Pakistan signs convention to curb cross-border tax evasion

It also signed the MCAA to give effect to OECD multilateral convention

ISLAMABAD: Pakistan has signed a new multilateral convention at the platform of Organisation for Economic Cooperation and Development to counter cross-border tax evasion and avoidance strategies adopted by multinational companies.

The new convention will also strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.

Schoolchildren should be taught how to spot fake news, says OECD

The country signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit, known as BEPS Convention, in France on this Wednesday along with 76 other countries and jurisdictions.

On the same day, Pakistan also signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Accounts Information, known as MCAA. The MCAA has been signed to give effect to OECD multilateral convention that Pakistan signed in August last year. The MCAA framework agreement provides details about the information sharing mechanism.

Pakistan to receive information under OECD by early 2018: Dar

The offshore tax assets of Pakistanis remain a sensitive political issue, particularly after Panama leaks that led to accountability of sitting prime minister and his family members.

The ministers and high-level officials from 76 countries and jurisdictions signed or formally expressed their intention to sign an innovative multilateral convention that will swiftly implement a series of tax treaty measures to plug loopholes in bilateral tax treaties exploited by multinational enterprises.

Pakistan’s ambassador to France, Moinul Haque signed the treaty, after Finance Minister Ishaq Dar could not travel to Paris.

Proposals to deter foreign companies from tax evasion

The new convention will have the force to close gaps in existing 1,100 bilateral tax treaties that are being exploited by the multinational companies to transfer their profits under various pretexts without paying due taxes. Revenue losses due to BEPS effects are conservatively estimated at $100 billion to $240 billion annually, or the equivalent to minimum 4 per cent to 10 per cent of global corporate income tax revenues, according to the OECD.

Almost 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties, said the OECD. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming, it added.

In last two budgets, Pakistan has also amended legal provisions relating to transfer pricing by the multinational companies aimed at curbing tax avoidance by them. The government has also proposed to setup a Directorate General for Transfer Pricing to maximise its tax gains after seeing big firms not accurately reporting their profits.

Pakistan officially becomes signatory of OECD Convention

The new multilateral convention will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD, G20 and BEPS Project. Treaty measures that are included in the new multilateral convention include those on hybrid mismatch arrangements, treaty abuse, permanent establishment, and mutual agreement procedures, including an optional provision on mandatory binding arbitration, which have been taken up by 25 signatories.

In August last year, Pakistan officially became a signatory of the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters aimed at curbing growing tax evasion.

Out of 104 member countries, as many as 54 countries will put in place their domestic mechanisms in 2017 for the first exchange of information. Another 47 countries will start first exchange of information in 2018.

Companies in tax havens: OECD seeks debate on beneficial ownership

Pakistan may get the first access to information by either the end of 2018 or early 2019, according to officials involved in negotiations.

MCAA treaty

Pakistan also signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Accounts Information, known as MCAA. Mohammad Iqbal, Chief International Taxes of the FBR singed the MCAA on behalf of Pakistan. Douglas Frantz, Deputy Secretary General of the OECD witnessed the signing ceremony.

The MCAA is the framework agreement in the pursuance of Article 6 of the Multilateral Convention on Mutual Administrative Assistance in tax matters that Finance Minister Ishaq Dar signed in August last year.

The MCAA provides details about the exchangeable information and associated requirements. With the signing of the MCAA, Pakistan has completed all the legal requirements for automatic exchange of financial account information and has committed to exchange information from 2018 onwards.

However, Pakistan has not yet plug legal lacunas, like Economic Reforms Protection Act of 1992 and sections like section 111 (4) of Income Tax Ordinance that are barriers to meaningful action against tax evaders.