EDITORIAL: The United Nations Framework Convention on International Tax Cooperation unveiled a draft during its ad hoc committee meeting with extremely ambitious objectives that envisage more inclusive and effective international tax cooperation to enable member countries to respond to existing tax-related challenges from digitalisation to global operation of large multinational enterprises as well as to mobilise domestic resources and use tax policy for sustainable development.
Those who may be affected need not be overly concerned as the negotiating committee established by the UN General Assembly is scheduled to convene in 2025, 2026 and 2027 mandated to hold at least three sessions per year with the possibility of the final draft significantly weakened as is the case with several other UN proposals and, as in other cases for example Kashmir and Palestine, not implemented at all in spite of its passage.
Nonetheless it is a step in the right direction and must be appreciated.
Three observations with respect to Pakistan, and indeed many other developing countries, one hopes would be taken into consideration before the draft is finalised.
First and foremost, accountants employed by multinationals in developed countries use different tax laws in different countries, tax havens as well as other tax loopholes to minimise the tax burden on their clients. These, one assumes, would be a major target of the negotiating committee.
However, in the developing world the major contributors to tax evasion/avoidance have been the policymakers themselves, an example being the passage of the Protection of Economic Reforms Act 1992 that legalised what the administrations of developed countries have never done, notably the freedom to bring, hold, sell and take out foreign currency without a foreign currency declaration as well as immunity against any inquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency and the balance of foreign currency accounts would remain exempt from the levy of wealth tax, income tax and even compulsory deduction of zakat. Much of the wealth that is stashed abroad therefore is not by multinationals, but by families.
Second; major leakages are evident due to the practice of under- and over-invoicing in this country. The most recent example of this has been in the import of solar panels as revealed by a recent study undertaken by the tax authorities.
However, in this context it is relevant to note that flawed economic policies inclusive of a steady rise in external and internal borrowing by our administrations with obvious negative repercussions on the exchange rate as well as artificially controlling the rupee-dollar parity (associated with the period when Ishaq Dar was the Finance Minister), account for not only sustained under- and over-invoicing but those who remit money back home opt to use the illegal hundi/hawala system to remit money instead of the official channels as the rate on offer by the former is higher than the latter.
And finally, the overarching objective of the country’s tax authorities has not been to reform the tax structure, which relies up to 75 to 80 percent on sales tax, a regressive tax whose incidence on the poor is greater than on the rich, which explains the current high poverty levels of 41 percent in this country.
And instead the current administration, like its predecessors, is urging Federal Board of Revenue (FBR) to optimise tax collection - a directive with the express objective of reducing the reliance on domestic and foreign borrowing to meet its ever rising current expenditure - which if previous and the current budget is taken as a yardstick implies more indirect taxes as they are the low hanging fruit. This would almost certainly raise poverty levels even higher and public discontent would spill over on our streets.
One would have hoped that out of the box thinking would have led the incumbent government to reduce current expenditure (or at least not raise it by 21 percent this year) and at the same time begin the reform process through reducing the reliance on indirect taxes by a minimum of 10 percentage points each year instead of deliberately mis-defining indirect taxes (withholding taxes in the sales tax mode) and crediting it under direct collections, an action that the Auditor General warned FBR against but to no avail.
Copyright Business Recorder, 2024