Pakistan

Bureau of Economic and Business Affairs
Report
July 5, 2016

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Executive SummaryShare    

Despite a relatively open foreign investment regime, Pakistan remains a challenging environment for foreign investors. An unpredictable security situation, chronic energy shortages and a difficult business climate –including lengthy dispute resolution processes, poor intellectual property rights (IPR) enforcement and inconsistent taxation policies – have contributed to a significant drop in Foreign Direct Investment (FDI) in recent years. Pakistan ranked 138 out of 189 countries in the World Bank’s Doing Business 2016 rankings, falling two places from the previous year.

The Pakistan Muslim League-Nawaz (PML-N) government was elected in May 2013 on pledges to turn around Pakistan’s economy, enhance trade and investment, and bridge the energy shortage. In September 2013, the Government of Pakistan (GOP) and the International Monetary Fund (IMF) entered a three-year $6.8 billion Extended Fund Facility (EFF) arrangement which includes a series of reform benchmarks. The government has implemented some macroeconomic and energy reforms, such as a reduction in electricity subsidies, and attempted to privatize a number of state owned enterprises (SOEs). Progress toward privatization has been slow, however, impeded by strong domestic political pressures. The GOP, for example, has repeatedly postponed plans to privatize Pakistan International Airlines (PIA) and three state electricity distribution companies. The GOP’s attempt to sell a 26 percent stake in PIA, along with management control, has been particularly fraught: in February, three people died amidst anti-privatization protests.

The United States has consistently been one of the largest sources of FDI in Pakistan and one of its most significant trading partners. Bilateral trade between the United States and Pakistan exceeded $5.5 billion in 2015. The Karachi-based American Business Council (ABC), an affiliate of the U.S. Chamber of Commerce, has a membership of 68 U.S. companies, most of which are Fortune 500 companies, operating in Pakistan across a range of industries. The Lahore-based American Business Forum (ABF) also provides assistance to U.S. investors. American companies have profitable investments across a range of sectors,, notably, but not limited to, fast-moving consumer goods and financial services. Other sectors attracting U.S. interest have been: franchising, ICT, thermal and renewable energy healthcare services, and tele-medicine. Used equipment from the United States is also in high demand.

In 2003, the United States and Pakistan signed a Trade and Investment Framework Agreement (TIFA), the purpose of which is to serve as a key forum for bilateral trade and investment discussion between the two countries. The TIFA seeks to address impediments to greater trade and investment flows and increase economic linkages between our respective business interests. TIFA meetings are held annually, with the most recent TIFA inter-sessional meeting occurring in March 2015.

Table 1

Measure

Year

Index or Rank

Website Address

TI Corruption Perception Index

2015

117 of 168

http://www.transparency.org/cpi2015#results-table

World Bank’s Doing Business Report “Ease of Doing Business”

2016

138 of 189

http://www.doingbusiness.org/rankings

Global Innovation Index

2015

131 of 141

https://www.globalinnovationindex.org/content/page/data-analysis

U.S. FDI in Pakistan ($M)

FY15

$208.9

http://www.sbp.org.pk/ecodata/nifp_arch/index.asp

World Bank GNI per capita

2015

$1,400

http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a per capita gross national income (GNI) of $4,125 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/pages/docs/doc/report-guide-to-the-indicators-and-the-selection-process-fy-2015.

1. Openness To, and Restrictions Upon, Foreign InvestmentShare    

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.

Business Registration

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.

Industrial Strategy

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).


Privatization Program

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.

Competition Law

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.

2. Conversion and Transfer PoliciesShare    

Foreign Exchange

The SBP maintains strict controls over the exchange rate and monitors foreign exchange transactions in the open market. Banks are required to report and justify outflows of foreign currency. Travelers leaving or entering Pakistan are allowed to physically carry a maximum of $10,000 in cash. There are no restrictions on payments of royalties and technical fees for the manufacturing sector. However, there are restrictions on other sectors, including a $ 100,000 limit on initial franchise investments and a cap on subsequent royalty payments of five percent of net sales for five years. Royalties and technical payments are subject to a 15percent income tax.

To facilitate commercial bank operations, in 2002 the SBP allowed cross-border payments of interests, profits, dividends, and royalties, without submitting prior notification. However, banks still have to report loan information, which allows the SBP to verify remittances against repayment schedules.

Exchange companies are permitted to buy and sell foreign currencies for individuals, banks, and other exchange companies. Additionally, they can sell foreign currencies to incorporated companies to facilitate the remittance of royalty, franchise, and technical fees. In recent years, there has been an increase in overseas worker remittances sent through these companies.

Remittance Policies

The GOP allows the remittance of full capital, profits, and dividends over $5 million, Dividends are tax-exempt. There are no limits on dividends, remittance of profits, debt service, capital, capital gains, returns on intellectual property, or payment for imported equipment in Pakistani law, though for selected transactions that could impact Pakistan’s foreign exchange reserves approval of the government’s Economic Coordination Committee is often required. Banks are required to report and justify outflows of foreign currency and investor remittances can only be made against a valid contract or agreement registered with the SBP within 30 days of execution.

