Taxation dispute prolongs refinery upgrade negotiations under new policy

FBR insists on taxing the release from the escrow account, while the refining sector advocates for the government to treat it as a grant to avoid taxation

The refining sector faces challenges in finalizing agreements with the government for upgrading facilities to produce cleaner fuels under a new policy. according to The News.

A news story published in The News tells that with the deadline for signing agreements set to expire on January 16, 2024, both sides need to resolve the taxation escrow account dispute. Under the policy, the release from the joint escrow account will follow a pro-rata basis, with a maximum of 25 percent from the escrow account and 75 percent from the refinery’s resources for the upgrade, subject to auditing by internationally reputed firms for transparency and accountability.

However, the Federal Board of Revenue (FBR) insists on taxing the release from the escrow account, while the refining sector advocates for the government to treat it as a grant to avoid taxation.

Industry officials argue that any taxation would render the upgrades economically unfeasible for the refineries. Four refineries—Pak Arab Refinery Limited (PARCO), National Refinery Limited (NRL), Attock Refinery Limited (ATRL), and Cnergyico Limited—have not signed agreements for their upgrades, citing concerns over taxation, arbitration, force majeure, and import incentives misalignment with the announced policy.

Pakistan Refinery Limited (PRL) is the sole refinery to have signed the agreement in November last year.

The Cabinet Committee on Energy (CCoE) extended the deadline for signing agreements by two months, set to expire on January 16, 2024. The policy, implemented on August 17, 2023, offers incentives and concessions to existing refineries investing in upgrading to produce Euro-V-compliant fuels, contributing to environmental conservation.

Refineries were required to sign upgrade agreements with the Oil and Gas Regulatory Authority (OGRA) within three months of the policy announcement.

The aim was to attract $4-5 billion in refining sector investment to reduce the burden on foreign exchange reserves and dependency on imports.

The policy emphasizes that a modern refining sector will stimulate economic growth, benefitting consumers, stakeholders, and adjacent industrial development.

The taxation issue remains the sole outstanding challenge after resolving other concerns, with efforts underway to reach a resolution in the next two to three days to proceed with the signing of upgrade agreements, according to a senior official from a local refinery.

 

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