According to the FBR's report submitted to the Supreme Court of Pakistan in a suo motu case regarding maintaining foreign accounts by Pakistani citizens without disclosure of the same and paying taxes in Pakistan, for tax matters involving intentional conduct which is liable to prosecution under the criminal laws of the applicant state, the provisions shall have effect for earlier taxable periods as well, unless restricted to a maximum of three years by a jurisdiction through a reservation made to the Convention.
The FBR said that the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Multilateral Convention) is a joint initiative of Council of Europe and the Organization for Economic Co-operation and Development (OECD). There are 116 countries and jurisdictions which are currently signatories of the Multilateral Convention, of which 99 countries and jurisdictions have ratified the Convention.
The Multilateral Convention is the most comprehensive multilateral instrument available for all forms, of tax co-operation to tackle tax evasion and avoidance, particularly through efficient exchange of information amongst its signatories. The Convention shall facilitate the signatory jurisdictions in the areas of international cooperation for better operation of domestic tax laws. The Multilateral Convention provides that the jurisdictions shall exchange any information that is foreseeably relevant for the administration or enforcement of their domestic tax laws and covers all the following three strands of exchange of information amongst the jurisdictions.
Exchange of Information on Request: At the request of one jurisdiction, the requested state shall provide the applicant state with any information as mentioned above concerning particular persons or transactions. If the information is not sufficiently available in the tax files of the requested state, that state shall take all relevant measures to provide the applicant state with the information requested. Spontaneous Exchange of Information: If information comes into the possession of a signatory jurisdiction which may have tax implication in another signatory jurisdiction, the same shall be provided to that jurisdiction without prior request or waiting for the specified date on which information is exchanged automatically.
Automatic Exchange of Information: The signatory jurisdictions shall automatically exchange financial accounts information of the residents of other signatory jurisdictions held by its financial institutions to those jurisdictions annually.
The Multilateral Convention also caters for other forms of assistance in tax matters such as tax audits, service of notices and recovery of taxes. Considering these benefits of Multilateral Convention, especially in the area of exchange of information, the FBR initiated the process of becoming its signatory well in time.
As a consequence of becoming party to the Multilateral Convention, the FBR has developed an exchange of information arrangement with more than 100 countries and jurisdictions as of now, irrespective of the fact whether it has a tax treaty with these jurisdictions or not.
Multilateral Competent Authority Agreement on Automatic Exchange Financial Account Information: Under Article 6 of the Multilateral Convention, the OECD has devised a Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCCA) which specifies the details of what information on the financial accounts will be exchanged and when. The information to be exchanged included name, address, tax identification number, date and place of birth, account number; name and identifying number of reporting financial institution; account balance or value on the last date of the relevant period and total gross amount of interest, dividend, etc. credited to the account during the relevant period, etc.
The MCAA is a multilateral framework agreement, with the consequent bilateral exchanges coming into effect between those signatories that file the subsequent mandatory notifications. The MCAA provides that subject to the applicable reporting and due diligence rules consistent with the common reporting standard (CRS), each competent authority will annually exchange with the other competent authorities the aforementioned financial account information on automatic basis, with respect to which it has MCAA in effect. The committed jurisdictions are required to have in place by the time the first exchange takes place appropriate safeguards to ensure that the information received remains confidential and is used solely for the purposes set out in the Multilateral Convention. There are 98 countries which have signed the MCAA. Consequent upon the approval of cabinet to sign the MCAA, Pakistan has signed the MCAA on 7th June 2017, the FBR said.
Implementation of automatic exchange of financial accounts information under the MCAA, inter alia, requires primary and secondary legislation; administrative and IT infrastructure and confidentiality and data safeguards.
The FBR has been able to put into place all the building blocks for automatic exchange of information in record time after ratifying the Multilateral Convention in December 2016. These steps included FBR initiated a pilot project for automatic exchange of information as a collaborative effort between FBR, Her Majesty's Revenue & Customs (HMRC) of United Kingdom (UK) and the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes Secretariat. The pilot project team has held several meetings and conducted various orientation sessions in collaboration with Global Forum and HMRC. The pilot project has employed a step-by-step approach to the implementation of the required standards for automatic exchange of information. The FBR's progress in the pilot project has time and again been appreciated by OECD and HMRC.
The FBR has put primary legislation in place for automatic exchange of information in all its tax laws. The FBR has also notified the secondary legislation ie Common Reporting Standard (CRS) rules on 15th March 2017 requiring financial institutions to commence due diligence of the reportable accounts from 1st July 2017 onwards and provide FBR information on residents of other jurisdictions by 31st May 2018 to be exchanged with relevant jurisdictions in September 2018. The FBR has also conducted half a dozen orientation sessions of the financial institutions in partisan for automatic exchange of information.
The FBR has established dedicated Automatic Exchange of Information (AEOI) Units ie AEOI Centre and six AEOI Zones across the country. Additional data safeguards and confidentiality measures have been put into place in these units, the FBR has also obtained ISO-27001:2013.
The FBR has initiated the process of acquiring the common reporting standard (CRS) software with the help and support of Department for International Development (DFID) to receive information from the reporting financial institutions. The software and allied hardware shall be provided by DFID as grant-in-aid by March 2018. The FBR has committed for the first automatic exchange of financial accounts information under the MCAA by September 2018 and has taken all the required steps in this regard.
Updating Article on Exchange of Information in Tax Treaties: the FBR is also in the process of updating and replacing the Article on exchange of information in its Avoidance-of Double Taxation Agreements with the latest text of the OECD Model. Briefly, Article 26 of the OECD Model Tax Convention provides that the competent authorities of the contracting states shall exchange information and no state shall decline to provide information merely for the reason that such information is of no interest to it, or because the information is held by a bank, other financial institution or nominee or a person acting in an agency or fiduciary capacity. According to the new version of the Article, the contracting states shall, exchange such information on request as is foreseeably relevant for carrying out provisions of the Convention or to the administration or enforcement of the domestic tax laws of the requesting state. Barring Few Tax Havens: there is a worldwide consensus on proper exchange of information to check tax evasion and fraud. Adoption of Article 26 of the OECD Model Tax Convention 2010 would be a step in the right direction as the same represents internationally accepted standards on exchange of information. The FBR has obtained approval of the federal cabinet to update the article on exchange of information in its tax treaties with 43 countries. The draft protocols have been sent through Ministry of Foreign Affairs to these countries.
In case of Switzerland, the existing tax treaty was not in line with the international standard on exchange of information as provided in Article 26 of the OECD Model Tax Convention. The treaty has now been renegotiated and the revised treaty signed by the two countries. The Article on exchange of information has been updated by inserting Article 26 of the OECD Model Tax. Pakistan has completed the internal procedure for its coming into force, the FBR added.