A three-member Supreme Court bench led by Chief Justice Saqib Nisar has asked the Governor State Bank of Pakistan (SBP) to formulate a mechanism in consultation with the Federal Board of Revenue (FBR) and the Federal Finance Secretary aimed at recovering undeclared wealth held abroad by Pakistanis. The practice of nationals/residents holding vast amounts of assets abroad that are not declared with the tax authority is not unique to Pakistan. However, other nations have been engaged in dealing with this issue and the best way forward for the Governor SBP would be to look at the successes of any measure(s) taken by any other country in dealing with this problem. Indonesia represents one of the success stories in luring its residents/nationals to declare their foreign-held assets - liquid and fixed.
The Indonesian government announced a nine-month tax amnesty to those who opted to voluntarily declare their liquid and fixed assets held abroad. The scheme included the levy of a one-time 3 percent tax on repatriation of liquid assets and 5 percent on declaring liquid and fixed assets without the obligation of repatriation. About 972,000 taxpayers took advantage of the amnesty programme and declared assets estimated at a whopping 368 billion dollars. However, only a small percentage was pledged to be brought back to Indonesia.
Subsequently, the Indonesian government announced that it had detected onshore assets that were not reported under the amnesty scheme and had not been obtained with taxed income though it did not release the estimated value of these assets. By September 2017, the Indonesian government decided to go after those that had not taken advantage of the amnesty scheme and announced that if the assets are found before July 1, 2019, they will be subjected to a final income tax of 30 percent for individuals, 25 percent for companies, and 12.5 percent for special cases.
The Indonesian tax office would gain access to data on Indonesian taxpayers' assets in jurisdictions that are signatories to the Organization for Economic Cooperation and Development (OECD) under the Automatic Exchange of Financial Account Information in Tax Matters. Pakistan, too, is a signatory to this with the then finance minister Ishaq Dar, stating early last year that Pakistan would begin to receive information under this agreement by end 2017 or early 2018. In addition, Pakistan has joined 'Open Government Partnership' (OPG) in December 2016, signed OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters in September, 2016 as well as a revised Agreement on Avoidance of Double Taxation with Switzerland in March, 2017. True, FBR needs to proactively investigate information from these sources, and it has shown a reluctance to do so where members of the ruling elite are concerned as noted by the Supreme Court during the Panama Papers case, yet the fact remains that the noose against tax evaders as well as tax avoiders is tightening throughout the world.
There is no quick fix and patience is required to convince foreign asset holders to voluntarily declare their assets; declaration of liquid assets held abroad would have to be accompanied by six months to one-year bank statements and fixed assets must be accompanied by documents that provide evidence of purchase price. Once these assets have been declared then they shall form part of the tax returns that are filed by the owners of these assets and their future income will be taxed and movement tracked by the FBR.
It is however essential that a distinction is made between assets created out of tax-evaded funds and those that have been acquired/created from 'proceeds of crime'. There can be and should be no amnesty or facilitation of any kind for such assets that owe their origin to corruption and other criminal activities.