The SBP, Ministry of Overseas Pakistanis, and Ministry of Finance created the Pakistan Remittance Initiative in 2009 to facilitate faster, cheaper, and more efficient flow of remittances and in recent years, there has been an increase in overseas worker remittances. The GOP, through the 2001 Income Tax Ordinance of Pakistan, exempted taxes on any amount of foreign currency remitted from outside Pakistan through normal banking channels and converted into rupees.

The 1976 Foreign Private Investment Promotion and Protection Act guarantees remittance of profits earned through sale and appreciation in value of property.

3. Expropriation and CompensationShare    

The 1992 Furtherance and Protection of Economic Reforms Act protect FDI in Pakistan from expropriation by the 1976 Foreign Private Investment Promotion and Protection Act. The country’s Investment Policy of 2013 reinforced the GOP commitment regarding the security and safety of FDI.

4. Dispute SettlementShare    

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

Pakistan’s legal system is based on British common law and is strongly influenced by Islamic Sharia Law. The application of Islamic Sharia Law remains primarily confined to the areas of domestic or personal matters. There are two classes of courts: the superior or high courts and the lower or subordinate courts. The superior judiciary is composed of the Supreme Court, the Federal Sharia Court and five High Courts. The Supreme Court holds the country’s highest jurisdiction. Neither the Supreme Court nor a High Court may exercise jurisdiction in relation to Pakistan’s Tribal Areas, except in the cases where it is clearly stipulated. The lower courts are composed of civil and criminal district courts, and various specialized courts specifically covering areas such as: banking, intellectual property, customs & excise, smuggling, drug trafficking, terrorism, tax law, environmental law, consumer protection, insurance and corruption. The government also has the authority to set up administrative courts over which they exercise exclusive jurisdiction. Each province has a high court, which hears appeals from district courts in civil cases and session courts in criminal cases. It is common for one judge to preside over the district and session courts. The Supreme Court has jurisdiction over the provincial high courts, referrals from the federal government, and cases involving disputes among provinces or between a province and the federal government. Special courts and tribunals deal with taxation, banking, and labor.

Bankruptcy

Pakistan does not have a single, comprehensive bankruptcy law. Currently, foreclosures are governed under the Companies Ordinance of 1984 and administered by the SECP. The Banking Companies Ordinance of 1962 governs liquidations of banks and financial institutions. Court-appointed liquidators who auction the property of a bankrupt company organize the actual bankruptcy process, which can take years to complete.

Investment Disputes

Pakistan is a member of the International Center for the Settlement of Investment Disputes (ICSID). Foreign investors have noted, however, that the lack of clear, transparent, and timely investment dispute mechanisms has negatively impacted their investment decisions in Pakistan. In addition, they have expressed concerns over how arbitration cases are resolved. Enforcement of rulings is another major concern, as it can be inconsistent.

Several high profile foreign investment disputes in the mining and energy sectors remain active in Pakistani courts.

International Arbitration

Even though the Pakistan Arbitration Act of 1940 provides guidance for arbitration in commercial disputes, commercial cases in the courts typically take years to resolve. As a result, most foreign investors typically write into their contracts the right to international arbitration.

ICSID Convention and New York Convention

Pakistan is a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention). In 2005, Pakistan ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Duration of Dispute Resolution – Local Courts

There is no specific duration for dispute resolutions and the process may take years to resolve.

5. Performance Requirements and Investment IncentivesShare    

WTO/TRIMS

Pakistan has been a World Trade Organization (WTO) member since January 1, 1995 and a General Agreement on Tariffs and Trade (GATT) member since 1948. Pakistan provides most favored nation (MFN) treatment to all member states with the exception of India and Israel. Since 2012, imports from India have been managed through use of a “negative list” of products that cannot be imported into Pakistan. There are about 1,200 products currently on Pakistan’s negative list. Pakistan does not conduct any trade with Israel.

During the period under review, Pakistan was a respondent in three WTO dispute settlement cases, including one involving the United States; over the same period, it was involved in five cases as a complainant

Pakistan is a signatory to the South Asia Free Trade Agreement. It also has bilateral free-trade agreements with China, Indonesia, Iran, Malaysia, Mauritius and Sri Lanka. At the time of this report, Pakistan was in the early stages of negotiating preferential trade agreements with Turkey, Thailand and South Korea.

In October 2015, Pakistan ratified the WTO’s Trade Facilitation Agreement, making it, at the time, the 51st WTO member to do so and the only country in South Asia. The country is also one of 23 WTO countries, including the EU, that are negotiating the Trade in Services Agreement (TiSA).

