Offshore assets and tax evasion


PUBLISHED October 10, 2021


The state and individuals have conflicting interests when it comes to collecting and paying taxes. Every government tries to generate income, especially income tax. But individuals and businesses, with the help of tax advisors and accountants, structure their transactions to minimize the tax impact on their operations.

Irish Double Tax – a corporate tax base erosion and profit shifting (BEPS) tool deployed by foreign-controlled multinational companies to pay only 1-2% tax – and the Ireland’s 12.5% ​​corporate tax rate remained the preferred tools applied by global tech giants like Google and Facebook to avoid taxes.

The “Irish Double” has helped exploit the difference between the tax regimes in Ireland and the United States. Companies could therefore register a subsidiary located in Ireland but with control housed in a tax haven, such as Bermuda. If the profits were attributed to the Irish company, they could remain off-balance sheet and taxed by any of the states.

Ireland’s dual regime ended in 2015 due to pressure from the European Union while the lowest corporate tax rate of 12.5% ​​would also drop from 2023 to 30% under a deal signed between 136 countries under the aegis of the Organization for Economic Co-operation and Development. .

Due to the visibility of economic activities by the corporate sector, countries and entities have been able to contain increasing tax evasion and evasion, but the individual problem persists.

Shrouded in confusion

The Pandora Papers, the good work of the International Consortium of Investigative Journalists, further exposed the layers of secrecy and pointed to the serious problem – assets hidden by individuals in offshore territories – known as tax havens.

The thing that even the ICIJ has not been able to establish so far is that offshore companies owned by these people be reported in their annual tax returns and asset statements. It was also used as an excuse as well as a real reason by the tax authorities not to go after these people.

The Pandora Papers arrived six years after the Panama Papers. Unlike in the past, when the Panama newspapers rocked the world, including creating circumstances that led to the ousting of Prime Minister Nawaz Sharif from power, the Pandora papers have yet to create ripples on a larger scale. . But it still highlights the problem that despite the growing threat of exposure, wealthy people are willing to take risks to have offshore companies.

An offshore company is a limited liability entity that has no tax liability, no public register of shareholders and directors, and no annual reporting requirements, making it easy to park avoided or evaded tax and bad money. acquired. Tax evasion is an extreme measure taken by a person to evade their obligations, which could result in hefty fines and penalties, including jail time if the element of money laundering is involved.

The Panama Papers leaked data spanned nearly 40 years, from the late 1970s to the end of 2015, and exposed a never-before-seen view of the offshore world, providing a day-to-day, decade-by-decade glimpse. on how black money circulates in the global financial system, generating crime and depriving national treasuries of tax revenue, writes Dr Ikram ul Haq, a well-known international tax expert on Pakistan, in his column “The Leaks” in an English daily.

He explained that these tax havens not only offer low or no taxes, but also allow people or entities to circumvent the rules, laws and regulations of other jurisdictions, using secrecy as the primary tool. Therefore, Tax Justice Network (TJN) prefers the term “secrecy jurisdiction” instead of the more popular term “tax haven”.

But public opinion in Pakistan is increasingly divided over whether it is good or bad to have offshore companies. Pakistani citizens have the right to own foreign assets by accumulating an export commission; import commission, income earned abroad and funds transferred from Pakistan, wrote Shabbar Zaidi, former chairman of the RBF, in his book Rich People, Poor Country.

In the case of Pakistan, the movement of money from the country was previously not easily possible due to the regulated exchange rate regimes, but the exchange rate regime which is now in practice promotes the free flow of funds in and out of the country. any jurisdiction, provided the ta ‘has been paid in a particular jurisdiction, according to Shabbar Zaidi.

Pakistan liberalized the foreign exchange regulatory regime in 1992 with the introduction of the Economic Reform Protection Act by the then government of Prime Minister Nawaz Sharif. It was probably a coincidence that the Sharif family businesses named in Panamanian documents were registered in 1993 and 1994 – after the country brought into force the Protection of Economic Reforms Act (PERA) – which facilitated the move. outgoing foreign currency.

Dr Haq further wrote that all of the leaks identify the big drivers that are behind the creation of hard-to-locate businesses in the British Virgin Islands (BVI), Panama and other offshore havens. But India signed a bilateral deal with the BVI in 2011 and successive Pakistani governments have failed to do so.

Missed opportunities?

The RBF has missed many opportunities that have come their way to pursue tax evaders by closing loopholes. There hasn’t been a full-time FBR international tax director general for nearly a year and a half, indicating that the issue has remained a low priority for the authorities.

