Revenue Concealment, FATF Compliance: Tax Administration Enhancements Wanted – Opinion

In this final of a multi-part series of articles, I will discuss the multiple objectives needed to improve tax administration in order to stop income obfuscation and meet FATF income and wealth requirements in Pakistan. Let me repeat that the best tool to eradicate corruption and improve accountability in any society is through effective implementation of tax laws. The reason for this is very simple. If all income from all sources is properly recorded in tax records, there is no possibility of obtaining income from undesirable sources including corruption.

The accumulation of wealth is the secondary level. The administration must be effective in the phase of "earned income". In principle, there must be complete proof of income and no one may dare to hide any form of income. This income can be taxed, tax-exempt or tax-exempt, but must be declared in such a way that it is included in the income statement for that year. Without the application of this universal principle, there can be no meaningful improvement in tax administration.

The Pakistani tax system, which had deviated greatly from these principles since the 1990s, is to be brought back on track. Any attempt to deviate from it will be counterproductive in the long run. History testifies that no criminal charges could be brought against a Mafia chief in the United States, except for tax evasion, for which he was convicted. It is almost impossible to escape the tax network if properly implemented.

If accountability is to be introduced in Pakistan, the only way to do it is to put in place a system where all incomes are declared and properly recorded. Taxing them is a secondary issue. In other words, agricultural income or income from exports can be exempt from tax or taxed at zero; however, the person receiving such income must in all circumstances take this income into account in their income statement. This is actual income, not an alleged amount. If we give room that a particular income either does not need to be reported on the income statement (practical case is agricultural income) or is not predictable (as is the case with alleged taxation), then accountability against corruption is based on the Ownership of assets or for enormous expenses will remain but a wish and an impossible goal. This is because, in this case, there are ample opportunities to justify funding assets and expenses that are identified as undeclared, undeclared, or not taxed. The most obvious way is through ancestral farming which provides farming income.

This leads to a differentiation between undeclared, undeclared and untaxed assets. These are three different types of assets and in bringing proceedings against them it is important to identify the differences between these three classifications, taking into account the realities of Pakistan. I will explain these three terms in the following paragraphs after I have explained the legal disclosure requirements in Pakistan.

In my previous article, I referred to a document called the "Wealth Statement" which is required by Pakistani law. This statement is a balance sheet of a person's assets, debts, and principal. In effect, this means that every Pakistani (who must file a statement of assets) is required to disclose all assets anywhere in the world in his or her name and the sources from which those assets were acquired. These sources can be income, credit, or a gift from someone else. The sum of income, liabilities and gifts during a period is reflected by the increase in assets after deducting expenses.

In theory, this is a comprehensive document; However, the main question I am asked as an accountant and former chairman of the FBR is what percentage of total wealth in Pakistan that should have been included in the individual's statement of wealth actually appears in the statement of wealth as a whole. From my personal point of view, there is a very large gap, which is reflected in the heading of this article “undeclared”, “uncleared” and “untaxed assets”. The emphasis on this topic is to clarify that any "income concealment" measures expected in the near future and required by our society will be based on "inexplicable assets" as defined in Section 111 of the Income Tax Ordinance, 2001. Therefore, before entering the field, we should be aware of the realities.

Pakistan may be one of the few countries that follows the Anglo-Saxon legal system that requires the filing of documents in the form of property declarations. There are no asset identification documents in the UK, USA, Canada or India. These countries have not required this form because income tax laws are in place for the taxation of "income" and these laws cannot be used to track, track, or tax assets or expenses. In this context, it should also be noted that the statement of assets, as prescribed in our law, has nothing to do with the wealth tax law, which is established by a wealth tax law called Wealth. was prescribed

Tax Act, 1963. This law was abolished in the 2000s.

This begs the question of whether or not there should be a property declaration in Pakistan. In theory, the answer is in the affirmative, that there should be no asset statement in Pakistan; however, the current rule is justified by the fact that there were many opportunities within the law in Pakistan to completely de-identify income. Accordingly, an asset or expense document has been required to keep track of them. This is the only justification for the property statement, and under the current circumstances, I agree.

