The Income Tax Ordinance, 2001, the Foreign Exchange Regulations Act, 1947, the Protection of Economic Reform Act, 1992, the Anti-Money Laundering Law and the Protection of Foreign Investment Act are the relevant laws that need to be read and understood before jumping on any conclusion on the legal status of assets held by Pakistani citizens abroad and creation of offshore entities. Trust law is another subject that needs a review.
At the outset, it is to be understood that offshore companies, for tax purposes, are not made to evade or avoid Pakistan tax. They are made to avoid, within permissible limits, foreign tax which is over 30 percent around the developed world. In Pakistan, for example, the income is taxed on the basis of source. So a Pakistani resident or a foreigner is taxed almost equally if the source of income is in Pakistan. On the same count if a Pakistani citizen or a person having Pakistani nationality or a holder of NICOP would not a resident in Pakistan for tax purposes, then he or she is neither required to pay any tax in Pakistan for their foreign sourced income nor is he or she required to make disclosure of assets held outside Pakistan. Tax residence in Pakistan is based on sole criterion of physical stay in Pakistan of over 183 days. Prior to the Finance Act, 2003 past four years' stay was also relevant. To conclude from the tax planning aspect offshore companies are not made to evade or avoid Pakistan tax. They are made to earn and place the income in a jurisdiction where there is no tax and least disclosure of assets. A Pakistani citizen not being a tax resident in Pakistan can own assets and income, if they are not from Pakistan source, and he or she is not required to disclose the same in any form in Pakistan.
Secondly, income earned in Pakistan can be officially converted into foreign currency and remitted out of Pakistan by individuals without any specific approval of State Bank of Pakistan under the present application of the foreign exchange laws. Whether such income is taxable and has been taxed is an income tax issue. Remittance of same, by individuals to acquire assets outside Pakistan is legal and permissible under the present laws. Whilst reaching any conclusion on the matter this aspect is also required to be kept in mind. It is reiterated that by introducing presumptive tax regime, which has been validated by the Supreme Court, income tax has been divorced from actual income. So we do not know from income tax viewpoint and record how much accounting and actual income arises to an exporter (being a company) or any other category which fall under presumptive tax regime. This resolves the issue of assets held outside Pakistan.
Thirdly, there is the issue of anti-money laundering laws. Under the present anti-money laundering laws of Pakistan, evasion of tax is not included in the list of crimes that leads to provision of anti-money laundering laws. We hear from press reports that the IMF is insisting that such provision be inserted and the Pakistani government has refused to do so. There are very few countries where such open-ended laws exist. It is therefore better to revisit our laws before arising at unnecessary conclusions.
Fourthly, the Trust Act to be revised to settle the matter of disclosure by settler, beneficiary and the trustee. The ambiguity is being abused. The last question is why Pakistanis enter into offshore entities business when we under the laws have provided all windows for legal whitening and placement of money. There are three answers. Firstly, very few advisors and accountants suggest that it is better to plan and organise the business rather than having a fear of constant enquiry. We have a tendency to encourage non-disclosure even when we know that legal and constitutional protection is available. Secondly, double taxation in the form of tax on dividend be abolished. Like the development world dividend distribution by a company out of taxed profit is taxed in the hand of the recipient but at the same time an equivalent credit is given in company's own taxation. Abolition of presumptive taxation is obviously the first pre-requisite. Thirdly, discussion about assets held by Pakistanis is considered as subject being a taboo, not a subject to be handled in a manner that same can be used for productive purposes in Pakistan.
My immediate suggestions will be that it is made mandatory for all persons having Pakistan citizenship to declare their world assets. This is prevalent in the US and the UK is seriously heading towards the same. This does not mean taxation of foreign sourced income of non-resident Pakistani citizens. Compliance to that provision is ensured in the US by travel restrictions on persons who have not filed the requisite returns. Moreover, provisions like Section 111(4) of the Income Tax Ordinance, 2001, whereby the source of funds cannot be enquired if the same is received by way of remittance in foreign currency. This provision which was introduced for small remittances is being used as a window for whitening the untaxed wealth. So the same should be deleted or appropriately amended. Tax evasion be included in the list of crimes for anti-money laundering laws. Lastly like the amnesty provided to traders, an option be provided to all Pakistan citizens to declare their undeclared foreign wealth by paying a tax at the rate of 5 percent without asking them to bring the asset to Pakistan. (The views expressed in this article are not necessarily those of the newspaper)