ISLAMABAD: Influential people are pressurising the caretaker federal government to allow them to declare their hidden foreign investments in shares for only 2% tax under the offshore amnesty scheme, which may cause losses of hundreds of millions of dollars to Pakistan.
The rate that the influential people were seeking was 60% lower than the applicable rate of 5% of the gross value of assets, said sources in the State Bank of Pakistan (SBP) and the Federal Board of Revenue (FBR). However, both these government entities were resisting the pressure.
The FBR and SBP feared that any concession, given in violation of the offshore tax amnesty law, could not only bring a bad name to the scheme, but may also expose them to scrutiny by courts and anti-corruption watchdogs, the officials said.
Caretaker Finance Minister Dr Shamshad Akhtar chaired a meeting at the weekend in Karachi to decide the matter, said SBP officials.
They said the meeting remained inconclusive after the central bank asked the finance ministry to take full responsibility of clearing offshore investments in shares and stocks at a reduced rate of 2%.
To a question, the finance ministry replied that meetings on the tax amnesty scheme were an ongoing effort to ensure success of the scheme.
The Foreign Assets (Declaration and Repatriation) Act 2018 has offered three types of tax rates for the declaration of offshore assets. Those who declare their offshore liquid assets but do not repatriate them to Pakistan pay 5% tax. For the non-repatriation of immovable foreign assets, the rate is 3% whereas the rate is 2% for the liquid assets repatriated and invested in government securities – US dollar-denominated bonds – up to five years.
Officials said about half a dozen wealthy people, who had huge investments in foreign securities and in listed companies in Pakistan through offshore banks and entities, wanted to declare their investments at only 2% tax.
According to an assessment of AF Ferguson chartered accountancy firm, Pakistanis have about $40 billion worth of offshore assets in the shape of bank balances and foreign securities and another $20 billion in Pakistan-listed companies.
The investments in shares in Pakistan-listed entities are largely held through a portfolio account with an offshore bank or an offshore entity in countries called tax havens. These people want to take benefit of the reduced 2% tax without en cashing their investments and investing in the tax amnesty bonds.
Legal and tax experts clarify that the 2% rate is applicable only in the case when assets are repatriated.
Responding to a question, the finance ministry said “the SBP has to specify the mode and manner of repatriation of liquid assets to Pakistan.”
It pointed out that the tax rate for declaring the liquid assets held abroad was 5% and if those were repatriated to Pakistan, the rate would be 2%.
The above rates had been provided by the law and “it is not the prerogative of any individual or institution to prefer one rate over the other,” the ministry said.
To a question whether there was a difference of opinion on the applicable rates between the finance ministry and the SBP, the ministry replied that the SBP enjoyed full autonomy in its functions conferred under the Act and there was no question of any difference of opinion as the Ministry of Finance had no role in the matter.
Potential tax loss
Although the chances of declaring the entire $60 billion of investments in shares and bank balances are remote, this could fetch a maximum of $3 billion in taxes if people pay 5% tax. However, if the government accepts the demand, the maximum tax contribution will be $1.2 billion – 60% less than expectation.
Owing to that reason, officials said, the SBP was not ready to take responsibility as that could invite the attention of the anti-corruption watchdog.
Persons who hold assets in other people’s names have been taking advantage of repatriation of dividend and capital in US dollars.
Till June 30, about $6 billion in foreign assets had been declared by Pakistani citizens who paid $290 million in taxes. The scheme has already been extended till July 31.
The response of SBP spokesman Abid Qamar on the applicable tax rate for foreign investment in shares was awaited.
There was also pressure on the FBR to declare through frequently asked questions that the tax rate for assets invested in shares and stocks will be 2%.
FBR spokesman Dr Mohammad Iqbal refused to comment on the matter.
Published in The Express Tribune, July 10th, 2018.