At the outset, it is highly important to note that unlike the past amnesty schemes, this particular scheme does not derive its strength from the Income Tax Ordinance, 2001. It is a special act of the parliament by the name of the Foreign Asset (Declaration & Repatriation) Act, 2018 which has been framed, in principle, according to the OECD guidelines with respect to procedures for one-time compliance opportunity. This Act, in addition to the Income Tax Ordinance, 2001 override other laws for the time being in force. This special feature was not there in any past schemes. In this connection, it is important to note the last scheme announced in Pakistan in 2000 was a product of Section 59 of the then Income Tax Ordinance, 1979. It had very limited immunity. That law covered the taxation side of non-compliance only. This new law is an act of parliament for the declaration of foreign and local assets and encompasses the Companies Ordinance 1984 and the Foreign Exchange Regulation Act, 1947 for example.
Pakistani citizens who have undeclared Pakistan source assets would have to take an important decision on the subject. That decision in the author's view should take into account important aspects which have been discussed in the following paragraphs. It is a fact that in the past 40 years there had been vast accumulation of foreign assets out of sums that were chargeable to tax in Pakistan. The primary reasons for such accumulation were our relaxed regimes with respect to foreign exchange accounts maintained by individuals and presumptive tax regime where documentation was discouraged by 'design'. As usual there is a general feeling, which is completely wrong that nothing extraordinary will happen if such asset remain undeclared. This means that status quo will continue. They may be right. There cannot be any authoritative view on the future course of action but if we see the domestic and international developments, some of which have been identified below then it transpires that this perception is not well founded. People who will miss the bus will regret forever. Some of the practical domestic and international developments in this regard are listed as under:
International developments:
* Invariably in all the cases the banks in the foreign countries are seeking declarations by the accounts holders, to the effect that such balances and transactions have been declared in the respective fiscal declaration of the jurisdiction of the account holders. In usual circumstances a time period is allowed for that statement and if that statement is not made then accounts are being 'frozen for operation' with an intimation that operations will be allowed as and when the declaration is available. The author has practically observed that in many cases such letters are ignored as usual, however the gravity of situation emerges on first or second reminder. It is clearly stated that financial regulation in such countries operate in a particular manner and such matters should not be taken lightly;
* It has been observed that almost all the reliable and authentic legal and accounting firms and other persons acting as trustees to the foreign trusts abroad are not willing to operate on behalf of the foreign trust and entities unless there is clear identification of beneficial ownership. This represent practical difficulty in operating offshore entities without disclosing the beneficial ownership. This has created a practical difficulty for operating the system as used to be previously;
* On account of recent actions undertaken in USA against some financial sector institutions originating from underdeveloped world, banks operating in international businesses are extremely hesitant in dealing with the transactions unless there is complete disclosure for fiscal purposes;
* In the UK, a special regime termed as 'Unexplained Wealth Order' [UWO] has been initiated whereby under the Proceed of Crimes Act of the UK, the UK authorities have acquired the right to enquire the sources of income of real estates in UK held by a non-resident. This is not a tax law. It has the right of confiscation if adequate and appropriate information is not available;
* In the UAE, value added tax has been imposed. It is the first step towards a fiscal regime. Accordingly in future it would not be possible to operate in UAE without appropriate disclosure. Secondly FATF is exercising adequate actions against UAE for compliance that will ultimately force the UAE authorities to account for the assets and wealth in the UAE.
* Some of the events identified in the aforesaid paragraphs are not laws or regulations; these are trends and practices. For a common man it is to be appreciated that in the future period it appears to be highly difficult to operate in any jurisdiction without proper documentation. It will be noted that author has intentionally excluded the issue of 'exchange of information' which is all the more important in this field. However that aspect has not been discussed for the reason that that even before that action, which is going to be there anyway,there are adequate bases for correction of records and documentation to safeguard foreign assets and transactions.
Domestic developments.
1. With reference to change in the domestic environment the subject of accumulation of foreign assets would remain incomplete without discussing the dilution of the protection and concessions provided by the Protection of Economic Reform Act, 1992 and Foreign Currency Accounts (Protection) Ordinance, 2001. Prior to the Finance Act, 2018 these laws were 'sacred cows' and there were no substantive amendment in these laws since inception for almost 35 years. The Finance Act, 2018 has changed the whole paradigm of the foreign exchange regime in Pakistan. The first and foremost change is removing the legislative cover of 'no enquiry' and 'no questioning' about the balances and transactions in these accounts. This means that after July 1, 2018 the privileges that were there would be abolished. Provisions relating to secrecy have also been changed.
2. The second change with respect to foreign currency accounts is the abolition of feeding such accounts by acquiring foreign currency from open market. Now such procedure will be available only to the persons who are' filers' in the tax system. At present, there is no restriction of acquiring foreign currency against rupees by the filers however it is highly expected that in future the system will not be as 'free for all' as it was in the past and State Bank of Pakistan will adequately ensure proper outflow of funds from foreign accounts maintained in Pakistan even by the filers.
3. The most important feature that would emerge after the July 1, 2018 is restriction on right to acquire new vehicle and property above certain amount by the person not being a tax filer. This appears, to be an ordinary matter. People in general have not perceived the underlying feature that is emerging in this case. This action is an indication of a big change that in future, it would be rightly expected that travel abroad, acquisition of jewellery and other person effects, remittance of education fee for children, medical bills etc. would not be eligible for person who are not 'tax filers'. A start has been made and it is anticipated that process of correction will be expedited. It is also considered that social pressure will restrict reversal of such actions.
4. The Finance Act, 2018 has also introduced a new wealth statement in respect of foreign assets. In the past there were serious actual and perceptional differences about the disclosure of foreign assets in the wealth statement. Now a separate wealth statement has been prescribed under Section 116A that includes all foreign assets including beneficial interests in trusts and other offshore entities. Furthermore there are very severe penalties for non-disclosure in that wealth statement. It would be highly inadvisable for resident Pakistani to give wrong wealth statement for foreign assets future. There is a possibility that in future that crime may be included in foreign exchange regulations also.
5. The UAE is a non-tax jurisdiction. Many Pakistani settled their business in the UAE in a manner that part of 'profit' that should have been earned in Pakistan was actually earned in the UAE. Other than that rental income and other such income from assets in the UAE were not taxable in Pakistan on account of corporate veil. The Income Tax Ordinance 2001 by way of 'Controlled Foreign Companies' has introduced provisions whereby such income may be taxed in Pakistan. This concept is not being appreciated generally as it is new for many persons in Pakistan. This concept is in practice in the US since 1960. In short, the avenue of earning in the UAE and keeping it there, as untaxed income, is practically finished in many respect.
6. Another important feature that is expected to emerge is with respect to deposit accounts with commercial banks. At the moment, there is no restriction or requirement of being a filer for maintaining a bank account even if the transactions and balances exceeds millions of rupees. It is highly expected the KYC requirements and other obligations will be further tightened and it would ultimately lead to a time when accounts exceeding certain sums will only be allowed to be maintained by the persons who are filers.
7. At present, there are many places and avenues to park untaxed wealth. These include real estates, especially open plots and bearer securities like prize bonds. There are very strong pressures socially to curb that tendency. It will not be possible for the forthcoming governments to resist that pressure especially in the case where both current and trade balances are perennially imbalance.
In the light of the aforesaid brief discussions, with these changing environment, as a pragmatic person this writer is not able to understand the rationale of not availing this one-time compliance scheme as introduced by the relevant act referred above. It is this writer's view that those who will not avail this opportunity will be less farsighted people.