Offshore assets - IV

General: 1. In my first article on the subject, published on 26 October2016, I had identified that there can be various structures in practice for the ownership of 'Offshore Assets' by Pakistani citizens. In this part of the article, I will dilate on various ownership structures, under which such assets can be held. These structures have direct bearing with the tax incidence in Pakistan, therefore, this part of the article is to be read in conjunction with what has been stated in Part III that covered various tax aspects on this subject.
Two Primary Structures
2. There are primarily two structures in relation to Offshore Assets.
(i) Structures where Offshore Structures also own Pakistan Assets;
(ii) Structures exclusively owning Offshore Assets.
3. In the first case, foreign companies, trusts, and other forms of organisation, as identified in the following paragraphs, are formed/interposed directly or indirectly to hold Pakistan assets, including shares of listed and unlisted companies.
In the second case, such structures own only foreign assets.
4. In this connection, at the outset, it is stated the structures identified and explained in the following paragraphs are not unique in character with reference to Pakistani owners. These are generic situations and by and large remain same irrespective of the ownership of such structures.
5. The subject of sources and availability of funds for forming foreign companies have been identified in Part I of this series of articles; that aspect will not be repeated in this article.
6. It is important to note that State Bank of Pakistan for very valid reason does not permit such kinds of ownership, if the funds for the acquisition of foreign entity are not acquired through mechanism provided in Foreign Exchange Regulation Act, 1947. Nevertheless, as stated in my earlier article, the acquisition of foreign exchange through Foreign Currency Accounts (Protection) Ordinance, 2001 remains unquestionable for reasons explained under the earlier articles.
Generic Structures
7. In the following illustrations which consist of 5 primary cases in diagrammatic form, I have tried to describe the process of maintaining offshore assets. Cases 1 to 5 have intentionally been prepared in a manner that whole process becomes understandable for common reader. In this connection, it is reiterated that these structures are not peculiar to Pakistan. All these structures are universally applicable, nevertheless, each country designs its corporate, fiscal and exchange laws according to her own socio-economic requirements.
Entity incorporated outside Pakistan is a separate person that is entitled to borrow or lend in Pakistan. Accordingly, the assets of that intervening company can be substantially different from the initial capital of the Pakistan resident. This is the process used generally to acquire properties in the West. The companies are usually incorporated in jurisdiction being tax haven. If that jurisdiction allows 'Bearer Shares' then transfer becomes a lot easier and swift. At the same time, bearer shares lead to loss of financial trail. In some jurisdictions bearer companies are also called 'trust companies'.
This structure is an addition to Case II. In this situation, a foreign trust is formed by a person, say Mr A for the benefit of his dependants. Mr A becomes the settlor. His children are the beneficiaries. Trust can be discretionary or otherwise. In case of discretionary trust, there is no defined benefit for the beneficiaries, and the same depends on the discretion of settlor. The other party generally known is a 'trustee'. The role of the trustee is effectively being the manager only. In my article relating no taxation, I deliberated in detail the present tax disclosure requirements with respect to trust structure. This is one of the most important, unattended subjects in Pakistan taxation.
In principle, the only difference between Case III and Case IV is that in the fourth structure, assets of the offshore setup also include assets in Pakistan. There is nothing illegal or impermissible under the law if assets in Pakistan are held in this manner. Ownership of assets in Pakistan is held by a foreign enterprise. For all purposes, it is a foreign owned asset.
Rationale and Firewalls
8. Detailed analysis of these structures reveal that there are many firewalls under the existing regime of Pakistan that allow effective maintenance of Offshore Assets by Pakistani citizens. In that situation, a question may arise whether or not there could be a legislation or regulation in Pakistan that would enable Pakistanis to disclose all offshore assets, directly or indirectly, held offshore. This is a very debatable and difficult subject.
9. The primary question in this regard is whether there is a need for such disclosure if the transactions do not fall within the ambit of anti-money laundering law. Secondly, if such prescriptions are made then they may be abused to harass an honest business person, and many Pakistani citizens may opt to relinquish citizenship instead of unnecessary disclosure. In this regard, the primary objective of all provisions should be minimum regulations instead of policing. This requires that introduction of any such requirement be made after taking into account all these factors. These comments do not, in any manner, mean providing protection to money laundering or evasion of Pakistan tax. Whole debate and analysis about the Offshore Assets is being made to segregate that ownership of offshore company and offshore asset is not a crime. If the money and funds for the same have been acquired through crime then there is no excuse for the same. These two primary kinds of assets are, therefore, required to be segregated.
Nationlisation and Business Confidence
10. With reference to the aforesaid discussion, read with earlier comments, the primary consideration is that my discussion in limited to funds and sources which are dealt within legal means and represent the structures which businesses may create inter-alia for various reasons. In the whole process, we should not forget that during the socialistic tendency of Bhutto regime, there was a 'nationalisation' of Pakistan assets of all major industrial families that led to a deep sense of insecurity for assets held in Pakistan. That environment has partly been diluted over the time; however, the inconsistent political rhetoric and quality and capacity of regulators are contributory factors in not cementing the required confidence. Secondly, the cases of genuine business people are merged and handled, especially in media and press, in the manner similar to those dealing in corrupt practices. This tendency evaporates the gesture of goodwill required in creating conducive environment for stable sustainable economic decision.
11. The history of the financial regulations, especially fiscal regulations, reveals that there is no concrete step to promote documentation and corporatization. On the contrary, there are provisions in the taxation law that provide perpetual immunity if foreign exchange is involved. That particular regime (Section 111(4) of the Income Tax Ordinance, 2001) and many others, such a presumptive tax regime, are root causes of low level of documentation and corporatization. It is reiterated that popular political rhetoric over-ride long-term objective that leads to perpetual problem in tax structure.
12. With reference to structure referred above, it can be summarised that it is a simple financial management issue, and legislation, including investigation, on such matter can only be made by personnel competent in that subject. It is not a legal question.
13. In the last part of these articles, I would try to provide some recommendation for an evolutionary process on the matter of possible reporting of offshore assets of Pakistan citizens.