Investment Incentives

The GOP’s investment policy provides both domestic and foreign investors with the same incentives, concessions, and facilities for industrial development. Though some incentives are included in the federal budget, Special Regulatory Orders (SRO) promulgate most tax incentives. For example, through an SRO issued by Pakistan’s Federal Bureau of Revenue, the sales taxes on industrial machinery and customs duties on imported agricultural machinery have been abolished. Additionally, export-oriented industries have been granted customs duty exemptions on the import and purchase of raw materials. Custom duties for machinery imported by the manufacturing and social service sectors are under five percent.

In 2011, the GOP imposed sales taxes ranging from four to six percent on unregistered companies working in the supply chain of export oriented sectors, including textiles, surgical, sports, leather, and carpets. Registered companies remain exempted from sales tax. Retailers in the same export-oriented sectors are subject to a four percent sales tax. Separately, in 2014 Pakistan’s Federal Bureau of Revenue (FBR) issued a new SRO imposing a 17 percent sales tax on imported finished textiles and leather goods while keeping the sales tax on similar locally produced products at five percent. The FBR has stated that they intend to equalize the tax rates over time but have not provided a timeline. The vast majority of import tariffs are under 30 percent of the value of the good.

Research and Development

In Pakistan, there are no provisions for research and development initiatives. However, high tech industries, which include power tools, information technology and solar energy utilization, benefit from a wide range of fiscal incentives.

Performance Requirements

Pakistan does not mandate specific performance requirements for foreign entities operating in the country. There is no requirement to hire domestic workers at any grade or have local representation on the company's board of directors. U.S. businesspeople are granted multiple entry visas valid for five years with a 90-day stay. Technical and managerial personnel working in sectors that are open to foreign investments are not required to obtain special work permits. Work visas for technical and managerial personnel are granted for one year and can be extended on a yearly basis.

Data Storage

Foreign investors are allowed to sign technical agreements with local investors without disclosing proprietary information. According to the country’s 2013 Investment Policy, manufacturers that bring new technology to Pakistan receive the same incentives available to companies operating in Pakistan’s Special Economic Zones (SEZs).

6. Protection of Property RightsShare    

Real Property

Pakistan's legal system offers incomplete protection for the acquisition and disposition of property rights. The 1979 Industrial Property Order safeguards industrial property in Pakistan against government use of eminent domain without sufficient compensation, even in the public interest, in accordance with provisions of the law. The order protects both local and foreign investments. The 1976 Foreign Private Investment Promotion and Protection Act guarantees remittance of profits earned through the sale or appreciation in value of property.

Intellectual Property Rights

Pakistan remained on the U.S. Trade Representative’s Priority Watch List in the 2015 Special 301 review. The report cites weak protection and enforcement of intellectual property rights (IPR), particularly with respect to copyrights, pharmaceutical data, and media piracy. Pakistan has made some progress in combating large-scale illegal optical disc production and retail sales of pirated and counterfeit products. Further action is required to combat book piracy, aggressively prosecute IPR crime, and ensure that courts issue deterrent-level sentences for IPR infringers. The GOP has identified intellectual property protection as a key area for its “second generation” economic reforms.

In 2005, Pakistan created the Intellectual Property Organization (IPO). The IPO, a semi-autonomous body under the administrative control of the Cabinet Division of Pakistan, consolidates into one government agency the authority over trademarks, patents, and copyrights – areas that were previously handled by offices in three separate ministries. IPO's mission is to initiate and monitor the enforcement and protection of intellectual property rights through law enforcement agencies, in addition to dealing with other IPR-related issues. The IPO’s establishment, while important has not led to consistently measurable results in terms of increased public awareness of intellectual property rights, increased enforcement, or prompt action to address specific legislative and policy weaknesses. IPO has conducted training courses for IP professionals in accordance with WIPO standards.

Pakistan’s 2012 Intellectual Property Organization law provides for specialized IPR tribunals to adjudicate cases and a policy board with private sector representation to assess policy decisions. However, the implementation of these laws is a slow and protracted process.

Although progress remains slow, the GOP achieved an important milestone when it set up three IP tribunals in 2015. One IP tribunal, in Lahore, is operational; meanwhile, judges have been appointed to tribunals in Islamabad and Karachi, but these courts are not yet hearing cases. The tribunal’s effectiveness and the overall impact on Pakistan’s IP regulatory environment is not yet clear.

Pakistan has enacted five major laws relating to patents, copyrights, trademarks, industrial designs, and layout designs for integrated circuits, but weak enforcement have limited the impact of these laws. GOP is working to update these laws with technical assistance from the U.S. Commercial Law Development Program (CLDP). However, the process is protracted and progress is slow.

In April 2005, in an effort to improve IPR protection, the GOP transferred inter-agency responsibility for the enforcement to the Federal Investigation Agency (FIA). Expanding manpower and training at the FIA remains a key challenge. The FBR, which manages customs authority in Pakistan, faces numerous challenges in properly identifying and interdicting counterfeit material at Pakistan’s borders. However, in a promising sign, the FBR recently established an IPR Directorate to improve enforcement capacity. In May 2015, FBR launched an electronic recordation system and drafted Trade Related Intellectual Property Rights Enforcement Rules, although they have yet to be published. Additionally, the IPO signed an MOU with FBR in October 2015, agreeing to strengthen IPR enforcement at the border through data sharing and capacity building initiatives; however, this agreement is pending implementation.

