Offshore assets - II

In the article published, on this subject, in the paper last week, I had briefly identified the related dimensions of offshore assets of Pakistani citizens. As stated in that article, each particular aspect is required to be examined in depth to have a clear understanding of this important subject. The purpose of this second article is to elaborate on the matter of legal and regulatory framework, being foreign exchange laws of Pakistan.
Whenever there is a discussion on the ownership of foreign assets, following two fundamental questions will arise:
(a) Do Pakistanis have the right to hold foreign assets?
(b) What is the manner of transfer of foreign exchange abroad for the acquisition of foreign assets?
In the earlier article, six (6) broad avenues/methods were identified through which funds could be transferred to acquire assets abroad. Those were essentially the financial and accounting dimensions of the subject. In this article, I have concentrated on the foreign exchange laws of Pakistan, with particular reference to the two questions raised above.
Right to hold foreign assets
The primary foreign exchange law of Pakistan is the 'Foreign Exchange Regulation Act 1947' [FERA]. The 'Foreign Exchange Manual' issued by the State Bank of Pakistan contains rules and procedures for operation of the said law. This primary law has not been fundamentally changed over time. This law is, in substance, regulatory that requires approval of the State Bank of Pakistan for movement and holding of foreign assets.
In essence, under the FERA, the Federal Government has the right to prescribe whether Pakistanis are allowed to hold foreign exchange outside Pakistan. Accordingly, as per the SRO 1016(I)/1979 dated October 17, 1979 (as amended up to April 1991) every citizen of Pakistan who acquires foreign exchange outside Pakistan was required to surrender the same to an authorized dealer. That effectively meant that Pakistani citizens, unless specifically approved by the State Bank of Pakistan, were not allowed to hold foreign currency outside Pakistan. Consequently, unless approved, assets acquired from foreign exchange abroad were technically not allowed to be held. This obviously excludes assets that were held with the approval of the State Bank of Pakistan.
Through the SRO 984(I)/2003 dated October 11, 2003, the SRO 1016, referred above, has been rescinded. The consequential effect of the SRO 984 is the abolition of restriction that Pakistani citizens cannot hold assets abroad. The practical interpretation emerging after the SRO 984 is that, Pakistanis can hold foreign exchange and asset created out of the same abroad. This is a very important change. This effectively resolves the first issue whether or not there is any prohibition in holding assets abroad. It is important to note that the SRO 984 is only restricted to the right of holding assets abroad. It does not deal with the availability of such foreign exchange outside Pakistan. That is a separate subject, which has been discussed in the following paragraphs. Although it is not the subject here; however, in practical sense, there had never been any query or observation on the matter of holding assets abroad after issuance of the SRO 984. The income tax declarations prescribed under the law contain special columns for the same.
Another important aspect of the matter is that in Chapter VI, Paragraph 13 of the Foreign Exchange Manual, there is still a reference of repealed the SRO 1016 that gives the impression about surrender of foreign exchange to SBP. There is a need for a clarification on the matter. The SRO 1016 does not exist anymore.
Availability of foreign exchange outside Pakistan
The FERA is a comprehensive law. However, it is important to note that in the post-1990 era, the legislature introduced two laws that have substantially created a system of dealing in foreign exchange that is effectively parallel in some sense to the FERA.
These are:
1. The Protection of Economic Reforms Act, 1992, [PERA]; and
2. The Foreign Currency Accounts (Protection) Ordinance, 2001 [FCAO].
For the sake of clarity, it would be advantageous to reproduce the text of PERA:
Act No. XII of 1992
An Act to provide for furtherance and protection of economic reforms
WHEREAS it is necessary to create liberal environment for savings and investments; and other matters relating thereto;
AND WHEREAS a number of economic reforms have been introduced and are in the process of being introduced to achieve the aforesaid objectives;
AND WHEREAS is necessary to provide legal protection to these reforms in order to create confidence in the establishment and continuity of the liberal economic environment created thereby;
It is hereby enacted as follows:-
1. Short title, extent and commencement.-(1) This Act, may be called the Protection of Economic Reforms Act, 1992.
(2) It extends to the whole of Pakistan.
(3) It shall come into force at once.
2. Definitions.-In this Act, unless there is anything repugnant in the subject or context.-
(a) "Government" includes both the Federal Government and any Provincial Government;
(b) "economic reforms" means economic policies and programmes, laws and regulations announced, promulgated or implemented by the Government on and after the seventh day of November, 1990, relating to privatization of public sector enterprises, and nationalized banks, promotion of savings and investments, introduction of fiscal incentives for industrialization and deregulation of investment, banking, finance, exchange and payments systems, holding and transfer of currencies; and
(c) all other expressions used in this Ordinance shall have the meaning respectively assigned to them under the relevant laws.
