOEs and financial institutions on equal terms.
Screening of FDI
Since 1997, the GOP no longer screens industrial sector foreign investment unless investors apply for special incentive packages or government tariff protection and price guarantees. The same year, the GOP also eliminated requirements that foreign investors seek provincial government clearance for project location.
The Competition Commission of Pakistan (CCP) is responsible for regulating the anti-competitive and monopolistic practices of both private and public sector organizations. The 2010 Competition Commission Act codified the mandate of the CCP into law and revised the appeals process to include an appellate tribunal in Islamabad tasked with issuing decisions within six months. The law also reduced the fine for offenders from 15 percent to 10 percent of revenue-earned and authorized the CCP to collect three percent of the earnings of other major regulatory agencies to supplement their budget.