Dealing with the challenge of offshore tax evasion

Dealing with the challenge of offshore tax evasion

Bilal Hassan

In Pakistan, income is taxed on the basis of source. A non-resident person is taxed only to the extent of Pakistan-sourced income, and is neither required to pay tax on foreign-sourced income nor does he need to make disclosure of assets held abroad. Tax residence status in Pakistan is determined on the basis of physical stay of 183 days or more in a tax year. The resident Pakistanis have been involved in offshore tax evasion as residents in many other countries. Significant amounts of capital continue to flow from Pakistan to other countries through offshore companies located in tax havens, e.g. Panama, Bahamas, British Virgin Island, Seychelles, Samoa, Mauritius, Niue, Jersey and Anguilla. Because income earned in Pakistan, whether taxable or not, can be officially converted into foreign currency and remitted out of the country, contrary to the provisions of foreign exchange laws. The tax havens disclosed through Panama Leaks showed that there were a total 270 of entities which were owned by 444 individuals from Pakistan.

After actively engaging in outbound investment through offshore companies for many years, resident Pakistanis have stashed large amounts of earnings in offshore bank accounts. According to an estimate, Pakistani nationals have more than 152,500 offshore bank accounts wherein a hefty amount of US$ 11 billion is deposited. It is believed that more than half the earnings stashed in the offshore accounts are undeclared and are, hence, untaxed earnings. Moreover, the volume of hidden assets of Pakistani nationals in different foreign tax havens is estimated to be US$ 350 billion. The quantum of untaxed Pakistani wealth abroad can also be estimated from the fact that under the tax amnesty 2018, about 5,363 entities (individuals and companies) declared foreign assets worth Rs 1,003 billion, with major share of assets located in the United Arab Emirates (UAE).

In Pakistan, considerable amounts of tax evaded money are laundered every year. For example, according to the US State Department’s Interna­tional Narcotics Control Strategy Report, Pakistan loses over US$ 10 billion every year in trade-based money laundering.  According to an estimate, around US$ 40 billion have been sent abroad during the last 40 years with the aid of money-changers and exchange companies.

To deal with the challenge of offshore tax evasion, several amendments have been introduced to the Income Tax Ordinance, 2001 (ITO) in the recent past. An ‘offshore asset’ is defined in section 2(38AA) of the ITO, which includes any movable or immovable asset held, any gain, profit or income derived or any expenditure incurred outside Pakistan. The definition of ‘offshore evader’ is provided in section 2(38AB) of the ITO, which means a person who owns, possesses, controls, or is the beneficial owner of an offshore asset and does not declare, or under declares or provides inaccurate particulars of such asset to income tax authorities (Commissioner). A penalty higher of Rs 100,000 or an amount equal to 200% of tax sought to be evaded has been prescribed in section 182(1) of the ITO for an offshore tax evader involved in offshore tax evasion in the course of any proceedings under the ITO before any income tax authority or the appellate tribunal. A new section 192B has been inserted in the ITO to prescribe prosecution for concealment of an offshore asset. Any person who fails to declare an offshore asset to income tax authorities or furnishes inaccurate particulars of an offshore asset, and the revenue impact of such concealment or furnishing of inaccurate particulars is Rs 10 million or more, shall commit an offence punishable on conviction with imprisonment up to 3 years or with a fine up to Rs 500,000 or both.

“Offshore enabler” is defined in section 2(38AC) of the ITO to include any person who enables, assists or advises any person to plan, design, arrange or manage a transaction or declaration relating to an offshore asset, which has resulted or may result in tax evasion. Penalty higher of Rs 300,000 or an amount equal to 200% of the tax which was sought to be evaded has been prescribed in section 182(1) of the ITO for an offshore enabler who in the course of any transaction or declaration made by a person has enabled, guided, advised or managed such person to design, arrange or manage that transaction or declaration in such a manner which has resulted or may result in offshore tax evasion in the course of any proceedings under the ITO. Prosecution for enabling offshore tax evasion has also been provided by inserting a new section 195B into the ITO. Accordingly, enabling offshore tax evasion is an offence punishable on conviction with imprisonment up to 7 years or with a fine up to Rs 5 million or both.

“asset move” is defined in section 2(5C) of the ITO and it means the transfer of an offshore asset to an unspecified jurisdiction by or on behalf of a person who owns, possesses, controls, or is the beneficial owner of such offshore asset for the purpose of tax evasion. An “unspecified jurisdiction” means a jurisdiction, which has not committed to automatically exchange information under the Common Reporting Standard (CRS) with Pakistan. Any jurisdiction, which has committed to automatically exchange information under the CRS with Pakistan is defined as “specified jurisdiction” in section 2(60A) of the ITO. A penalty higher of Rs 100,000 or an amount equal to 100% of the tax is prescribed in section 182(1) of the ITO for a person involved in asset move from a specified territory to un-specified territory.

A new sub-section (5) is inserted in 145 of the ITO to empower the income tax authorities, on the basis of information received from any offshore jurisdiction, to freeze any domestic asset of any person including any asset beneficially owned by the person for 120 days or till the finalization of proceedings including, recovery proceedings and any other proceedings under the ITO whichever is earlier, if the income tax authorities has reason to believe that such person who is likely to leave Pakistan may be involved in offshore tax evasion or such person is about to dispose of any asset.

Section 216 of the ITO is amended to enable the FBR to publish the names (in the electronic and print media)  of offshore tax evaders, who have evaded offshore tax equal to Rs 2.5 million or more, and offshore tax enablers who have enabled offshore tax evasion.