The deadline of the ongoing asset declaration scheme is nearly upon us. With three days left, a few ambiguities and lacunas relating to the payment of taxes to discharge tax liabilities on the declaration of foreign assets has created confusion among the declarants and their tax advisors alike. Some of those key ambiguities and lacunae, and their potential solution are discussed below.
The asset declaration ordinance (ADO) demands that tax liability on foreign assets must be paid in foreign currency, regardless of whether those assets are repatriated to Pakistan or not. The conceptual premise behind this requirement is to increase the pie of forex reserves in the country.
Until two days ago, many declarants who had held foreign currency in Pakistan in the form of cash – say a pile of USD in a bank locker – could not deposit that in their foreign currency bank account within Pakistan because they were non-filers. However, courtesy a circular by the State Bank of Pakistan (SBP) (FD Circular 03/2019), non-filer declarants can now deposit that hypothetical pile of USD in their foreign currency bank account within Pakistan provided they meet certain conditions, including the submission of declaration filed with the Federal Board of Revenue.
Once they have deposited that money, they can also pay their tax liabilities from the same account by writing a cheque to their bank, and then the bank will issue a debit authority to the central bank. The banks have already been debriefed by the SBP.
But while the issue relating to declaration of locally held foreign assets by non-filer stands resolved, those relating to declaration of foreign assets held abroad aren’t exactly clear to many declarants.
There are those who want to declare their foreign accounts held abroad but want to pay their tax liability through their FX account at a local bank without repatriating their foreign assets. Well that cannot happen since that won’t lead to an increase in overall reserves of the country; it would only move the reserves from commercial bank to the central bank.
There are two options for these people, if they chose not to repatriate foreign assets to Pakistan. Option 1: They can discharge their tax liabilities by making a payment to National Bank of Pakistan’s New York account, which is receiving the payment under an arrangement with the central bank. Here, some declarants are facing problems: in the wake of FATF and tight regulation by American financial authorities the payment is either going to be delayed or even perhaps get stuck.
Sources say, some London-based bankers are advising their Pakistani clients to find out another way to make the tax payment when they found out that the payment being made is for declaration of assets. That’s because nobody wants to get in trouble with the American authorities; their fines are quite a deterrent.
There are two solutions to this problem. First, make the payment to New York before the cut-off date of June 30, 2019 and then share the banking details (SWIFT & bank statements) with Pakistani authorities as a proof that the payment did in fact leave their bank accounts before the deadline.
This would be in line with the accepted practice in the last amnesty scheme where some payments received two months after the cut-off date were accepted as being made within the deadline since the declarant was able to prove through his foreign account bank statement/SWIFT message that the payment had left his bank account before the deadline.
The other solution – and this is brings us option 2 – is to make the payment in Dirham to UBL Bank in Dubai, which is also receiving payment under an arrangement with the central bank. This option to receive tax payments in Dirham reflects an astute thinking on the part of government since it allows both the declarant and the government to bypass the stiff regulatory filters that the flow of USD has to go through in New York.
In fact, it is not even a requirement that payment of taxes can only be made through the just-declared bank account. It can be made from a previously declared account as well. For instance, if a declarant has declared his London bank account under ADO 2019, he can discharge his tax liability from a previously disclosed account in the US, UAE, or wherever. Again, the idea is to increase domestic reserves.
The real trouble is for declarants who have non-financial assets abroad but don’t have foreign bank account outside Pakistan. This is a genuine concern for many declarants who have bought property in Dubai from money that wasn’t sent from Pakistan to Dubai through proper banking channel.
Since payment of tax liability after declaration of foreign property – say a flat in Dubai – can only be made in foreign currency via a foreign bank account, those people are really in a pickle. Remember that as discussed above, the government is not accepting tax payment in FX currency from FX bank account within Pakistan unless the declarant’s action has resulted in increase of overall reserves, which is clearly not the case in this Dubai flat example at hand.
As of now there is no clear-cut way out for these declarants. Pakistan’s foreign exchange regime is based on a regulatory notion that everything is prohibited except that which is specifically allowed under the regulations. As per certain sources familiar with banking industry, this means that those declarants who have a flat in Dubai for example, but don’t have a foreign bank account can discharge their tax liabilities stemming from the declaration of that flat through their friends or family members bank account abroad.
However, since declarants aren’t exactly sure whether this payment will be acceptable by the government as due discharge of tax liability, given the government’s silence on this matter, they are hesitant – rather confused - to declare their exemplified flat in Dubai.
BR Research will not pretend to be a tax advisor, but until such time the government provides clarity on this matter – and it is advised to do that soon – it would still be quite pragmatic to go ahead and declare their foreign immovable property even if they are unable to pay the tax on that declaration. Granted that according to the ADO, the government will slap surcharge for tax payments made after June 30. But those affairs could be lobbied with the government on the genuine problems that exist because of this legal lacuna. After all, this ADO seems to be the last option to wipe the slate clean. Don’t waste it!
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