Pakistan’s existing regulatory structure provides virtually no IPR protection for seeds or plant biotechnology, but other elements of the regulatory system are beginning to function for the first time since devolution. Pakistani farmers rapidly adopted Bacillus Thuringiensis (Bt) cotton after it was first introduced informally during 2002 in the province of Sindh. Bt cotton now accounts for about 95 percent of cotton area in Pakistan. The technology first spread informally but the single Bt event was eventually approved by the government and both the private and public sectors are producing local varieties with the Bt event. After 2010, the GOP amended its constitution to devolve certain powers to the provinces, creating uncertainty between federal and provincial officials as to responsibility for regulatory approvals. The federal system functioned through 2012, but no new varieties were approved from 2012 until February 2016 when the federal government resumed approvals of new biotech seed varieties. Through early 2016, 34 varieties of commercial cotton and over 100 applications for crops that are undergoing research have been approved by the federal National Biosafety Committee, a major step forward after several years of inaction.

The GOP is currently debating the Plant Breeders’ Rights Act, a law which if implemented, will provide a framework for patent protection. The Act has been the most forward looking in establishing potential IPR protection by enabling firms to register their varieties. If approved, it could open Pakistan’s market to new biotechnology products, provided firms are confident that IP protection is adequate. One major U.S. seed firm is working with Pakistani partners to pursue a “fee-capture” system that would enable it to collect royalty payments from sales of new technology outside the regulatory bounds of the Plant Breeder’s Rights Act.

Pakistan is a party to the Berne Convention for the Protection of Literary and Artistic Works, and is a member of the World Intellectual Property Organization (WIPO). On July 2004, Pakistan acceded to the Paris Convention for the Protection of Industrial Property. Pakistan has not yet ratified the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Trade and Investment Officer
U.S. Embassy, Islamabad
(+92) 051-201-4000

Country/Economy resources:

List of local lawyers: http://islamabad.usembassy.gov/cs_legalinfo.html

7. Transparency of the Regulatory SystemShare    

A number of government agencies, including the SECP, BOI, and SBP, oversee the commercial and financial regulatory system. Under the 1984 Companies Ordinance, all companies are required to register with the SECP. Additionally, the SECP regulates the securities market through its Securities Market Division. The SECP and the Pakistan Stock Exchange collaborate to streamline procedures to register and list securities. The 1971 Securities and Exchange Rules and the 1969 Securities and Exchange Ordinance govern Pakistan’s equity markets. The Companies Ordinance provides a guideline for the closure of a company, while the Banking 1962 Companies Ordinance provides the procedure for closing of a bank.

The SBP, in its role as bank regulatory authority, has established a formal process of consultations with banks on draft regulations. Under Section 40 of the 1997 SECP Act, the SECP also publishes draft regulations to seek public comment prior to finalization.

Historically, Pakistan’s Federal Board of Revenue (FBR) has had the power to issue statutory regulatory orders (SROs) and, through them, can issue new taxes and duties as well as grant exemptions and concessions. The FBR, through SROs, were able to issue and retract tax ordinances with relative autonomy as proposed taxes were not routed through through Pakistan’s Parliament. Under this system, there was little transparency or oversight into the SRO decision-making process. In 2013, however, the GOP began the process of eliminating SROs, although the process has been slow. In 2015, the power to issue new SROs was withdrawn from the FBR. The authority to issue SROs currently resides with Economic Coordination Committee (ECC) of the Cabinet.

As mentioned earlier, the 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 turnover and authorized the CCP to collect three percent of the earnings of other major regulatory agencies to supplement their budget

8. Efficient Capital Markets and Portfolio InvestmentShare    

Pakistan’s financial sector policies support the free flow of resources for domestic and foreign investors. The SBP and SECP continue to expand their regulation and oversight of financial and capital markets. The top five banks (one of which is state owned) control 52.6 percent of all banking sector assets. In 2015, total assets of the banking industry were $14 billion. As of December 2015, net non-performing bank loans (NPLs) totaled approximately $600 million, roughly two percent of net total loans.

Interest rates are dependent on the reverse repo rate (also called the policy rate). In the recent past, the SBP has steadily brought down the policy interest rate from a high of 10 percent at the fourth quarter 2014 to 6.5 percent in February 2016. Foreign entities are allowed to borrow from domestic banks without limits. Banks are required to ensure that total debt exposure to any domestic or foreign entity does not exceed 25 percent of the bank’s equity. The private sector predominantly accesses credit from commercial banks. Credit however, can be difficult secure for all but the most credit-worthy companies as commercial banks frequently prefer to lend to the GOP than to the private sector. Pakistan’s domestic corporate bonds, commercial papers, and derivative markets remain in the early stages of development. According to the 2013 Investment Policy, foreign investors in all sectors are allowed domestic credit lines subject to prevailing the rules and regulations of the SECP and SBP, and observance of the required debt-to-equity ratio. The policy extends the use of loans, previously limited to import of industrial plant machinery, to any purpose.

