There were the Panama Leaks in 2017 followed by the Paradise Leaks and Pandora Leaks. Now there is a Swiss Leak relating to foreign assets held in Credit Suisse. There will be many more, including those in relation to properties in a Gulf city. The names of many Pakistanis are mentioned in the list of persons who held assets outside Pakistan.
They include retired army generals, government servants, businessmen, politicians and people from all other segments of society. As the facts are unveiling over time it increasingly appears that my estimate for the value of such assets at $120 billion in 2017 was not wrong. It is important to note that only those Pakistanis are being identified who have used their Pakistani identity (passport) for holding such assets outside Pakistan. Those Pakistanis who use their foreign identity are not included as such information is generally not revealed.
In 2017, I wrote that these revelations will change the paradigm of financial morality of people in Pakistan. It is, therefore, about time we distinguished between declared taxed wealth/assets held in and outside Pakistan and undeclared untaxed wealth/assets outside Pakistan.
People belonging to the second category and their siblings have no right to claim patriotism and identify themselves as well-wishers of Pakistan’s economy as against those falling under the first category who earned in Pakistan, paid tax, declared their money and placed a part of assets outside Pakistan. In the recent leaks, I have found many persons and their siblings who claim to be well-wishers of this country despite the fact that their undeclared assets/wealth without identifying any source have been lying in Switzerland for over two decades. There has to be some social accountability. It will be there soon. If not, the whole society will be facing or experiencing the law of the jungle.
I have stated earlier that after 2003 there is no restriction on any person to hold assets/wealth outside Pakistan. It is an honour for a Pakistani if such an asset has been acquired through legitimate means. However, that person has to identify the sources from where such assets have been created, the taxes due, if any, paid under the law, and the legally accepted manner of transfer of such assets outside Pakistan. Anyone who fails to do so can never be treated as ‘first class’ citizen of Pakistan. ‘First class’ citizens have to be suitably awarded.
Then there are ‘second’ and ‘third class’ citizens. ‘Second class’ citizens are those who have assets outside Pakistan in the form of ownership of trusts and companies outside Pakistan. These trusts were declared in the asset declaration laws of 2018 and 2019. The funds held in these offshore companies have been invested back in Pakistan in the form of shares in Pakistani entities. There are many large business houses which invested their funds in Pakistan in this manner. However, in their case there are two positive aspects. Firstly, the assets have been declared in Pakistan and the funds have been invested in Pakistan by way of purchase of shares in various listed and unlisted entities.
Then there are ‘third class’ citizens who have assets outside Pakistan, which have been obtained through legal sources of income however taxes on the same have not been paid, no declaration for the same has been made and assets are still held outside Pakistan. This ‘third class’ will be treated ruthlessly by the foreign authorities and by our own laws in Pakistan. However, since their sources of income are legal therefore criminal proceedings may not be initiated against them.
The ‘worst class’ citizens who are required to be disqualified for any recognition is the fourth one where, in addition to all the discrepancies attached to the ‘third class’ people, is the fact that funds for obtaining such assets have been obtained through illegal means such as bribery, corruption, drug dealings, etc. These persons are to be criminally prosecuted. Funds if identified in the name of a resident of Pakistan are to be confiscated under the foreign exchange law if those have been acquired illegally.
This classification has been made to counter the impression being created by some persons, including some media professionals, that all classes of persons holding foreign assets are identical. These agents belonging to ‘third’ and ‘fourth classes’ of people want to create a smokescreen for society to camouflage the good versus evil. This can never be done.
The ‘first’ and ‘second class’ citizens have invested their funds in Pakistan and they are seriously working for the industrial and financial development of the country. They have to be given social credit. Unfortunately, Pakistanis have a very limited vocabulary in this regard. In our media and even in serious discussions an offshore company easily attracts censure.
This is completely wrong. There cannot be international level business operations unless there is adequate availability of foreign exchange. This is possible only when there is an offshore entity for earning dividends and gains on disposal of assets to invest in and outside Pakistan. Ironically, however, this matter is being completely undermined or destroyed by an amateurish mindset with certain purposes that may include the objective of protecting ‘third’ and ‘fourth classes’ of people.
In this connection, a recent development relating to implementation of the Controlled Foreign Companies (CFC) law as contained in Section 109A of the Income Tax Ordinance, 2001 has resulted in a technical dispute between the taxpayers owning offshore companies who have invested in Pakistan and the tax department.
In this connection, the first matter to be considered is that even under the worst implementation the CFC rules are only relating to upfront payment of a deferred tax. There is no additional tax. If a Pakistani resident owns an offshore company then dividends from that company are taxable even if distributed and kept outside Pakistan. So whatever is being considered as ‘astronomical’ is just an issue of deferral.
On the technical side it is stated that Pakistan’s law on CFC consists of only eleven (11) subsections whereas the UK law on the same subject consists of more than ten (10) pages. This requires clarification from the Board as has been made in other countries like the UK. When I was Chairman Federal Board of Revenue I issued a circular on the ‘basics’ of CFC rules.
That contained more than five (5) pages. I had the intention of issuing other circulars on the matter however I left before that time. I hope FBR is working on this subject. The matter raised by FBR is technical and that will also be thrashed out soon. In my view, the interpretation by the officer is erroneous which has already been brought to the knowledge of higher authorities and matters will be sorted out soon. There is no way in which the taxes paid in Pakistan, which has been in such cases, is ignored whilst applying CFC rules. The order reported in the press has been passed in a hurry with an additional misunderstanding about the time set for reassessment.
Nevertheless, the message that should be understood clearly is that those Pakistanis who have invested their foreign assets in Pakistan are more sincere with Pakistan than anyone else. They had the legal chance to keep the funds outside Pakistan, however they took the country risk and brought their funds back to Pakistan. They cannot be treated equal to ‘third’ and ‘fourth class’ citizens who have kept their undeclared money outside Pakistan.
In a recent lecture at CEO Club, I stated that Pakistan is at the crossroads in establishing good versus evil in the financial sector. I reiterate that Pakistanis should condemn — socially and financially — the ‘third’ and ‘fourth class’ citizens and all the beneficiaries of such assets be declared as not being ‘Sadiq’ or ‘Ameen’ under Article 62 of the Constitution. The trust of people in the system cannot be restored unless this action is undertaken. I am certain that if the law will not take its course the ballot box will.
Copyright Business Recorder, 2022
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