CBR can forgo tax on loans from non-resident bank

ISLAMABAD (October 24 2006): The Central Board of Revenue (CBR) is empowered to give income tax exemption to loans obtained through financing arrangement by a non-resident bank for the Pakistan International Airlines (PIA) for acquiring three Boeing 777-300 ER aircraft and one General Electric Propulsor from Boeing Inc, USA.

Sources told Business Recorder on Monday that the national flag carrier has agreed to acquire aircraft from Boeing Inc, USA. This acquisition is being financed through financing arrangement (guaranteed loan) through Export-Import Bank of United States of America ie Eximbank loan facility availed through a lease transaction. The whole financial arrangement has been done through this non-resident foreign bank.

The lessor will finance the acquisition of the aircraft through an Eximbank loan facility, to be supported by a 'sovereign guarantee' issued by the Ministry of Finance on behalf of the President of Pakistan.

Sources said that the terms of the financing arrangement as summarised in the 'Memorandum' shows that it represents a 'Private Loan' obtained from non-resident persons. Under clause 72 of Part I of the Second Schedule to the Income Tax Ordinance, 2001, CBR is empowered under this clause to approve the loan arrangements for tax exemption.

Sources said that the 'project' of acquisition of aircraft and General Electric Propulsor by PIAC having regard to the rate of profit and terms of repayment of the Eximbank loan complies with the requirements laid down in the aforesaid clause and it would assist in economic development of the country. It, therefore, qualifies for approval of exemption under this clause of the Income Tax Ordinance 2001.

Sources said that in addition to entitlement for approval under clause 72(i) of Part I of the Second Schedule of the Ordinance, this financing arrangement also inter alia qualifies for approval under clause 75 of the Part I of the Second Schedule of the Ordinance.

The CBR is examining the proposal to approve the Financing Arrangement under clause. 72(i) and/or 75 of Part I of the Second Schedule to the Income Tax Ordinance, 2001.

A similar financing arrangement was entered into by PIAC in 2003. That arrangement was approved by the Government of Pakistan for the purpose of clause 72 of Part I of the Second Schedule of the Ordinance, sources said. Under the terms of financing arrangement for acquisition of three Boeing 777-300 aircraft and one Propulsor:

Export-Import Bank of the United States of America (Eximbank) has made available guarantee for financing PIAC.

The proceeds from the Eximbank loans will be used to acquire the aircraft and a Propulsor from Boeing Inc, USA for use by PIAC. The structure, terms and conditions are subject to the approval of Eximbank, USA. Eximbank loan is a series of arrangements, which have been briefly summarised in this memorandum.

Sources said that the Eximbank loan lenders will make available to Textila 3, a company incorporated under the laws of the Netherlands (Lessor') an Eximbank Loan under the Eximbank Loan facility up to 85 percent of the cost of aircraft and the propulsor. This facility in aggregate will amount to $465 million.

Lessor will use the proceeds of the Eximbank loan to acquire the aircraft and the propulsor and lease these to PIAC. The transaction partakes the nature of a financing arrangement. Financing parties to the loan are the Eximbank, the Eximbank Guaranteed Loan Agent and/or any other party as and if applicable. The closing date of arrangement at present is not to be later than November 30, 2006.

The funding date will be delivery date of each aircraft but not later than March 2008 for the last aircraft. The President of Pakistan will be the sovereign guarantor of this facility. The sovereign guarantor will, through the Ministry of Finance issue, an irrevocable and unconditional comprehensive guarantee for the benefit of Eximbank and the Lenders.

Subject to Eximbank's approval the Eximbank loan will be repayable by lessor in up to 48 quarterly instalments of principal and interest with respect to each aircraft and 32 quarterly instalments for the propulsor commencing no later than three months from the draw down date for such aircraft.

The Eximbank loans will inter alia be secured by: One, a first priority mortgage over the aircraft (the 'Mortgage') and an assignment by way of security (or equivalent protection) of the warranties relating to the aircraft and the engines.

Two, a first priority pledge over the relevant bank account(s), if any, for Eximbank loan repayment and-any moneys, including the relevant lease rentals, from time to time credited to such accounts(s) (the 'Account Pledge'). Three, a first priority pledge of shares of the borrower (the 'Share Pledge') and any other security required by Eximbank, terms of financing arrangement added.

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