FDI Plummets in Pakistan as Tax Policies Frazzle Firms

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(Bloomberg) — Pakistan’s foreign direct investment inflows have fallen to the lowest since 2023, as business leaders complain of erratic tax policies driving away business.

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Data released on Friday showed a 34% decline in year-on-year investment, with just $1.64 billion net trickling into the country of 250 million people over the past 12 months. 

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Major multinational companies have packed up since an economic crisis in 2022, including Procter & Gamble Co., the world’s largest consumer goods maker which indirectly created thousands of jobs in Pakistan, and Telenor ASA, a top taxpayer which invested $2 billion over two decades, both at the end of last year. 

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TotalEnergies SE, Shell Plc, and Uber Technologies Inc. have also departed, while other foreign companies, including Microsoft Corp., which spent a quarter century in the capital Islamabad, have handed over to local partners or scaled back operations.

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The contribution of multinational companies “is not just in dollars and cents,” said Abdul Aleem, the head of the Overseas Investors Chamber of Commerce and Industry in Pakistan. “The biggest damage to Pakistan is the top talent and skills they take with them. Most of the CEOs that are working in Pakistan once worked in those companies.” 

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Multiple executives involved with companies that have left or downsized since 2023 said that a severe and inconsistent tax policy was a dominant reason driving away business. Asking not to be identified because they did not have permission to speak to the media, several spoke about how it became harder to plan for the long-term or predict profitability.

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Caught between pressure from the International Monetary Fund to increase revenue and a large populace unable or unwilling to pay income taxes, Pakistani authorities have long resorted to squeezing companies. Businesses in the country currently pay up to 44% tax, made up of a baseline corporate tax rate of 29% and a basket of add ons that include employee protection funds and a progressive super tax.

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The super tax, imposed on the highest-earning businesses, was first introduced as a one-off emergency tax but was repeatedly extended. A legal challenge against it earlier this year failed, although the government slightly reduced the rate in the latest budget. 

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“Pakistan is a significant outlier, and it is paying the price,” Pakistan’s Chamber of Commerce said in a statement in May. The corporate tax rate exceeds the 20% rate imposed in Thailand and Vietnam.

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Telenor and Shell declined to comment, while Procter & Gamble, Uber and TotalEnergies did not respond to requests. Microsoft said that they changed their operating model in Pakistan as a part of a “regular process of business evaluation and optimization”. 

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Khurram Schehzad, adviser to Finance Minister Muhammad Aurangzeb, said the exits are due to companies changing their global strategies. He added that there have been 79 new foreign entrants between 2023-2025, compared with 19 exits.

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Still, total FDI inflows remain low, at a moment when Pakistan is enjoying one of its strongest diplomatic positions in years.