Foreign assets and foreign assets declaration law: Strengthening the rule of law

The Federal Board of Revenue (FBR) in exercise of its powers under the Assets Declaration Act has released the rules for the process and procedures to be adopted whilst examining any matter related to asset declaration laws as enunciated in 2018 and 2019. Surely, it a step aimed at promoting rule of law in fiscal administration. In the past, various legislations could not achieve the desired objectives on account of lack of procedural clarity. This risk cannot be taken with respect to financial and fiscal issues because businesses are run on the basis of ‘trust’ between the state and its subjects. In Pakistan, such trust has been shaken many times that has led to a lack of long term investment in Pakistan. That Foreign Direct Investment is a secondary subject is a fact. Our primary problem is that in many cases Pakistani businessmen do not trust the state policy on a long-term basis. Although the list is rather long, I will quote only three instances in this respect. Two are commonly known whereas the third is a case not publicly known, therefore it would be discussed anonymously. The first act was the nationalization of major industries by Z.A. Bhutto government in 1972 and thereafter. The second episode was freezing of the foreign currency accounts by the Nawaz Sharif Government in late 1990s. There has been a lot of discussion on these two instances, would therefore spare the readers repetition and concentrate on the third instance. In this case, a Pakistani entrepreneur with his very hard work created a brand in FMCG sector. That brand was sold in 2017 to a listed company of a developed country at a very reasonable price in USD and the sale value of assets ‘in Pakistan’ was received in foreign currency in Pakistan. Instead of being recognized for his achievements for creating a big brand in Pakistan, that entrepreneur was dragged into litigations on account of lack of clarity on various fiscal and financial laws. At the end, he decided that there will be no investment by his group in Pakistan. The business community is a ‘well-knit’ group and everybody in the market observed the circumstances and developments in that case. A very senior businessman informed me that in business circles the manner in which that person was handled is a disaster for business confidence bigger than the act of nationalization of industries in the 1970s. There may be weaknesses in that case; however, the primary question is whether or not the manner in which such matters are investigated and examined is commensurate with international practices. In this respect we should always remember that Pakistan is not the only destination for investment by entrepreneurs whether Pakistani or otherwise. International best practices must be adopted in these matters.

The purpose of this preamble is that this mistake should not be repeated. The foreign asset declaration laws represented voluntary declarations. Such laws should carry the confidence that is required in such cases. Those who availed the facility should clearly see that the state had taken a step that shall be honored in letter and spirit. The state is different from government. In the period subsequent to the asset declaration law, information had been received by FBR about foreign assets of Pakistani citizens. In many cases such assets included the assets that have been declared in the asset declaration law. The field officers and the administration of FBR are bound to ensure that there should not be any action whereby the substance or spirit of asset declaration laws is disturbed. The rules as proposed to be prescribed on December 22, 2020 are constructive and positive steps in this direction. There were instances of fishing enquiries and some other matters that required a framework for operation of law. The rule of law can only be there when there are rules to operate a law. There cannot be any discretion. Prominent features of these rule are in the following paragraphs.

The first and foremost need for these rules is to provide the FBR to undertake any function in relation to asset declaration law. I reiterate the view expressed in many articles in this newspaper that there is a fundamental difference between the Amnesty Schemes that were introduced in the past and the asset declaration law which was enunciated for the first time in the history of Pakistan. An amnesty scheme is governed by a provision in the income tax law. Accordingly, proceedings in relation to that amnesty can be undertaken by the officers working under that law. As against that, an asset declaration law is a separate act which overrides the Income Tax Ordinance, 2001 and other fiscal and financial laws. Accordingly, there cannot be any action in relation to an ‘Asset’ declared under the asset declaration law by an officer appointed under the income tax law. In the strict sense an asset or a person who has declared something under the asset declaration law is alien to Income Tax law. The rules as prescribed now are the link between the asset declaration law and the income tax law. Without having these powers which emanate from the asset declaration law through these rules all the actions by the income tax officers with respect to assets declared under the Asset Declaration law have no legal significance. This is the primary objective of these rules. In this situation it is my suggestion, which in my view, is also the legal requirement, that all proceedings undertaken in the past should be annulled or remanded to be examined in accordance with these rules. This primary question should be addressed on an urgent basis to bridge the trust gap. The simple question is whether there can be any question relating to the asset declaration law by an officer appointed under the income tax law. The answer is firmly in the negative. These rules provide that mechanism in a reasonable manner.

The asset declaration law provided relief for the assets declared at a particular date. All the declarations were made on that basis. For example Mr. A declared USD 1,000,000 in a bank account. Under the OECD Common Reporting Standards, information is received by the FBR. It is quite possible that on June 30, 2019 that cash had been used in the purchase of a flat in London. A practical issue that has arisen is that taxation officers on the basis of an incorrect understanding intended to add the value of that flat as an undeclared asset not realizing that the value of that asset [cash at that time] had already been declared under the asset declaration law. This matter has been described in the prescribed rule to the effect that the form of asset declared as at a particular date is to be accounted for after taking into all the relevant facts.

The third aspect that has been taken up is declaration by the foreign trusts, their settlers, contributors and beneficiaries. These provisions were inserted in the asset declaration law keeping in view the practical circumstances. In many cases, assets outside Pakistan were held under trusts formed outside Pakistan. In many cases contribution to the trust were not by the persons who were the settlors. In various cases, assets were beneficially owned by persons other than the settlors or the contributors. All these variations were fully taken into account in the asset declaration law. There was a need for a common and appropriate understanding of the subject. That has been provided in the rules.

Another subject that has been settled in the rules is the determination of the status of holder of public office. This determination has to be made by the relevant institution. This is extremely important for the reason that such matters are too sensitive to be discussed at regular income tax executive and appellate forums. It is a question of fact. Nothing has to be interpreted.

In this respect it is important to note that India also introduced an asset declaration law. In that law India incorporated the manner in which income tax authorities are required to act in relation to that law. In Pakistan, this concept was laid down in the Act by way of a right to prescribe the rules. The proposed rules as published on December 22, 2020 are extremely important in the context that there has to be a common and transparent manner of operation of law.

The asset declaration law is an overarching legislation. The purpose of this law is not to collect tax. Its only objective is disclosure of beneficial ownership, inter alia, to counter terror financing. Accordingly, the asset declaration law provided relief with respect to foreign exchange regulations, anti-money laundering law and others. These aspects also required procedural clarity. In the prescribed rules this matter has appropriately been accounted for.

To conclude, it is stated that the foremost consideration for any civilized society is the rule of law. In Pakistan, there are laws but they are not implemented in their letter and spirit. Investors whether local or foreign can only be there if there is a law and a process to implement the law in a fair and equitable manner. The rules fulfil the need as was required under the asset declaration laws of 2018 and 2019.

Copyright Business Recorder, 2020