A Serious Effort or An Election Gimmick?
Tax amnesty is generally offered to taxpayers to offer them an opportunity to disclose income or assets accumulated through untaxed sources and to pay their unpaid taxes. It generally takes the form of reduced or no interest or penalties and freedom from prosecution. Tax amnesties are announced to stop tax evasion, increase tax compliance and to raise additional revenue for balancing the budgets.
By signing the Multilateral Convention on Administrative Assistance in Tax Matters (hereinafter the Convention) of the Organisation for Economic Cooperation and Development (OECD), on 14 September 2016, Pakistan entered into commitment with the OECD member countries with regard to automatic exchange of information concerning tax matters. The Convention enables the signatories to seek assistance in tax examination for preventing base erosion and profit-shifting, as well as curbing tax evasion. The most important aspect of the Convention is that almost all the tax-haven jurisdictions are its signatories and, therefore, non-compliance leading to tax evasion can be effectively controlled with the cooperation of these jurisdictions.
Pursuant to Article 6 of the Convention, Pakistan signed the Multilateral Competent Authority Agreement on Automatic Exchange of Information (AEOI) agreement in tax matters on a reciprocal basis on 7 June 2017. Under the AEOI agreement, the member countries are bound to exchange information, upon request of one state to the applicant state or automatically exchange information regarding income or capital, information obtained during examination of a taxpayer affairs, information obtained in the course of simultaneous examination in each state concerned and information obtained through tax examination by a representative of the tax administration of one state in the requested state.
Being a signatory to the AEOI agreement, the Pakistani tax authorities could seek information on banking and other details of resident Pakistanis from the member countries from the tax year 2018 onwards and even for earlier periods about tax matters involving intentional conduct, which is liable to prosecution. Pakistani tax authorities are commencing automatic exchange of financial accounts information from September 2018 onwards. Consequently, the tax authorities will receive detailed information about banking and other financial channels of the resident Pakistanis automatically each year from other countries and jurisdictions. The automatic exchange of information will expose hidden offshore accounts and assets of the resident Pakistanis to tax authorities and will, therefore, curtail cross-border tax evasion.
In view of the provisions of the AEOI, agreement it was imperative to provide an opportunity to people holding fixed assets and liquid assets abroad to declare them with the tax authorities of Pakistan.
Therefore, on 5 April 2018, the Prime Minister of Pakistan announced the Tax amnesty Scheme for Declaration and Repatriation of Foreign Assets to bring in the amounts through formal channel. Additionally, the tax amnesty provides one-time opportunity to people holding undisclosed domestic assets to declare them voluntarily.
Other possible reasons for the announcement of tax amnesty could be to generate additional tax revenue to achieve budgetary target of around Rs 4 trillion. It is because when Pakistani nationals having huge untaxed wealth in the bank accounts in the foreign countries, many of them being tax havens, declare them, the tax authorities will collect substantial revenue. It is worth mentioning here that the collective wealth of the Pakistani nationals hidden overseas is estimated to be between $300 and $500 billion, which is more than, or at least equal to, the country’s current GDP of $300 billion. The Panama Papers and the Paradise Papers included 450 and 193 Pakistanis, respectively, who own as much as 5 percent of the total hidden $10 trillion global wealth.
Furthermore, tax compliance is extremely low in Pakistan. Only 1.2 million people file income tax returns. More perplexing is the fact that out of these 1.2 million filers, only 700,000 actually paid tax. This amnesty scheme also aims at enhancing tax compliance.
Last but not least, the ratio of direct tax collection to total tax collection is low. For example, the ratio of direct taxes to total tax revenue was 38 percent for the tax year 2014, which further dropped to 36 percent during the tax year 2016.
Tax Reform Package
To achieve the above-stated objectives, inter alia, the present government announced five-point tax reforms package, which is as follows:
1. The computerized national identity card (CNIC) numbers would be the national tax numbers (NTNs);
2. the income tax brackets and tax rates for individual taxpayers would be revised as:
3. undeclared assets held locally or abroad could be declared after making payment at prescribed rate under the tax amnesty scheme. One-time exemption from accountability laws would be available to persons availing the tax amnesty scheme;
4. tax would be collected on all property transactions at a uniform rate and the government would have the right to purchase any property by making payments at prescribed rates over and above declared value within six months of registration; and
5. the government would monitor citizens’ financial records and would issue notices in case of tax evasion.
salient Features of the Tax Amnesty Scheme
The salient points of the tax amnesty scheme with regard to declaration and repatriation of the foreign assets are as follows:
- Pakistani nationals would be able to declare undocumented foreign assets;
- foreign exchange could be repatriated on 2 percent payment either through bonds for 5 years at the rate of 3 percent per annum (six-month payment) or all encashment in PKR at the prevailing interbank dollar rate;
- dollar account-holders in Pakistan who have purchased dollars through undeclared money could also legalize on 2 percent payment;
- foreign fixed assets could be declared on 3 percent payment and would be evaluated at the market price, which could not be less than the cost of acquisition;
- foreign liquid assets such as cash, securities and bonds held abroad and in local dollar accounts could be declared on 5 percent payment;
- all remittances less than $100,000 per year per person would continue without any question from any agency about the source and would be exempted from tax;
- all remittances greater than $100,000 per year per person would be exempted from tax but only the Federal Board of Revenue (FBR) could question the sources of funds; and
- only tax-filers could open a new foreign exchange account.