In January 2016, Pakistan’s three stock exchanges (Lahore, Islamabad, and Karachi) merged to form the Pakistan Stock Exchange (PSE). The PSE is a member of the Federation of Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE). The PSE is also an affiliated member of the World Federation of Exchanges and the International Organization of Securities Commissions.

In 2010, the GOP implemented a capital gains tax of 10 percent on stocks held for less than six months and 8 percent on stocks held for more than six months but less than a year. No capital gains tax is applied on holdings that exceed 12 months. The 2012 Capital Gains Tax Ordinance appointed the National Clearing Company of Pakistan Limited to compute, determine, collect, and deposit the capital gains tax. Portfolio investments, capital gains, and dividends can be fully repatriated.

Recent capital market reforms include the introduction of minimum capital requirements for brokers, linking of exposure limits to net capital, strengthening of brokers’ margin requirements, introduction of system audit regulations (mandating audit of 60 percent of brokers), introduction of over the-counter (OTC) markets to facilitate registration of new companies with less paid-up capital, and introduction of a National Clearing and Settlement system. The SECP implemented a number of other regulations, including on clearing houses, margin trading, proprietary trading, and abolition of the group account facility. Capital market legal, regulatory, and accounting systems are consistent with international norms.

Pakistan has adopted international accounting standards, with comprehensive disclosure requirements for companies and financial sector entities, and Pakistan adheres to the majority of international accounting and financial reporting standards.

Money and Banking System, Hostile Takeovers

The SBP requires that foreign banks have at least $300 million in capital reserves at their flagship location in Pakistan and a minimum of 8 percent capital adequacy ratio in order to operate in Pakistan and to open branches. In addition, foreign banks are required to maintain the following minimum capital requirements which vary based on the number of branches they are operating:

1 to 5 branches: Required to maintain $28 million in assigned capital,
6 to 50 branches: Required to maintain $56 million in assigned capital,
Over 50 branches: Required to maintain $94 million in assigned capital.

The GOP enacted legislation providing a legal framework for friendly and hostile takeovers in 2002. The law provides that companies have to disclose any concentration of share ownership over 25 percent. There are no laws or regulations to authorize private firms to adopt articles of incorporation that discriminate against foreign investment. Per the Foreign Exchange Regulations, any foreign investor can invest in shares and securities listed on Stock Exchanges in Pakistan, and can repatriate profits, dividends, or disinvestment proceeds. The investor has to open a Special Convertible Rupee Account with any bank in Pakistan in order to make portfolio investments.

9. Competition from State-Owned EnterprisesShare    

Large and inefficient SOEs have retained a monopoly in a few key sectors, and the GOP provides annual subsidies to cover SOEs’ losses. Three of the country’s largest SOEs include: Pakistan Railways (PR), Pakistan International Airlines (PIA), and Pakistan Steel Mills (PSM). When the Sharif Administration took office in June 2013, it pledged to restart privatization efforts: the administration identified 31 state-owned companies slated for privatization, and hired transaction advisors for the first several transactions that were expected before the end of 2015. However, these efforts have been met with fierce controversy: a recent attempt to partially privatize PIA caused a serious backlash from labor union and opposition parties. Progress remains stalled despite repeated GOP assurances of its commitment to privatization.

Pakistan Railways (PR): PR is the only provider of rail services in Pakistan and the largest public sector employer with close to 90,000 employees. PR is no longer officially slated for privatization. PR’s freight traffic has declined by over 76 percent since 1970. Of PR’s 458 locomotives, on average, only 248 remained available for use. The company relies on government bailouts of $2.8 million a month to pay salaries and pensions. In the FY 2015 budget, total government grant payments to PR was budgeted at $410 million. In 2014, Pakistan initiated the public-private partnership policy (which was deferred since 2012), the private sector is being offered commercial management and passenger facilitation of 14 express, four passenger, one rail car each for mail, mixed, and shuttle trains. Nonetheless, there are indications that PR is improving its performance: it recently purchased 55 4,000-horsepower locomotives, which will be used for freight operations, and aims to recapture market share previously ceded to the trucking industry.

Pakistan International Airlines (PIA): continues to struggle and is criticized for poor management, excessive staffing, inefficient operations, and a non-competitive market strategy. In contrast to PR, PIA is technically not operating as a monopoly. It faces domestic private sector competition from Air Blue and Shaheen Air and also very strong competition from Gulf carriers and other regional airlines on international routes. In a December 2015 meeting, the Economic Coordination Committee (ECC) of the Federal Cabinet approved another bailout package of $90 million for PIA and also boosted sovereign guarantees from $1.3 billion to $1.4 billion. According to reports, the government intends to use the package to add premium services in long-haul routes and prepare the organization for privatization. In January, PIA announced after-tax losses of $194 million for the first nine months of calendar year 2015 (Jan-Sep), slightly lower than the $210 million loss incurred in same period of the previous year.