3. The act to override other laws.-The provisions of this Act shall have effect notwithstanding anything contained in the Foreign Exchange Regulation Act, 1947 (V II of 1947), the Customs Act, 1969 (IV of 1969), the Income Tax Ordinance, 1979 , or any other law for the time being in force.
4. Freedom to bring, hold, sell and take out foreign currency.-All citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be entitled and free to bring, hold, sell, transfer and take out foreign exchange within or out of Pakistan in any form and shall not be required to make a foreign currency declaration at any stage nor shall anyone be questioned in regard to the same.
5. Immunities to foreign currency accounts. - All citizens of Pakistan resident in Pakistan or outside Pakistan who hold foreign currency accounts in Pakistan, and all other persons who hold such accounts, shall continue to enjoy immunity against any enquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency accounts.
(2) The balances in the foreign currency accounts and income therefrom shall continue to remain exempted from the levy of wealth-tax and income tax and compulsory deduction of zakat at source.
(3) The banks, shall maintain complete secrecy in respect of transactions in the foreign currency accounts.
(4) The State Bank of Pakistan or other banks shall not impose any restrictions on deposits in and withdrawals, from the foreign currency accounts and restrictions if any shall stand withdrawn forthwith.
6. Protection of fiscal incentives for setting up of industries.-The Fiscal incentives for investment provided by the Government through the statutory orders listed in the Schedule or otherwise notified shall continue in force for the term specified therein and shall not be altered to the disadvantage of the investors.
7. Protection of transfer of ownership to private sector.-The ownership, management and control of an banking, commercial manufacturing or other company, establishment or enterprise transferred by the Government to any person under any law shall not again be compulsorily acquired or taken over by the Government for any reason whatsoever.
8. Protection of foreign and Pakistani investment.-No foreign, industrial or commercial enterprise established or owned in any form by a foreign or Pakistani investor for private gain in accordance with law, and no investment in share or equity of any company firm, or enterprise, and no commercial bank or financial institution established, owned or acquired by any foreign or Pakistani investor, shall be compulsorily acquired or taken over by the Government.
9. Secrecy of Baking transaction.-Secrecy of bona fide banking transactions shall be strictly observed by all banks and financial institutions, by whosoever owned, controlled or managed.
10. Protection of financial obligation.-All financial obligations incurred, including those under any instrument, or any financial and contractual commitment made by or on behalf of the Government shall continue to remain in force, and shall not be altered to the disadvantage of the beneficiaries.
11. Rules.-The Federal Government may make rules for carrying out the purposes of this Act.
In 1999, there were major amendments in PERA. These are reproduced in the following paragraphs. These are relevant in the sense that the same were made after the action of freezing of foreign currency accounts after the nuclear blast in 1998:
ORDINANCE No. XXI OF 1999
AN ORDINANCE
to amend the Protection of Economic Reforms Act, 1992
WHEREAS it is expedient to amend the Protection of Economic Reforms Act, 1992 (XII of 1992), for the purposes hereinafter appearing;
AND WHEREAS the National Assembly and the Senate stand suspended in pursuance of the Proclamation of Emergency of the Fourteenth day. of October, 1999, and the Provisional Constitution Order No. 1 as amended:
AND WHEREAS the President is satisfied that circumstances exist which render it necessary to take immediate action;
Now, THEREFORE, in pursuance of Proclamation of the fourteenth day of October, 1999, and Provisional Constitutional Order No.l of 1999, as amended, as well as Order No.9 of 1999, and in exercise of all powers enabling him in that behalf, the President of the Islamic Republic of Pakistan is pleased to make and promulgate the following Ordinance:
1. Short title and commencement :-(l) This Ordinance may be called the Protection of Economic Reforms (Amendment) Ordinance, 1999.
(2) It shall come into force at once.
2. Amendment of section 4, Act XII of 1992.-In the Protection of Economic Reforms Act, 1992 (XII of 1992), hereinafter referred to as the said Act, section 4 shall be numbered as sub-section (1)of that section and after sub-section (1) numbered as above the following new sub-section shall be added, namely :-
"'(2) Nothing in sub-section (1) shall apply to
(a) "any foreign exchange borrowed under any general permission given by the State Bank of Pakistan under sub-:section (1) of section 4 of the Foreign Exchange Regulations Act, 1947 (VII of 1947);
(b) any payment from abroad for goods exported from Pakistan;
(c) proceeds of securities issued or sold to non-residents;
(d) any payment received from abroad for services rendered in, or from, Pakistan;
(e) earnings or profits of the overseas offices or branches of Pakistani firms and companies including banks; and'
(f) any foreign exchange purchased from an authorized dealer in Pakistan for any purpose.".