It is important to note that in any economy, ultimate ownership of assets rests with a real person. Corporations, partnerships, sole proprietorships, trusts, and non-profit organizations are the media through which individuals own these assets. Therefore, it is imperative for any tax administration to properly regulate the generation of income for tax purposes in the hands of individuals. In reality, individuals are supposed to be taxed according to their solvency. Companies should be given incentives to earn and reinvest more. In Pakistan, however, we are working on the downside. In developed economies, personal taxes are generally more than corporate taxes, and that is actually the correct tax policy.

Private wealth is held across the country in the following form:

  1. Immovable properties;

  2. Investments in government securities;

  3. Shares in listed companies;

  4. Shares in unlisted companies;

  5. Share in company assets;

  6. Loans and advances;

  7. Cash and bearer papers;

  8. Bank deposits;

  9. Gold, bullion and precious metals; and

  10. Paintings and other valuable collections.

These assets can be held in Pakistan or outside of Pakistan. After 2018 there will be a separate statement of assets for assets held outside of Pakistan.

In theory, all assets of any kind should be reported on one or the other statement of assets with a track record of income for each year. This is an idealistic position. Given my brief experience in the field as a tax administrator in a country, I can frankly say that in Pakistan a very significant proportion of these assets are not part of an asset statement. For example, if you buy even expensive real estate in Pakistan, the number of which may exceed the number, you will find that a large number of them will not be included in the tax records. Even if there is an initial data set that loses its track in the final state. This is true of almost all of the types of assets identified above. For example, the number of declared business accounts is far lower than that of the business accounts maintained by the banks.

The purpose of this description is to recognize that it is necessary to appreciate the realities and mistakes made in the past in order to identify the right path for the future. It is a fact that the past cannot be undone. When General Musharraf came to power in 1999, he initiated an "Asset Survey Process" across Pakistan and all land and other assets were required to be disclosed on the appropriate forms. The military was brought in for the administration. In principle a good move; However, we all know the fate of the process and the data collected may reside in some offices of the tax department.

Regardless of the past, it is our duty to determine the future course in such a way that past mistakes are not repeated. To this end, it must be understood that undeclared assets in the Pakistani context do not necessarily mean untaxed assets. There are thousands of assets owned by Pakistanis that are not disclosed in the Statement of Assets, even though they were required to be disclosed, but the question is whether these assets are untaxed and if so, criminal proceedings, including AML allegations, may be brought against them become. The answer is no. There is a shortage of overseas Pakistanis who own assets in Pakistan and abroad. If these individuals become a Pakistani tax resident, they must disclose all of their Pakistani and non-Pakistani assets on their Pakistani Property Statement.

Most Pakistanis have defaulted on this account in the past because, in general, only those assets that were taxable in Pakistan were disclosed and those that were not taxable in Pakistan were not disclosed. Now, if the law is enforced in full force for such a person, there may be a default. The question is how to deal with this failure if the tax administration so interprets it. In short, this situation raises the question of whether past failure to disclose assets in the statement of assets necessarily means that income from which such assets are created is taxable in Pakistan. Or the maximum fee is a penalty for not filing the property declaration. From my point of view, the answer lies in the latter.

I repeat the statement that from a Pakistani point of view, undeclared assets are not necessarily untaxed assets and in most cases underlie the failure to disclose information. In the past, the penalties for failing to disclose were so mild that people didn't care. The question now arises as to how big the quantum leap is that should be made in law enforcement. I believe that we should proceed with moderation, taking into account administrative capacity. An all-encompassing overall approach is practically neither feasible nor desirable.

In light of the above, my suggestion is:

  • The tax administration should focus on ensuring that all income is properly accounted for for the current year and beyond. All provisions, regulations and ordinances are to be designed in such a way that future income is recorded as consideration for income. For example, compensation for loans for agricultural income needs to be properly accounted for.

  • Assets held as of June 30, 2021 and in previous years should not be unnecessarily examined as laws that allowed the accumulation of such assets without proper disclosure were duly enacted. The aggressive investigation will lead to nothing but harassment and inappropriate corruption.

The above suggestions do not mean that I am applying for an "NGO" / amnesty for the assets held as of June 30, 2021. My simple argument is that if there is "clear information" about income or corruption money that has escaped assessment, appropriate action should be taken. The alternative approach of generating untaxed / crime income from the assets held will not produce positive results as there are many ways to justify ownership of these assets under the law then in force.

Copyright Business Recorder, 2021

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