Income Tax Ordinance 2001 provides the Federal Board of Revenue (FBR) with the legal authority to investigate assets held outside the country by Pakistanis with two exemptions: (i) if a payee has lived for less than six months in the country; and (ii) if he/she is paying tax in another country with which Pakistan has an avoidance of double taxation agreement.
All other income/assets held abroad, are taxable, according to the Ordinance. What has become patently evident to all is that even though a law to tax assets held abroad by Pakistanis under certain conditions is on the statute books yet implementation remains extremely weak.
The reason for this is as much to do with the large Pakistani diaspora resident abroad, coupled with an official labour export policy targeted to maximise remittance income, as it has to do with the fact that the government has not earmarked either adequate resources or, indeed shown any resolve to ensure that assets held abroad are taxed according to the Tax Ordinance.
Whenever an effort has been made to assess the tax payable on assets held abroad it has been dismissed by the concerned as harassment, corruption or political victimisation. This is irrespective of the fact that the government of the day has often been aware of the nature and extent of investments made abroad.
Former Prime Minister Shaukat Aziz once publicly stated that the government was fully cognisant of how much money was being invested in the United Arab Emirates and, more importantly from the perspective of the statute, by whom; but at the end of the day, nothing came of this accusation.
There is also open acknowledgement by several members of the country's political leadership, including senior members of the present government and opposition, of possessing expensive real estate in both Arab countries as well as in Western capitals. Again nothing has come of it.
There is no doubt that in case notices are issued to these powerful and the mighty, the replies, even though unsatisfactory in several instances, would be meekly accepted and the files closed. In this scenario no purpose is served of having a law on the statute books that has never been implemented and is unlikely to be implemented in the future.
Thus we make bold to say that the government should amend the law to make it implementable. The existing Income Tax law is partially tailored on the US pattern where the mere fact of citizenship means that a national living in a foreign country is liable to pay income tax in the US on his world-wide earnings with a credit being given for any taxes already paid or due in a foreign country. In contrast, in the United Kingdom, citizenship is not a basis for levying income tax.
Generally speaking, a person is deemed a UK resident for fiscal purposes if: (i) in any tax year he lives in the UK for more than 182 days (similar to our Income Tax Ordinance); and if his visits to the UK exceed 91 days per tax year for 4 consecutive tax years in which case he is considered a tax resident in the fifth year. In addition, UK non-residents (as opposed to domiciled non-residents) are liable to UK income tax on income derived from: (i) property in the UK; (ii) income from any trade or profession carried on through a branch or agency in the UK; and (iii) any employment the duties of which are performed in the UK.
Also UK non-residents do not pay tax on (i) interest from certain UK Government securities and (ii) interest from UK-situate banks and building society deposits. It is unfortunate that even though the government convened a conference under the auspices of the World Bank late last year, which reviewed our tax policy and administration, as committed by the government to the International Monetary Fund in its Letter of Intent, there was little mention of making the Income Tax Ordinance 2001 implementable on income/assets held abroad. It is hoped that this flaw is rectified.