In June last year, the UK tax authorities suspended cooperation with Pakistan under a global ‘Tax Inspectors Without Borders’ (TIWB) initiative over concerns over legal and administrative structures that were hampering auditing multinational enterprises on the basis of information received from abroad. .

Islamabad lost a chance to catch big fish as it lost opportunities in the form of information on foreign bank accounts and money stashed in Swiss banks.

Her Majesty’s Revenue and Customs (HMRC) was providing assistance to Pakistan on how to use multinational transfer pricing information received under the Cooperation Organization’s Country-by-Country Reporting (CbCR) regime and for economic development (OECD).

The suspension reduced the prospect of collecting taxes that some multinational companies had evaded or avoided paying in Pakistan. Pakistan received information from foreign jurisdictions on these companies under the CBCR regime, but was unable to use this information, which angered HMRC.

The RBF has not been able to take full advantage of the information available to it through the work of the ICIJ or through multilateral agreements such as with the OECD.

After Panama Leaks, two tax amnesty programs, one by former Prime Minister Shahid Khaqan Abbasi and then by Prime Minister Imran Khan, incomplete information leaked in the Panama and Paradise newspapers also became reasons for negligible recoveries in the pass. As a result, some names that appeared in Pandora newspapers have declared their assets offshore.

The governments of Prime Minister Imran Khan and his predecessor, Shahid Khaqan Abbasi, gave 61.4 billion rupees in tax breaks to just 191 billionaires, who were caught owning offshore assets but were bailed out thanks to two tax amnesty programs.

No less than 191 people benefited from the tax amnesty regimes of 2018 and 2019, said Dr Mohammad Ashfaq, now president of the RBF, to the Standing Committee on Finance of the National Assembly in November 2019. At that time. , Ashfaq was Managing Director of International Taxes. After Asfhaq’s elevation first as a member of Inland Revenue Operations and then as chairman of the RBF, the post of CEO is held on an ad hoc basis.

These 191 people declared Rs 94.2 billion in offshore assets while paying only Rs 4.6 billion in taxes. Those 191 people paid an average of 4.9% of the value of assets in taxes, Ashfaq’s presentation showed.

The Income Tax Ordinance 2001 states that on a hidden asset, the RBF will charge a maximum income tax of 35% as well as a penalty of 100%, which will bring the total tax to pay 70%. The total tax break these billionaires got from the governments of Shahid Khaqan Abbasi and Imran Khan was Rs 61.4 billion at 70% tax debt.

No less than 135 people, named in the OECD database, took advantage of the 2018 PML-N tax amnesty scheme and declared assets of 62.4 billion rupees. They paid 2.9 billion rupees in taxes, according to the 2019 RBF presentation.

However, their actual liabilities without the tax amnesty could have been Rs 43.7 billion, obtaining relief of Rs 40.8 billion from the last government.

About 56 people, whose data was shared by the OECD, took advantage of the PTI’s tax amnesty scheme and reported assets worth Rs 31.8 billion, the RBF presentation showed. They only paid 1.7 billion rupees in taxes and obtained relief of 20.6 billion rupees.

Due to the low collection rate, the Office of the Federal Fiscal Ombudsman (FTO) had taken an opinion suo moto and launched an investigation to determine why the three field offices of the FBR were missing from the prime minister and the nation. But instead of correcting its path, the folks at FBR got stay orders from the courts against FTO’s decision.

The official record showed that the RBF headquarters forwarded nearly 1,580 cases worth Rs 260 billion or $ 2 billion to three AEOI areas of Karachi, Lahore and Islamabad. Recoveries in around 1,150 cases were only 4.6 billion rupees or $ 30 million as of last month.

Prime Minister Khan had promised to recover the $ 200 billion in looted money.

Some of the people who have been named in the Pandora documents have already declared their assets offshore. Among them, the president of the National Bank of Pakistan, Arif Usmani. There was another problem that many Pakistanis were non-residents for tax purposes, such as the sister of a former military general, officials said.

Finance Minister Shaukat Tarin also said his offshore companies knew about the central bank and were opened to sell stakes in his bank, Silk Bank.

The RBF has at least three options to prosecute these people – serve them with Section 176 tax notices for information, open their Section 177 audit, or summon them and take an oath – according to a expert.

Hoping that the rich will start paying their taxes honestly is a long way off. Its manifestation is that people continued to list offshore companies even after the Panama Papers, as the Pandora newspapers suggest. Pakistani businessmen and politicians are also afraid of being victims of political acts and they have deliberately kept their assets abroad during the rainy days.


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