3. Amendment of section 5, Act XII of 1992.-In the said Act, in section 5,-
(a) in sub-section (1), for the full stop at the end, a colon shall be substituted and thereafter the following proviso shall be added, namely:-
"Provided that such immunity shall not be available to citizens of Pakistan residing in Pakistan and to firms, companies and other bodies registered or incorporated in Pakistan in respect of any new foreign currency account opened or deposits created on or after the 16th day of December, 1999 or to any incremental deposits thereafter in an existing foreign currency account"; and
(b) in sub-section (2) for the full stop at the end, a colon shah be substituted and thereafter the following proviso shall be added, namely:
"Provided that such exemption shall not be available to citizens of Pakistan residing in Pakistan and to firms, companies and other bodies registered or incorporated in Pakistan in respect of any balance in a new foreign currency account opened or deposits created on or after the 16th day of December, 1999 or to incremental deposits created on or after the 16th day of December, 1999 in an existing foreign currency account and income therefrom.".
THE SCHEDULE
(See section 6)
1. Notification No. SRO 1283(I)/90, dated the 13th December, 10990 issued under sub-section (2) of section 14of the Income Tax Ordinance, 1979 (XXXI of 1979).
2. Notification No. SRO 1284(I)/90 dated the 13th December, 1990, issued under section 19 of the Customs Act, 1969 (IV of 1969).
In post-1999 regime, there was an effective retrieval of the system envisaged in original PERA. Accordingly, in order to clarify the matter FCAO was promulgated on September 28, 2001. Like PERA, FCAO has specific overriding effect over FERA and Income Tax Ordinance, 2001.
Secondly, it is also important to note that foreign exchange transactions under both the laws are restricted to individuals, not companies. As per my information, since September 28, 2001 when FCAOwas introduced, there is no change in the rights and procedures provided in that law. The overriding provisions in relation to FERA continue to exist. All these aspects will be discussed in the following paragraphs. The text of FCAO is as under:
THE FOREIGN
CURRENCY ACCOUNTS (PROTECTION)
ORDINANCE, 2001
ORDINACNE NO. I
OF 2001
[28TH September 2001]
An Ordinance to provide for protection to foreign currency accounts
WHERE HEREFORE, in pursuance of the proclamation of Emergency of the Fourteenth day of October, 1999, AND THE Provisional Constitution Order No. 1 of 1999, read with the Provisional Constitution (Amendment) Order No. 9 of 1999, and in exercise of all powers enabling him in that behalf, the President of the Islamic Republic of Pakistan is pleased to make and, promulgate the following Ordinance.
1. Short title, extent and commencement.-(1) This Ordinance may be called the Foreign Currency Accounts (Protection) Ordinance, 2001.
(2) It extends to the whole of Pakistan.
(3) It shall come into force at once.
2. Definitions. In this Ordinance unless there is anything repugnant in the subject or context.
(a) "authorised dealer" means a person authorized, under section 3 of the Foreign Exchange Regulation Act, 1947 (VII of 1947), by the State Bank to deal in foreign exchange;
(b) "foreign currency" means the foreign currency other than the Pakistan currency;
(c) "foreign currency accounts" means a foreign currency account ope3ned with an authorized dealer after the 28th May, 1998; and
(d) "State Bank" means the State Bank of Pakistan established under the State Bank of Pakistan Act, 1956 (XXXIII of 1956).
3. Protection of foreign currency accounts.-No person holding a foreign currency account shall be deprived of his right to hold or operate such account or in any manner be restricted temporarily or permanently to lawfully sell withdraw, remit, transfer, use as security or take out foreign currency therefrom within or outside Pakistan.
4. Indemnity. No suit or other legal proceedings shall lie against the Federal Government any person for anything in good faith done or intended to be done in pursuance of this Ordinance or any rule; direction or order made thereunder.
5. Ordinance to override other laws.-(1) Subject to subsection (2), the provisions of this Ordinance shall have effect notwithstanding anything contained in the Foreign Exchange Regulation Act, 1947 (VII of 1947) the Customs Act, 1969 (IV of 1969), the Income Tax Ordinance, 1979 (XXXI of 1979) or any other law for the time being in force.
(2) The protection provided to a foreign currency account holder under this Ordinance shall be in addition to, and not in derogation of, the protection provided under the Protection of Economic Reforms Act, 1992 (XII of 1992).
6. Power to make rules, etc.-(1) The Federal Government may in consultation with the State Bank, by notification in the official Gazette make rules for carrying out the purposes of this Ordinance.
(2) The State Bank may make regulations consistent with the provisions of this Ordinance and the rules made thereunder to provide for all matters for which provision is necessary for the purpose of giving effect to the provisions of this Ordinance.