PIA’s privatization is complicated by the PIA Act of 1956, which bars the transfer of shares to a non-governmental body. The GOP submitted a bill to parliament to address this issue by converting PIA in to a limited company thus pave the way for privatization. PIA’s current debt is estimated at around $3 billion. Meanwhile, the GOP created a new company, “Pakistan Airways,” as a subsidiary and may plan to shift the core business in this company. The GOP maintains that privatization will take place in six months and has already been given a green light by the Federal Cabinet and Prime Minister as per one of the conditions of the IMF EFF current arrangement.

Pakistan Steel Mills (PSM): Established by the GOP as a cheaper option than importing steel, PSM has deteriorated into a money-losing enterprise that relies on a ban on steel imports to remain afloat. In 2006, the Supreme Court halted the proposed $360 million sale of a 75 percent stake in PSM after facing opposition from a strong workers’ union and the general public. There was also concern that the transaction undervalued PSM. As a result of a government-backed financial restructuring package worth $185 million in the first quarter of 2014, the mill was operating at 30 percent of its capacity as compared to three percent during the same period last year. However, this package did not last long and PSM and the entity stopped operating in June 2015. The company has $3.5 billion in debt and accumulated losses, loses $5 million a week and has not produced steel at its 19,000-acre facility since June last year. That was when the national gas company cut power supplies, demanding payment of bills of over $340 million.

References: http://www.resourcegovernance.org/rgi/countries: the underlying country fact sheets provide information on competition from state-owned enterprises in the oil, gas and mining sectors for over 50 countries.

Information on SOES in OECD and partner countries:

http://www.oecd.org/daf/ca/soemarket.htm

OECD Guidelines on Corporate Governance of SOEs

State-owned enterprises (SOEs) continue to play an important role in Pakistan's economy. State involvement occurs mainly in manufacturing (e.g. fertilizers, steel and engineering goods), energy (oil, gas, and electricity) and key services (e.g. banking, insurance and transportation). In Pakistan, SOEs represent one third of the total stock market capitalization. Pakistani SOEs do not follow OECD guidelines for their corporate governance. In 2010, Pakistan initiated the process of issuing an SOE Code, however with the change of government in 2013 and the conditionalities – including the privatization of key SOEs – of the IMF program, there has been no progress since then.

Even though SOEs operate with their own budget they are still governed by various ministries. For examples, PSM is governed by the Ministry of Industries and Production, whereas the Ministry of Railways governs Pakistan Railways.

Sovereign Wealth Funds

Pakistan does not have its own sovereign wealth fund. Within the country, there are no specific exemptions for foreign sovereign wealth funds (SWFs) under domestic tax law. Foreign SWFs are taxed like any other non-resident person unless specific concessions have been granted under an applicable tax treaty to which Pakistan is a signatory.

10. Responsible Business ConductShare    

There are no unified set of standards defining responsible business conduct in Pakistan. For example, corporate social responsibility (CSR) is still in its infancy, although there is an increasing awareness of CSR among producers and consumers. Foreign and some local enterprises follow the accepted CSR principles and promote their messages through various media platforms. However, one major consequence is that CSR is sometimes equated with corporate philanthropy/charity, especially in the case of local corporations. Some indigenous companies have developed written CSR policies, but the majority, are either unaware of the benefits brought by CSR or they feel that even if they do not adopt CSR policies, they will not be penalized.

11. Political ViolenceShare    

The presence of several foreign and local terrorist groups within Pakistan poses a danger to U.S. citizens. Terrorist attacks have targeted civilians, government, and foreign personnel and organizations. There have also been frequent attacks on Pakistani military establishments. Major Pakistani cities are frequently on high-security alert with paramilitary and police patrolling the streets. Terrorist groups in Pakistan pose a threat to U.S. citizens and other westerners. There is potential for anti-U.S protests, which can turn violent. Embassies of most western countries, including the United States, United Kingdom, Canada, Australia, and New Zealand, have issued travel advisories against non-essential travel to Pakistan. Consequently, western businesses operating in Pakistan often employ costly security measures.

The Board of Investment, in collaboration with Provincial Investment Promotion Agencies, has in the past coordinated airport-to-airport security for foreign investors. To avail of this service, registered foreign investors or potential investors should make a request to the BOI with adequate notice and details of their itinerary. The service includes a police escort and guidance on making secure lodging and transportation arrangements.

Reference: http://www.acleddata.com/ provides visuals showing trends in political violence in Asia and Africa.

