Panama Papers: Experts term FBR’s tax notices a flawed procedure

Most recipients may not respond to the letters, FBR vows to penalise them

ISLAMABAD: As the process of serving notices to people named in the Panama Papers remains painstakingly slow, independent experts and chartered accountants representing these people claim that tax authorities have adopted a flawed procedure that may stall the entire exercise.

The divergent opinions come as the Public Accounts Committee prepares to hear about developments related to the Panama Papers from relevant government departments on Tuesday.



So far, the Federal Board of Revenue (FBR) has served tax notices to about 220 people who had been named in the Panama Papers and owned offshore companies.

The FBR is serving notices under Section 176 of the Income Tax Ordinance, which empowers tax officials to seek information about any transaction.

“The nature of the tax notice does not fall under Section 176; the notices should have been served under Section 111 or Section 122(5) of the income tax law,” said Syed Shabbar Zaidi, senior partner at AF Ferguson & Co, a leading chartered accountancy firm.

He said the scope of Section 176 was limited and it dealt with the taxes imposed in Pakistan. However, the information sought through the notice was not limited to Pakistan.

The director headquarters of FBR’s Intelligence and Investigation (I&I) wing of Inland Revenues has served the notices. Theoretically, the FBR’s respective field formations should have issued the notices, said Zaidi.

According to the directorate general I&I’s core functions, the wing will comprise a director general, director headquarters and three directors based in Karachi, Lahore and Faisalabad. The director Karachi will cover Sindh and Balochistan, director Lahore will cover Civil Divisions of Lahore, Gujranwala and Sahiwal in Punjab and director headquarters will look after the Islamabad Capital Territory, Civil Division of Rawalpindi and Khyber-Pakhtunkhwa in addition to his assignment at the headquarters.



Independent experts said the director headquarters could not serve these notices.

“The Panama Papers issue will not die down due to its political and social dimensions but the matter could not be resolved in this manner,” said Zaidi.

The opinion of chartered accountants and some other independent experts indicates that the FBR will not be in a position to take a meaningful action in the near future. There is a possibility that most people would not respond to these notices.

However, the FBR says if recipients of the notices did not respond, it can penalise them under Section 191 of the income tax law, which talks about imposing a fine and imprisonment of up to one year.

FBR spokesman Dr Mohammad Iqbal said the jurisdiction was an administrative matter that would not have adverse implications for the notices.

In April this year, the International Consortium of Investigative Journalists published a fraction of data leaked under the Panama Papers investigation, naming about 640 Pakistanis as beneficiaries of offshore holdings.

Of these, 155 have been identified by the Securities and Exchange Commission owning 600 companies in Pakistan.

The FBR notice seeks information about beneficiaries of the offshore companies, details of assets held directly or indirectly by the offshore company trust or entity, details of total investment along with the source and year-wise breakdown of investment made in these companies.

The FBR also sought details about any other moveable or immovable assets held abroad by these persons.

However, Zaidi said the FBR could not seek information about other assets until it had definite information.

The FBR has also asked about the investment made out of the income earned in Pakistan and the income, if any, being derived from the offshore company, trust, entity or asset and whether this income has been declared in Pakistan.

Experts said two kinds of investments were made in offshore companies. One made through illegal channels and the other through legal sources but due taxes were not paid.



They said in the second case, the government may have to offer an amnesty scheme to settle the issue.

They were also of the opinion that in most cases the tax authorities were unlikely to achieve anything through these notices. Non-resident Pakistanis who do not have a source of income in Pakistan would not be bound to reply to these letters.

Published in The Express Tribune, September 20^th, 2016.

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