(3) All rules, regulations, under or instructions in respect of foreign currency accounts made or issued by the Federal Government or, as the case may be, the State Bank, before the commencement of this Ordinance, shall in so far as they are not inconsistent with the provisions of this Ordinance, shall have effect and shall be deemed to have been made or issued under this Ordinance.
The most important aspect to be taken into account is that the 2001 Ordinance is much wider in application and specific to foreign exchange matters. The summary of this law is that it provides a comprehensive regime for Foreign Currency Accounts. These provisions are in addition to what is stated in FERA and Foreign Exchange Manual. In this connection, I again refer to paragraph 1(iv) of Chapter VI of the Foreign Exchange Manual that deals with the question of approvals, if any, required for remittance of funds out of foreign currency account. The question that remains unanswered is the overriding effect of FCAO. In my personal view, FCAO is a special regime that is effectively independent in nature, and circulars essentially issued under the FERA are overridden. This includes the circular relating to use of funds for 'commercial and investment' purposes outside Pakistan.
In this regard, Sections 3 and 5 of FCAO have special significance in relation to subject under discussion. Under Section 3, a person holding a foreign currency account is allowed to hold or operate such account in any manner and shall not be restricted temporarily or permanently to lawfully sell, withdrawn remit transfer or use as security or take out foreign currency therefrom within or outside Pakistan. This section effectively allows Pakistani to transfer funds held in foreign currency accounts in any manner they like and use proceeds to acquire any kind of asset abroad.
The overriding effect in relation to the FERA is also very important subject. If there is any restriction for the acquisition of any asset (whether immovable or immovable property like shares) then the same shall apply if the same is not funded by a foreign currency account. This makes commercial and practical sense as in that case, the foreign exchange system monitored by State Bank of Pakistan is not involved.
The overriding effect in relation to income tax laws has special significance. There are two viewpoints on the matter. As per the optimistic view, on this subject,this law will prohibit the tax authorities to seek information for the purposes of tax, such as those made under Section 176 of the Income Tax Ordinance, 2001 and second is the right to freeze such accounts against tax recovery. As against that, under the prudent view, the overriding effect is limited to the second aspect only, and there can be a possibility of seeking information under Section 176 of the Income Tax Ordinance, 2001 notwithstanding the overriding effect of FCAO. Nevertheless, this matter has not yet been tested and there can be strong views that protection is available even with respect to seeking of information under the Income Tax Ordinance, 2001.
Case laws on the matter
There is some confusion, in general, that there are case laws, being the decisions of the Supreme Court of Pakistan that have overridden the substance and rights under the aforesaid FCAO. This is a completely incorrect assertion. In this regard, two decisions are usually quoted which are:
1. Irshad Ahmad Sheikh vs State by the Supreme Court of Pakistan, reported as 2000 SCMR 814; and
2. Collector of Customs vs Khud-e-Noor by the Supreme Court of Pakistan, reported as 2006 SCMR 1609.
The second case relates to physical smuggling of foreign currency on a border check post. The preamble of the reported fact is enough to identify the matter. It states:
"Protection of Economic Reforms... Authority to hold foreign currency... Principle. In respect of criminal case falling under any provision of law prevailing in country, if a person claims that he has been authorized to take currency out of Pakistan, he has to adopt proper procedure i.e. through bank etc."
In this case, a person physically transferring amount above US 10,000 was considered to have no protection under the law. This is a correct decision to the extent that smuggling of foreign currency is not allowed; however, as stated above, the decision does not, in any manner, state that any provision of transfer of funds from a foreign currency account maintained in a 'bank' has been curtailed. Any other assertion of this case law is totally misconceived. The first case is even more interesting. The matter in that case was limited to seeking information for tax and other purposes. In short, there is nothing in any decision by any authority that disturbs the clear legislative position envisioned in the two laws discussed above. Nevertheless, as stated earlier, FCAO has encompassing, overriding status unless there is any change. I am not aware of any such change.
To summarize these aspects, it can be concluded that:
-- Pakistani individuals are allowed to hold asset in any form outside Pakistan, whenever created.
-- FCAO allows Pakistanis, being individuals, not companies, to transfer funds held in such accounts for acquisition of any asset outside Pakistan, including shares in foreign companies or any other movable or immovable assets.
This concludes the primary understanding about the foreign exchange position and offshore assets of Pakistani citizens. In the following parts of this series of articles, other aspects being the status of assets created from funds effectively transferred outside Pakistan through other means, usually called 'Hawala', and tax aspects of such sources will be deliberated in detail. The purpose of these articles is to have a constructive debate on the matter of foreign assets of Pakistanis abroad; the estimated quantum of which has been given in the earlier article.
(Concluded)