Pakistani nationals availing the tax amnesty scheme would be given a one-time exemption from accountability and other laws. However, the tax amnesty scheme would not be valid for the following categories:
(a) money laundering;
(b) drug smuggling;
(c) terror financing; and
(d) public office-holders including their spouses and dependent children.
Amnesty for Voluntary Disclosure of Domestic Assets
The salient points of the tax amnesty for voluntary declaration of domestic assets are as follows:
- All undeclared incomes earned before 30 June 2017 on all local assets such as gold, bonds, property, could be legalized on 5 percent payment;
- the Federal Board of Revenue assessed rate on property would be abolished from 1 July 2018;
- the provinces would abolish the DC rate on property;
- the non-filers of tax returns would not be able to purchase property exceeding PKR 4 million from 1 July 2018;
- 1 percent adjustable advance tax would be payable on purchase of any property at federal level;
- maximum 1 percent tax (local and provincial) would be chargeable on registration of property;
- the federal government would have the power to purchase any property in Pakistan within six months of registration by paying:
- 100 percent more for the properties registered in the fiscal year (FY) 2018-19;
- 75 percent more for the properties registered in the FY 2019-20;
- 50 percent more for properties registered in the FY 2020-21; and
- 67 percent more for the properties registered after the FY 2020-21.
One-time exemption from accountability laws would be available to the persons availing the tax amnesty scheme.
A Comparison of Global Tax Amnesty Schemes
A lot of countries have launched such money-whitening schemes in the past and have reaped dividends. Here follow some precedents in this context:
Italy introduced a tax amnesty in 2001. In 2009, the Italian tax amnesty subjected repatriated assets to a flat tax of 5 percent and succeeded in whitening a huge amount. About 80 billion euros in assets were declared, which resulted in tax revenues of 4 Billion euros. The Bank of Italy had estimated that Italian citizens held around 500billion euros in undeclared funds outside the country.
In 2003, South Africa had enacted the Exchange Control Amnesty and Amendment of Taxation Laws Act, a tax amnesty.
In Belgium, during 2004, the country’s legislative house had adopted a law allowing individuals subject to Belgian income tax to regularize the undeclared, or untaxed, assets they held before June 1, 2003.
In 2004, Germany had also granted a tax amnesty in connection with tax evasion.
In 2007, a Russian tax amnesty programme had collected $130 million in the first six months. The Russian programme, however, was not open to anyone previously convicted of tax crimes such as tax evasion.
On September 30, 2010, the government of Greece had granted tax amnesty to millions of Greek citizens by paying just 55 percent of the outstanding debts.
In 2012, the Spanish government had announced a tax-evasion amnesty for undeclared assets or those hidden in tax havens. Repatriation was allowed by paying a 10 percent tax, with no criminal penalty.
On June 26, 2012, the United States Internal Revenue Service (IRS), the nation’s tax collection agency, had said its offshore voluntary disclosure programmes had collected more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programmes.
During 2014, an amnesty scheme was offered in Australia, prompting thousands of rich Australians to declare billions of dollars in untaxed assets and income stashed in bank accounts in Switzerland and in other countries. The vast majority of voluntary disclosures were related to income and shares.
In October 2016, the Indian tax amnesty had drawn $9.8billion in asset declarations.
An October 2, 2016 report of the “Financial Times” India had stated: “A four-month amnesty for tax-evaders in India has resulted in the declaration of hidden assets worth nearly $10bn.”
Innumerable American states have had tax amnesties.
For example, the Los Angeles administration had collected $18.6 million in its 2009 tax amnesty programme, claiming that the amount was $8.6 million more than was expected and that businesses saved $6.7 million in penalties. The state of Louisiana had brought in $450 million from its 2009 tax amnesty programme, three times more than what was expected.
In Canada, a tax amnesty scheme called the “Voluntary Disclosure Programme” already exists for income tax and excise-related offences.
The Canada Revenue Agency has given this relief for a 10-year period prior to the date of filing and covers unfiled tax returns and unfiled information returns such as offshore asset form. Eligible taxpayers receive full penalty relief, and avoid any possible tax evasion prosecution.
The largest Islamic country, Indonesia, had netted about $9.61 billion in March 2017. The country had previously given such incentives in 1964, 1984 and 2008 also.