12. CorruptionShare    

Since 2013, PML-N has made progress towards introducing anti-corruption policies and prosecuting high officials accused of being involved in corruption. Corruption nevertheless remains widespread in Pakistan at the federal level, especially in procurement, international contracts, and taxation. There are anecdotal reports that corruption has increased at the provincial level following the 2010 constitutional amendment that devolved responsibility for many service-delivery oriented issues, such as health, education, and environmental regulations, from the federal to the provincial governments. Offering and accepting bribes are criminal acts punishable by law and could result in confiscation of property, imprisonment, recovery of dishonest gains, and dismissal from government service or a penalization in governmental grade. In 2015, Pakistan ranked 117 out of 168 countries on the Transparency International Corruption Perceptions Index.

Constituted under the 1999 National Accountability Ordinance, the National Accountability Bureau (NAB) is the country’s anti-corruption organization, with a mandate to expose and prevent corrupt activities, and to enforce anti-corruption laws. NAB struggles with insufficient funding and staffing.

The CCP targets corrupt activities, such as collusive practices, abuse of market dominance, and deceptive marketing. Despite active community engagement and triumphs in lower level courts, the CCP is hindered by insufficient government funding and slow progress of cases in the court of appeals. Corruption is pervasive in politics and government, and various politicians and government officials have faced allegations of corruption, including bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement.

The 2007 National Reconciliation Ordinance (NRO), promulgated under former President Pervez Musharraf, allowed the government to grant amnesty to public officials accused of corruption, embezzlement, money laundering, murder, and terrorism between January 1, 1986, and October 12, 1999. In December 2009, the Supreme Court declared the NRO null and void, and reopened all 8,000 cases against those who had received amnesty, including President Musharraf and sitting ministers and parliamentarians. Supreme Court decisions about the beneficiaries of NRO are still pending implementation.

Corruption within the lower levels of the police and customs officials is common, even considered normal by the general public. Transparency International notes that the major root cause of corruption is the lack of accountability and enforcement of penalties, followed by the lack of merit-based promotion and earnings, as well as overall low salaries.

There are reported cases of bribery and nepotism in the district and lower courts. Judges in lower courts lack independence and are sometimes pressured by higher court judges. Lower courts remain corrupt, inefficient, and subject to pressure from prominent wealthy, religious, and political figures. Political involvement in judicial appointments increases the government’s hold over the court system.

UN Anticorruption Convention, OECD Convention on Combating Bribery

Pakistan is not a signatory to the OECD Convention on Combating Bribery, but is a signatory to the Asian Development Bank/OECD Anti-Corruption Initiative. Pakistan has also ratified the UN Convention against Corruption.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

  • Major Qamar Zaman Chaudhary
  • Chairman
  • National Accountability Bureau
  • Ataturk Avenue, G-5/2, Islamabad
  • +92-51-111-622-622
  • chairman@nab.gov.pk

Contact at "watchdog" organization (international, regional, local or nongovernmental organization operating in the country/economy that monitors corruption, such as Transparency International):

  • Sohail Muzaffar
  • Chairman
  • Transparency International
  • 5-C, 2nd Floor,Khayaban-e-Ittehad, Phase VII, D.H.A., Karachi
  • 0092-21-35390408-9
  • ti.pakistan@gmail.com

13. Bilateral Investment AgreementsShare    

Bilateral Taxation Treaties

Pakistan and the United States began negotiating a Bilateral Investment Treaty (BIT) in 2004, but an agreement was never reached. Pakistan has signed BITs with 50 countries but has begun to implement the treaties with only 27 of those countries.

The United States and Pakistan have had a bilateral tax treaty in force since 1959. Pakistan also has double taxation agreements with 63 other countries. A multi-lateral treaty between the South Asian Association for Regional Cooperation countries of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka came into force with respect to Pakistan in 2011. The treaty provides additional provisions for the cooperation between the countries in the administration of taxes.

14. OPIC and Other Investment Insurance ProgramsShare    

The Overseas Private Investment Corporation (OPIC) maintains an active portfolio of projects in Pakistan, including new investments in renewable energy and electricity distribution efficiency. Projects must meet OPIC eligibility guidelines both for investment insurance and co-investment.

15. LaborShare    

Pakistan’s civilian workforce consists of approximately 63.34 million workers, but this estimate does not include the informal sector or child workers. The majority of the labor force works in the agricultural sector (43.7 percent), followed by the services sector (33.9 percent), and manufacturing (22.4 percent). Officially, the unemployment rate hovers at around 6.5 percent, but this figure is widely believed to be significantly understated. Additionally, a large number of the employed are underemployed. Pakistan is also an extensive exporter of labor, particularly to the Middle East.

The 18th Constitutional Amendment gives jurisdiction over matters related to labor to the provinces. In Punjab, Khyber Pakhtunkhwa, and Islamabad, the minimum wage is PKR 12,000 per month ($120). In Sindh, it is PKR 11,000 per month ($110), and in Balochistan is PKR 13,000 per month ($130). Labor law enforcement is weak at both the federal and provincial levels. Required labor inspections by and large do not take place, and low-level labor courts are generally considered corrupt and strongly biased in favor of employers. Furthermore, labor protection does not extend to a majority of the labor force, most notably agricultural workers. Pakistan does not comply with International Labor Organization (ILO) conventions, despite having ratified 34 conventions relating to human rights, workers’ rights, and working conditions.

