Home »Editorials » Another tax amnesty scheme on the cards?

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  • Jan 23rd, 2018
  • Comments Off on Another tax amnesty scheme on the cards?
Prime Minister Shahid Khaqan Abbasi while addressing Pakistan Economic Forum organized by the Pakistan Business Council hinted at the launch of yet another tax amnesty scheme - this time focused on bringing back foreign assets held abroad by Pakistani nationals.

The question that has emerged in recent years for several countries including Pakistan is how to lure those of its nationals who hold assets abroad - liquid and fixed - to declare their assets held abroad and eventually pay tax on their income. To be successful an amnesty scheme must be a one off, to ensure that those it seeks to target are convinced that the amnesty would not be on offer again and that once the scheme has lapsed the government would proactively seek to identify assets held abroad by nationals and prosecute them that may, among other actions, also include forfeiture.

If the Abbasi administration is successful in formulating and implementing this amnesty scheme then it would be the fourth amnesty scheme since the PML-N formed the government in 2013 with the first three, although limited in scope, not being too successful though none was specifically targeting assets held abroad. The International Monetary Fund (IMF) in its second mandatory review under the three-year Extended Fund Facility (September 2013-2016) referred to the December 2013 tax incentive package as targeted towards improving the "investment climate through reducing tax scrutiny. The package opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment, and raises potential money laundering risks. The immunity from routine audit hinders the self-assessment process, and the amnesty - entailed by waiving penalties and interests - is likely to be detrimental to improving compliance and collections as taxpayers will develop an expectation of future immunities".

Secondly, an amnesty scheme must be attractive enough and in this context, Pakistan can draw some lessons from such schemes launched by other countries. Indonesia for example offered an amnesty scheme that offered a reduced tax rate, and required only a declaration. According to the Financial Times, 16 December 2016, "more than 10,000 people a day answered the President's pitch in September: declare assets now and take advantage of a discounted tax rate - as little as 2 percent compared with 25 percent - and, in turn, be part of Indonesia's future. Revenue from the Nine-Month amnesty, continuing through March, is promised to build railway networks, ports and airports in a country whose prospects, politically and economically, have been on the ascent.... The tax amnesty became appealing first to trade associations, law firms and major developers that liked the lower tax rate - and possibly saw future government contracts for big construction. Tax rates were locked in depending on how early declarations were made. That sparked the September rush.

"Just with 2 percent or 4 percent, you can bring the 'dark' money under the sun," said a private banker in Singapore as reported by the Financial Times. "Once you declare amnesty, the money is no longer 'dark.'" Turkey too offered an amnesty scheme to its nationals in August 2016 wherein taxpayers were able to repatriate their wealth unconditionally without any tax burden. These two schemes were successful; however, Modi's amnesty scheme to self-declare secret assets after nearly 20 years drew a disappointing 9.93 billion dollars after which he authorized raids on high net worth individuals.

Pakistanis have an estimated 150 billion dollars assets held abroad of which 40 billion dollars are in real estate - held through offshore entities or directly, or in other words, if the government succeeds in repatriating even half of these assets the heavy reliance on borrowing from abroad to fund infrastructure development would ease. In Pakistan's case, an amnesty scheme would not be successful if repatriation of assets rather than declaration of assets in required for the simple reason that the state of the economy in general and the industrial sector in particular may not be conducive to repatriating wealth. The industrial sector is grappling with delayed refunds and higher input costs relative to neighbouring countries that has not only had a negative impact on our exports but also fuelled smuggling across our porous borders. In addition, several administrations, and the incumbent is no exception, have used the Federal Board of Revenue (FBR) for political reasons with audit of many a member of the ruling party and/or coalition partner stopped.

Thus an amnesty scheme alone would only be successful if it is fashioned on the Indonesian amnesty template in terms of the objective, ie, declaration, time frame (at least six months) and low rates (2 percent). We are confident if this is done, repatriation of a sizeable sum of liquid assets would voluntary ensue in due course of time as the environment abroad is not very hospitable to money from our part of the world.

Copyright Business Recorder, 2018


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