Govt empowers FBR to go after offshore accounts

However, legal challenges to new regime remain unaddressed

Shahbaz Rana July 10, 2019

ISLAMABAD: After a hiatus of four months, the federal government on Tuesday empowered taxmen to go after offshore bank accountholders, which will make offshore tax regime functional again but possible legal challenges to the new regime remain unaddressed.

The Federal Board of Revenue on Tuesday issued a notification to give powers to the officers of Directorate General of International Tax Operations. These powers have been given to operationalise section 230E of the Income Tax Ordinance that was added into the law in February but remained non-operational due to lack of powers to the officers.

The Pakistan Tehreek-e-Insaf (PTI) government took four months to issue a simple notification that has denied it benefits that it could accrue by using the information provided by the Organisation for Economic Cooperation and Development (OECD) about 152,000 bank accounts that have $7.5 billion deposits.

This has put a question mark over the ability of the Pakistan Tehreek-e-Insaf (PTI) government to handle fresh information that will arrive from 71 countries in September under the OECD arrangement, highly placed sources told The Express Tribune.

Section 230E deals with all matters related to offshore jurisdictions, allowing the tax authorities to get information from abroad, process it and chase the Pakistanis who own these assets but have not declared in their wealth statements filed with the FBR.

PTI stops drive to recover $7.5b from offshore accounts

Section 230E had given effect to Directorate General of International Taxes that comprises of director general, directors and additional directors.

The PTI government had introduced section 230E through the Second Supplementary budget that overrides the earlier offshore taxation regime.

According to the notification, the FBR has given the Chief Commissioner’s powers to Director General International Taxes, Commissioner’s powers to directors and additional commissioners’ powers to additional directors.

The sources in the FBR said that the notification will help to make the directorate general operational but legally speaking the directors cannot exercise the powers of the commissioners.

Background discussions with senior tax officials and statement given by the director general of international taxes in the National Assembly Standing Committee on Finance revealed that the government had stopped chasing offshore bank accountholders since February this year.

The standing committee had been told that after January the FBR did not serve notices to offshore account holders because the amnesty was in the air.

However, sources told The Express Tribune that the existing offshore tax regime became dysfunctional after an amendment introduced by the PTI government in February this year. There were also differences among the taxmen whether the February legal amendment should be retained in the law or it should be deleted, they added.

In 2017, the Pakistan Muslim League-Nawaz (PML-N) government had set up Automatic Exchange of Information Commissionerates in three big cities to deal with offshore information provided by the OECD. This setup worked till mid-February and it processed nearly 340 cases on the basis of OECD information.

Govt imposes 12.5% tax on income from offshore companies

Out of 152,00 bank accounts, the FBR processed only those bank accounts where deposits were in excess of $500,000 or Rs80 million. International Taxes Director General Mohammad Ashfaq said $7.5 billion were deposited in these 152,000 accounts and over $4.5 billion was owned by just 650 people.

Offshore work stops

Work stopped, including on the 340 cases, when the PTI government created a new legal structure but did not make it functional by delaying the issuance of its operational notification, according to the FBR sources.

Through its second supplementary budget, the PTI government established the Directorate General of International Tax Operations by inserting Section 230E into the Income Tax Ordinance 2001. This legal amendment made the Automatic Exchange of Information Commissionerates ineffective, said a senior official of the FBR who dealt with these cases.

The FBR did not consult the international taxes wing before the introduction of the concept of Directorate General of International Taxes, an officer privy to these discussions told The Express Tribune.

Under Section 207 of the income tax law, only 15 types of officers can use the income tax law powers. The post of director is not among these 15 listed categories and its equivalent is a commissioner but Section 230E does not list commissioner as an authorised officer.

The major loophole in the new international taxation regime is that a director cannot assess the income of a person as under the law these powers rest with the commissioners of Inland Revenue Service, said the FBR officials. Even the powers to provisionally assess the income of an offshore asset holder are limited only in case of an undeclared assets, they added

If a person has under-declared the value of an offshore asset, the directorate general is handicapped under the law, confirmed another official who dealt with these cases.

The sources said that the powers given through notification to the directors would not be an alternate to the legal powers, which are only available to the Commissioners. They said the billionaires who would be chased by the FBR can exploit this lacuna in the courts.

But FBR’s spokesman Dr Hamid Atiq Sarwar said after SRO the directors were authorised to use powers of commissioners within the scope determined by the SRO.

The FBR spokesman said that commissioner zones in Lahore, Karachi and Islamabad were fully functional under respective commissioners and were daily being given additional jurisdiction. He said that these commissioners have disposed of a large number of cases and are fully empowered for off shore taxation as a result of EOI.

But sources said that the directorate could give effect to only one major recovery of Rs785 million in Karachi that too many months ago. Overall, so far only 12 cases have been disposed of against 152,000 offshore bank accounts.

Director General Mohammad Ashfaq had told the standing committee that the work has been stopped since January.

Dr Sarwar acknowledged that due to delay in issuing SRO to empower directors, “provisional assessment of off shore assets, which is mere an enabler for exceptional cases” could be delayed but the final assessment is with commissioner automatic exchange of information zone.

He said that there could also be a delay in conducting transfer pricing audit but this is insignificant as board is yet to select such audit cases for 2018.

Fate of section 230E

Before the presentation of the budget Mohammad Ashfaq advised the FBR to delete the new faulty tax regime through Finance Bill 2019. But his advice was ignored. He issued another suggestion after presentation of the budget that was again overlooked by the FBR, according to the sources.

Another challenge before the directorate was that people can still file the income tax returns for the fiscal year 2017-18, which has also affected the work of the directorate even in cases where the notifications have already been issued.

Nearly 340 notifications had been issued during the period when the FBR had not extended the date for filing the returns. But subsequently the FBR again started giving extensions.

The sources said that until section 230E is not amended or automatic exchange of information zones are not made fully operational, the OECD information cannot be used.

Published in The Express Tribune, July 10th, 2019.

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