International employers and exporters often have international certifications demonstrating that they meet labor obligations, while local businesses often do not. The only significant area of U.S. investment in which workers’ rights are legally restricted is the petroleum sector, which is subject to the Essential Services Maintenance Act (ESMA). The ESMA bans strikes, limits workers’ rights to change employment, and presents limited options to a fired employee. While ESMA provides collective bargaining rights, it is almost never applied.

The GOP announced labor welfare measures in 2010 including the extension of social security eligibility to workers earning up to PKR 10,000 (S100) a month, creation of a Complaint Cell to address workers complaints, guaranteed payment of full wages to suspended workers, expansion of the government retirement benefits plan to establishments employing five or more workers, an increase in marriage and death grants, and increase in workers’ eligibility for company profit-sharing awards. The provinces are responsible for implementing these measures. As part of its commitments to the EU under the Generalized System of Preferences (GSP) Plus preferential trade scheme, Pakistan has agreed to ratify and implement 27 international conventions on human and labor rights, sustainable development, and good governance.

16. Foreign Trade Zones/Free Ports/Trade FacilitationShare    

The GOP established the first Export Processing Zone (EPZ) in Karachi in 1989, providing special fiscal and institutional incentives to export-oriented industries. Subsequent EPZ were subsequently established in seven other location: in Risalpur, Gujranwala, Sialkot, Saindak, Gwadar, Reko Dek and Duddar. Only the zones in Karachi, Risalpur, Sialkot, and Saindak are currently operational. The main incentives for EPZ investors are exemptions from taxes and duties on equipment, machinery, and materials (including components, spare parts, and packing material); indefinite loss carry-forward; and access to the EPZ Authority (EPZA) “Single Window” that facilitates the issuance of import permits and export authorizations. In 2012, Pakistan implemented the Special Economic Zones (SEZ) Act which established the regulatory framework with which SEZs operate within Pakistan today. The SEZ act allows private parties to establish companies as well as public-private partnerships within SEZs.

Despite offering substantial financial, investor service, and infrastructural incentives to reduce the cost of doing business some of Pakistan’s SEZs have struggled to attract investment due to the challenges they have had providing reliable gas, electricity, and water supplies.

Apart from SEZ-related incentives, the GOP offers incentives for other categories of export manufacturing. An Export-Oriented Unit (EOU) is a stand-alone industrial entity that exports 100 percent of its production. EOUs are allowed to operate anywhere in the country. EOU incentives include duty and tax exemptions for imported machinery and raw materials in addition to duty-free import of two vehicles per project.

17. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country
Statistical Score*

USG or international Statistical Score

USG or International Source of Date:
BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2015

272,865

2015

270,961

https://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx

Foreign Direct Investment

Host Country Statistical Source*

USG or international statistical source

USG or International Source of Date:
BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2015

225.5

2014

272

http://bea.gov/international/factsheet/factsheet.cfm?Area=622

Host country’s FDI in the United States ($M USD, stock positions)

2015

16.6

2014

(224)

http://bea.gov/international/factsheet/factsheet.cfm?Area=622

Total inbound stock of FDI as % host GDP

2015

0.08%

2014

N/A

N/A

*State Bank of Pakistan http://sbp.org.pk/ecodata/index2.asp


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data 2015

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

2,678

100%

Total Outward

1,827

100%

China

1,058

39.5%

China

803

43.95%

United Kingdom

264

9.86%

France

233

12.75%

United Arab Emirates

254

9.48%

Switzerland

151

8.26%

United States

226

8.44%

Saudi Arabia

133

7.28%

Italy

116

4.33%

United Kingdom

90

4.92%

"0" reflects amounts rounded to +/- USD 500,000.

Source: State Bank of Pakistan


Table 4: Sources of Portfolio Investment

Portfolio Investment Assets 2014

Top Five Partners (US Dollars, Millions)

Total

Equity Securities

Total Debt Securities

All Countries

381

100%

All Countries

206

100%

All Countries

175

100%

Saudi Arabia

190

50

Saudi Arabia

178

86

United Arab Emirates

25

14

United Arab Emirates

29

7

Virgin Islands, British

12

6

Cayman Islands

22

12

Cayman Islands

25

6

United Kingdom

8

4

Qatar

20

12

Qatar

20

5

United Arab Emirates

3

2

Japan

19

11

Japan

19

5

Cayman Islands

3

1

Turkey

13

7

Source: IMF Coordinated Portfolio Statement

18. Contact for More InformationShare    

Trade and Investment Officer
U.S. Embassy, Islamabad
(+92) 051-201-4000