In my first article on the subject the 'Panama Leaks - A blessing in disguise' published in Business Recorder on April 25, 2015, it was observed that notwithstanding all other aspects this revelation has highlighted many critical issues that were intentionally or unintentionally brushed under the carpet in the past. There are many unattended subjects in our Foreign Exchange Regulations, Income Tax Ordinance, 2001, Anti-Money Laundering Laws and Corporate Laws that need to be addressed cohesively to deal with the subject of accumulation and appropriate reporting of foreign assets held by Pakistani citizens. In this connection it is reiterated that having assets outside Pakistan is no 'crime'. In fact, in many situations it represents entrepreneurial genius of our business people. There is a serious need to segregate business transactions with those tainted with corruption. Furthermore there is a need to give due respect to persons who accumulated assets out of taxed wealth or wealth that was not taxable in Pakistan in contrast to those cases where such wealth has been accumulated out of untaxed income in Pakistan.
2. One of the instances relating to foreign assets is in the court and it would not be appropriate to make any comment on that matter, however, it is commendable that in post 'Panama Scenario' a productive debate has emerged in the media and other relevant circles about 'taxation' and foreign exchange matters of offshore assets of Pakistani citizens. This is the reason I called it a blessing in disguise.
3. In my April article I wrote:
"The question that we all need to answer is whether or not Panama Leaks has revealed something which is unknown to us. The answer is 'perpetual' silence on this most important matter of our economic policy. When I say that this disclosure is a blessing in disguise then what I mean to say is that Pakistan as a country should decide whether they want to continue with a system where there is effectively no direct taxation on income".
4. At the end of the day, the ultimate question that will arise will be source of income giving rise to accumulation of such assets. Once the source is identified then next subject will be the tax incidence on such source. In any civilised society this is the only effective means of 'accountability' on such matters other than compliance of exchange regulations, if any. We started from a wrong end. If we look for other means then it signifies that we are ignoring the basic principle of financial system in the new global environment.
5. In the first four parts of this series, which were substantially technical in nature, I have tried to explain all the related aspects:
(i) Part I indicated the size and the manner in which such assets are acquired;
(ii) Part II described the Foreign Exchange regulations and procedures;
(iii) Part III dealt with tax incidence and tax declaration; and
(iv) Part IV provided description of some generic structures used for such ownership.
6. All the four earlier articles have led me to conclude that there are many loose ends in our laws and procedures that need to be tied up, within the system, with a proper understanding instead of unmanageable over-regulation. This is the subject of this last part of the series. In the following paragraphs, for the sake of brevity I would like to directly refer to the solutions and recommendations on the respective subject of foreign exchange, taxation and corporate law.
Foreign exchange
7. With respect to foreign exchange regulations the recommendations are:
(i) Consolidation of Laws: At present there are effectively three laws dealing with inward and outward movements of foreign exchange in operations in Pakistan being FERA, PERA and Foreign Currency Accounts (Protection) Ordinance, 2001. This leads to confusion, lack of clarity and abuse in many cases. There is a need to substantially simplify the Foreign Exchange Manual and bring-in other two laws within that manual.
(ii) Regulation or De-regulation: As indicated earlier in my article Part II, there is effective de-regulation of foreign exchange movement, for individuals (whether within tax regime or otherwise) whereas there is complete regulation for corporate bodies in the matter of foreign exchange transactions. This effectively means that as a policy we promote non-documentation and non-corporatization through such measures. This is against the desired system for any civilised country. India replaced FERA with FEMA in the last decade and has effectively brought the matter in line with modern system. This is despite the fact that in India, the banking sector is largely state owned and highly regulated. This means that we should decide, once and for all, whether we want individuals that are intrinsically less documented to deal and place undocumented assets abroad instead of the corporate sector which is relatively organised.
(iii) Hawala: 'Hawala' transactions for acquiring foreign assets constitute a reality. That should be curbed to the maximum possible extent. At present, there is no law to penalise a case even where it is proven that 'Hawala' system has been used to acquire asset outside Pakistan. Provisions in Anti-Money Laundering Law needs to be properly amended to this effect. In my view FERA essentially cannot deal with 'Hawala' cases. It is very difficult to completely curtail such transactions. It is therefore suggested that there should be inter-government agreements with the UAE and other countries to the effect that there is a possibility of 'confiscation' of assets created there or here out of funds moving through 'Hawala' transactions. Bank to bank co-operation on this matter be improved. Model Agreement recently signed with OECD allows for the same and that matter should be expedited.
(iv) Repatriation of Export and Import Commission: There should be effective provision that any export or import commission to any foreign party, if being related to that particular exporter or importer, should be repatriated to Pakistan.
