Subsequent to publication of the article 'Offshore Assets - V - Solutions and Recommendations' on November 28, 2016, several positive steps have been taken up by the government, including issuance of draft SRO 101 of the Income Tax Rules, 2002, which relates to 'Common Reporting Standards' for banks in Pakistan on the information to be divulged by Pakistani banks to Federal Board of Revenue (FBR) under the OECD Model Tax Convention. Furthermore, a 'Prohibition of Benami Transaction' law has also been introduced. These developments reveal that, notwithstanding the political aspects of 'Panama Leaks', a blessing in disguise is emerging by way of correction in certain vital unchartered aspects of our national economy.
Kinds, forms and nature of foreign assets In the last seven to eight months since the revelation of Panama Leaks there have been substantial improvement in the public perception and information about the kinds, forms and nature of offshore assets of Pakistani citizens. The Institute of Chartered Accountants of Pakistan held three well attended seminars in Islamabad, Lahore and Karachi where this subject was widely discussed in a professional context. There has been a consensus amongst the professionals that this is purely a subject of Pakistan economics and the same should be handled in completely non-sentimental and non-political manner in the long-term interest of the state and the people of Pakistan.
In order to undertake the correction in an appropriate manner, it is essential to further dilate on the kinds, forms and nature of offshore assets of Pakistani citizens, as there can be many ways to classify such assets. I have tried to present this matter in simple way below:
Classification as to the owner being holder of public office or otherwise The first classification of offshore assets of Pakistani citizens can be made as to:
1. Foreign assets held by persons holding public office in Pakistan; and
2. Foreign assets held by persons not holding public office in Pakistan:
(a) Assets created out of taxed income and funds transferred offshore through legal system; and
(b) Assets created out of untaxed income where funds may not have been transferred from Pakistan through legally permissible means.
This classification is extremely important in the sense that, in the cases of assets held by persons not holding any public office, it is actually a business transaction. It is possible that such assets could have arisen/created out of funds on which due taxes have been paid and funds have been transferred through legal means. Within such assets, there could be cases, where taxes may not have been paid or the manner of transfer of funds from Pakistan may not be as per strict foreign exchange regulations of Pakistan. Nevertheless, there is no 'abuse of public office', in acquiring such assets. In my personal view, in case of assets held by persons not holding public office, a substantial portion has been kept outside Pakistan purely for economic and business reasons within the norms of prevalent legal system of Pakistan. Any regulation to be proposed should restrict itself to offshore assets of persons not holding public office.
Classification with reference to disclosure in Wealth Statement in the past The second classification relates to disclosure and non-disclosure of foreign assets held by a Pakistani tax resident in its wealth statement.
At this stage, the discussion is limited to 'disclosure in wealth statement' not the right of taxation by the government of Pakistan. In case of assets held abroad by a Pakistani citizen not disclosed in the wealth statement, a substantial sum represents the assets created out of the income that was not taxable in Pakistan. These cases invariably include Pakistani professionals and businessmen who worked abroad and earned money outside Pakistan, say in the Middle East and the West. Assets, mostly in the form of houses, were purchased out of such income. The person returns to Pakistan and in the subsequent period pays taxes due on income taxable in Pakistan. The only conceivable default or shortcoming, however, highly debatable in the legal context, is that such property is not disclosed in the wealth statement in the past years as required to be filed under the tax law of Pakistan. Notwithstanding any other aspect, Pakistan is one of the few countries that requires a wealth statement under the Income Tax Ordinance, 2001. There is no such requirement in the UK and the US, where we have the most refined taxation regimes in the world. To summarise, assets held abroad by tax resident of Pakistan, created out of income earned outside Pakistan, and are not disclosed in the wealth statement, may only be an academic default/shortcoming.
Classification as to the source of income
The third classification is as under:
1. Foreign assets, which are not disclosed in Pakistan, created out of income whose sources are not identifiable/explainable; and
2. Foreign assets, which are not disclosed in Pakistan, created out of identifiable/explainable income.
The first category in this classification is different, as in this case the person holding foreign assets cannot identify the sources from which such assets have been created. This may consequently lead to assertion that a portion of the same have been created out of untaxed funds transferred from Pakistan.
Classification of Undisclosed Assets in relation to time limitation The fourth classification is a derivative in the legal context; of assets identified in the third classification:
1. Foreign assets, not disclosed in Pakistan, created out of unexplained sources, not barred by law of limitation under the income tax laws;
2. Foreign assets held abroad, not disclosed in Pakistan, created out of unexplained sources, barred by law of limitation of Pakistan.
As per practical legal interpretation of Pakistani law, unexplained income/sources relating to a period over five (5) years is barred by limitation. Accordingly, the first category under this fourth classification will be those created in the past five years, others will be barred by limitation. The correct legal way to ascertain the accuracy of the aforesaid classification is to identify year of earning income or source from which such assets have been created. This may be an ideal situation but not a practical one. If someone proves that a house in London was purchased in 2005thenit will deem to arise out of income in 2005. If someone furnishes an explanation that the house now held in 2017 in London was purchased out of sale of house in 2005 (ie created from earnings in 2005) then same analogy should have been allowed to the person in the second scenario. This matter is subject to verification and onus of proof lies with the owner.
Classification as to form The fifth classification is in the nature of form. In this case, such assets can be identified as:
1. Foreign assets, not disclosed in Pakistan, held in liquid form as cash, bank accounts and bullion;
2. Foreign assets, not disclosed in Pakistan, held in non-liquid form such as immovable property, shares in foreign company etc.
Classification as to Bearer or Registered Assets The fifth classification can be further segregated into sixth classification as under:
1. Foreign assets, not disclosed in Pakistan held in the liquid form but identifiable to a person such as bank account etc; and
2. Foreign assets, not disclosed in Pakistan, held in bearer form such as cash, bullion, bearer ownership of foreign companies, etc. These assets are not identifiable to any person.
In this matter the current benami ownership law will also have to be taken into account. As under current law, there cannot be any benami assets.
Classification as to direct or indirect ownership The seventh and the last classification is a legal subject. In this case, a Pakistani person may be a settler, beneficiary, trustee or protector of a foreign trust holding Pakistani assets.
1. Foreign assets held 'directly' through a foreign trust where a Pakistani citizen is an identifiable beneficiary or a protector; and
2. Foreign assets held 'indirectly' through a foreign trust where a Pakistani citizen is an identifiable beneficiary or a protector.
Direct and indirect holding through trust refers to intermediary companies between the assets and the trust.
(To be continued)