FBR breakthrough unlikely in Panama leaks probe

So far, FBR has served tax notices to about 336 people named in Panama Papers - none have been prosecuted till date

ISLAMABAD: Pakistan’s chances of getting any advantage from leaked information about more than 400 of its citizens who have stashed wealth abroad are bleak, as its laws facilitate money laundering and tax evasion in a legal manner, according to experts.

They say until these laws are amended, tax authorities cannot take tangible action against culprits, which is also evident from past seven months’ proceedings. Another issue is the ability and will of the Federal Board of Revenue to take concrete actions, as it has so far preferred to hide behind these legal lacunae.



Interestingly, Prime Minister Nawaz Sharif had enacted the Protection of Economic Reforms Act (PERA), 1992 during his first stint as prime minister. After its enactment, industrialists and politicians whitened their illegal money, according to court records and statements of that period. Sections 4, 5 and 9 of PERA and section 111(4) of the Income Tax Ordinance, 2001 guarantee complete immunity from tax investigations.

Before passage of PERA, the country had a controlled regime of foreign exchange. “All citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be entitled and free to bring, hold, sell, transfer and takeout foreign exchange within or out of Pakistan in any form and shall not be required to make a foreign currency declaration at any stage nor shall anyone be questioned in regard to the same,” says section 4 of the act.

Similarly, section 111(4) of the income tax law is facilitating whitening of illegal money through foreign remittances. According to rough estimates, one-fifth of about $20 billion foreign remittances are domestically generated black money that is being whitened under the clause.

Another issue hindering progress on Panama leaks is that tax authorities neither have formal arrangements for exchange of information with the infamous offshore tax havens nor the capacity to confront influential people. Pakistan does not have such a treaty with known offshore tax havens Panama, British Virgin Islands, Jersey and Cayman Islands.



FBR spokesman Dr Mohammad Iqbal has repeatedly said in the past that there are two prerequisites for going after people identified in the Panama leaks. First, there should be official papers establishing that they really stashed their wealth abroad and secondly there should be a bilateral avoidance of double taxation and exchange of information treaty.

So far, FBR has served tax notices to about 336 people who had been named in the Panama Papers. None have been prosecuted till date.

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 to those named in the Panama leaks should have been served under section 111 or 122(5) of the income tax law,” Syed Shabbar Zaidi, a senior partner at AF Ferguson & Co, told The Express Tribune in September this year.

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

In April this year, tax authorities had also served a notice on Prime Minister Nawaz, seeking a clarification on receipts of foreign remittances from his son and subsequent distribution among his family members. This notice was also served under section 176 of the Income Tax Ordinance 2001. FBR never disclosed the outcome of this notice to the public to gain credibility that it was impartial.

However, research work carried out by leading tax expert Dr Ikramul Haq gives some hope. It also provides a lead to the country’s courts, which may get to the bottom of the case.

According to Dr Haq’s work published in an English daily this year, Nawaz received Rs129.3 million in foreign remittances from his son and then gifted Rs31.7 million to his daughter and Rs19.45 million to his second son in 2011. He disclosed these things in his article ‘Tough Times for PM’.

Haq wrote that under the law, there is a procedure to give a gift to someone, which in this case it has not been followed. He wrote that his investigation showed that numerous questions and dichotomies arose from the documents contained in the Panama Papers and those filed by Nawaz and his daughter before the Election Commission of Pakistan and FBR.



Haq said as per wealth reconciliation statement for tax year 2011, Nawaz Sharif showed that he gave a gift of Rs31.7 million to Maryam Nawaz and a gift worth Rs19.45 million to his son. He stated that Captain Safdar in his statements of assets and liabilities as on June 30, 2011 to the ECP, showed no change in the assets during the year. “If the amount was gifted to the daughter through a cross cheque, as required under the law, then her husband was bound to declare it,” he said.

Haq wrote that this gift raises many questions. For example, as per section 39(3) of the Income Tax Ordinance, any amount claimed as gift should be received either through a cross cheque or through a banking channel from a person holding a National Tax Number.

Admittedly, the PM’s son was not an NTN holder. This amount was to be offered as income even if received through a banking channel, which Nawaz failed to do. “This needs probe,” he said.

He said as per assets declarations from 2011 to 2013, Nawaz has been receiving huge gifts through remittances from his son. Since his son is not an NTN holder, the entire amount becomes taxable under the Income Tax Ordinance. “Secondly, the PM’s son never showed these amounts in his UK returns. In other words, offshore accounts have apparently been used to send these funds,” he added.

When contacted, FBR spokesman Dr M Iqbal said some protections available under the 1992 act were withdrawn through the Foreign Exchange Regulations Ordinance, 2001. "Sub section 3 of Section 39 provides that a loan or gift should be received through banking channels otherwise it will be treated as the income of the recipient," he said while responding to a question about how one should receive a gift for tax purposes.

Published in The Express Tribune, November 4^th, 2016.