(v) Effective Deregulation: There should be complete deregulation of foreign exchange transaction for individuals who are within the tax system and where it is ensured that amount so dealt with, is reflected in the wealth statement filed with the tax authorities. At the moment, the system runs in the negative order. Foreign currency accounts be allowed for persons within tax system with National Tax Number.
Income Tax Laws
8. This is most tricky and sensitive part of this subject. Nevertheless, as indicated in my earlier articles the first and foremost question that will arise in this case will be the application of law on undeclared foreign assets if barred by limitation as provided in the present Income Tax Ordinance, 2001. Very recently, we have 'incorrectly' changed that law to the effect that the law of limitation would apply from the 'date of acquisition' not from the 'date of discovery' of assets. However, since the present law provides limitation of proceedings for undeclared assets from the 'date of acquisition' therefore such law will also be applicable on foreign assets. Retrospective legislation will be wrong. To conclude this aspect, if any foreign undisclosed offshore asset is identified then income tax proceeding can only be undertaken within the time period provided in the law and if that time has elapsed then there is no right, at present, to charge tax on income that give rise to that asset. Disclosure is a secondary and effectively non-consequential issue.
9. The suggested actions are:
(i) Change in law of limitation: The old position of limitation of law from the 'date of discovery' be reinstated. This would effectively provide a clear way out for correction in future.
(ii) Change in the definition of Tax Resident: Definition of resident be amended to bring it in line with the earlier one (pre 2003) where stay in the last four years is also taken into account whilst determining tax residency. This will stop the tendency of 'residence shopping' in the nearby tax haven;
(iii) Protocol under Pakistan/UAE: A protocol be signed with the UAE being a jurisdiction with no income tax, to provide information about income chargeable to tax in Pakistan by tax authorities. No Pakistani citizen be allowed UAE tax residency to avail benefit that is otherwise taxable in Pakistan such as 'capital gains' on sale of shares of Pakistani companies. Exemptions under the treaty are generally applicable to countries, which have a taxation system. In this manner such amount is not taxed anywhere in the world. That is totally undesirable and a loophole.
(iv) Wealth Statement Declaration: All Pakistan tax residents to be required to disclose their world assets, whether declared in the past. Such declaration be segregated into two or three parts as under:
(a) Those acquired before last five years;
(b) Those acquired within last five years: There is no taxable consequence for the assets referred to in (a) above. With respect to those falling under (b) if such assets have been formed out of income chargeable to tax in Pakistan then such declaration be considered valid if an amount equal to 10percent is paid on the current value (not the cost) of such assets if declared before June 30, 2016. Section 111 of the Income Tax Ordinance, 2001 should not to be applicable on such assets and there should not be any requirement to bring back such assets to Pakistan.
(v) Trusts: 'Settlor' or 'Beneficiary' if being a Pakistan tax resident be required to disclose the assets of the foreign trust in the wealth statement of settlor or the beneficiary as the case may be. There can be an option with respect to discretionary trust. In case of discretionary trust, disclosure to be made by the settlor. Where the beneficiaries share is not determinable then the whole amount is to be disclosed in the wealth statement of the settlor.
10. With respect to tax consequences, it is observed that there are empirical evidences of natural desire due to changes in the regulatory environment around the world that assets are properly disclosed anywhere in the world. This blessing of Panama Leak should be used as an opportunity for correction. FATCA is also a contributory factor in that process. Let us all understand that over the time, we all will be required to disclose our second home, be it in Dubai, London, New York or Singapore.
Corporate and Trust Laws
11. Declaration of foreign assets, in wealth statement of Income Tax Ordinance, 2001 as referred above is a correct and appropriate in manner under the internationally acceptable system. Accordingly, the amendments introduced in the new Companies Ordinance, 2016 with respect to Global Register be re-examined with reference to requirement of the shareholders, director and officers of a company to disclose their foreign assets. There is a need to appreciate the boundaries within which a particular law can apply.
12. Trust laws are governed by the regulations, which were designed in the 19th century. These are very well laid down laws and should be retained.
13. To conclude the subject, it is stated that my estimate of US $120 billion of offshore assets of Pakistani citizens', other than those generated by corruption, is an 'asset' for Pakistan, which in most of the cases, does not involve any crime or non-compliance of law. The default even if it arose, in principle, would be on account of loose ends in our laws, procedures and level of compliance. These assets should properly, appropriately and systematically be brought into the system. This would provide necessary confidence to the private sector which is the only engine of growth in the world.
14. In order to synchronise all the aspects discussed above, a 'Finance Regulation Commission' should be constituted to provide productive and practical solution to the legislature on this matter.
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