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Consolidating relationship with UAE post-FATF

United Arab Emirates, a state formed in the 1970s after consolidation of former Trucial states of Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Umm Al-Quwain and Ras Al Khaimah, is a unique and admirable model of economic development. This state is one of the most successful economic transformation stories of the last 50 years. The UAE is a financial, tourism and commercial hub comparable with any other destination around the world. Pakistan with a population of 200 million and adequate knowledge base is the largest and geographically closest non-Arab partner of the UAE in many respects. It provides a substantial part of skilled and unskilled labour to the UAE. There are very deep cultural relations between areas in Pakistan and those in the UAE. I know that some tribes located in Gwadar and its surroundings have reasonable presence in UAE as well. Though it collapsed towards the end, Agha Hasan Abedi, a Pakistani banker, and Sheikh Zayed Bin Sultan Al Nahyan, the UAE president and ruler of Abu Dhabi, were partners in BCCI, an international enterprise that created disruption in the financial world at that time.

The UAE economy is based on principles suited to their environment. They provide easy access to capital and its movement. However, as a national policy the ‘citizenship’ is restricted. Its economy has been designed as a regulation free environment in corporate and fiscal matters. Such states are generally called ‘Tax Havens’. Furthermore, there is no tariff or control on imports and there is free movement of all commodities and products, including gold. It is generally considered that the UAE is the biggest open market for bullion in the world.

Post 9/11 there has been a change in economic regulations around the world. The net result is what we have in the form of FATF regulations of the OECD. These regulations require a revisit of regulations on movement of capital and goods. The primary objective is not to curb the movement of capital and goods but to ensure that capital and goods from undesirable sources should not move around the world with impunity and may provide terror financing or proliferation of drugs. Due to the Afghan War and geographical proximity, the UAE and Pakistan were put on the FATF watch-list for this very reason.

This changed landscape requires reevaluation of economic relations between the UAE and Pakistan in the post FATF environment. Notwithstanding the changing political relationship in the days to come, the UAE will require Pakistani skilled and unskilled workforce for their economy for another 25 years at least. It is anticipated that competition for jobs in the UAE between Pakistan, India and Bangladesh will intensify. Economic priorities override political decisions at the present time. It is my view that after its relationship with Israel the UAE will represent a society characterised by cultural diversity where different mindsets will amalgamate for a more cohesive world for the future.

Pakistan-UAE economic ties have been strong. Nevertheless, in the post-FATF world these ties require reengineering. In the last 40 years especially after the 1980s there has been heavy movement of capital from Pakistan to the UAE. Pakistanis have invested heavily in the UAE real estate and entities. Furthermore, the UAE being a free economy is used as a conduit for business transactions with countries that cannot be dealt with directly on account of constraints of political relationship. These are Iran, Israel and India. These are natural consequences of free trade regime and it is considered that sanctions and restrictions do not work in the manner as desired. The real problem lies with our side. On account of a deficient exchange regime promoted by our Protection of Economic Reforms Act of 1992 (PERA) and an obnoxious tax regime called ‘Presumptive Tax’ avenues remain open for outflow of untaxed capital from Pakistan to the UAE. We have seen the Ajman Property rush and other episodes. All these matters surfaced with the Panama Leaks in 2016. In many cases under consideration by National Accountability Bureau (NAB) the trail leads to the UAE. There is no fault of any regime in the UAE. The real problem lies with our laws. There has been realization on our side and corrective measures are being undertaken. However, in order to be compliant with FATF we need a complete reexamination of economic transactions between the UAE and Pakistan. Although I have no reliable information, I feel that assets owned by the Pakistanis in the UAE exceed USD 50 billion that is almost half of our national debt. We do not want tax or repatriation. We only need proper disclosures.

One of the issues that requires immediate correction is non-compliance of Pakistan’s law by the persons who hold ‘Aqama’ under the UAE immigration laws. I reiterate that there is nothing wrong in the UAE law. In my view it is a sort of residency in order to facilitate immigration and travel. It is absolutely clear from both sides being (the Government of Pakistan and the Government of the UAE) that holding of an ‘Aqama’ does not mean residency for tax purposes. Due to weakness on our side there is tendency to consider that an Aqama holder is a tax resident in the UAE. Therefore, people in many cases do not disclose their wealth in the UAE and do not pay tax on foreign income such as rent on the UAE properties. In my view this understanding is totally incorrect and the UAE Government’s regulations are absolutely clear on this subject. While I was the Chairman Federal Board of Revenue I assigned the then Director General International Taxes, who now happens to be Member Inland Revenue, to take up this matter. A letter was written to the UAE authorities. I reiterate that nothing is non-compliant on the UAE side. The only issue is how to move forward. I hope that this matter will be taken up seriously.

One episode will identify the issue in real sense. A middle class person of around 70 years of age came to me with a notice from the tax officer about his flats in the UAE. I asked him whether such flats are owned by him. He answered in the affirmative. He further informed me that he has sent the money through ‘Hawala’ and the flat had been declared under the Asset Declaration Law of 2018. He told that he had a factory manufacturing spares parts in a place near Ahsanabad on Super Highway. He was forced to sell the factory on account of constant threats from people around Sohrab Goth. Consequently he decided to sell the factory and sent the money through ‘Hawala’ to the UAE and bought a flat there. In the last two to three years he has not earned anything while the value has gone down by over 40 percent. His son does nothing and resides in the UAE waiting for revival of property market there. The issue he came to ask whether the rent in UAE is taxable in Pakistan or not. This is the story of many many people in Pakistan, especially Karachi. There is nothing wrong with the UAE. The problems lie with us.

Another issue that arises out of the use of ‘Aqama’ is a break in the proper trail in providing information under the Corporate Reporting Standards [CRS] of OECD. Such information is available only for the persons being citizens of Pakistan. In numerous cases persons having dual nationality and also holding ‘Aqama’ abuse the system to hide their wealth. Notwithstanding the matter of abuse as a person who has spent 40 years of his life in this field, it is my advice to people that in the post 9/11 world, it is preferable to declare assets at any one tax jurisdiction (the UAE is not a tax jurisdiction) otherwise adverse consequences will be there some day. It was for this reason I promoted two Asset Declaration Laws in 2018 and 2019 against the principles of equitable taxation. I am sure that in the days to come the UAE will move towards OECD compliance and then there will be severe consequences for Pakistanis who have not declared their assets. It is important to state here that if the wealth is out of income that has been earned abroad there is no tax in Pakistan provided the person was non-resident at that time.

In addition to the above, there is a need to reexamine the policy with respect to ‘gold’ import and its refining in Pakistan. There are media reports that there is heavy concentration of wealth in the form of gold in Pakistan. There is a need to reexamine the effects of a free gold market that is only one hour forty minutes flight time away. There is no point in regulating something when it is apparent that such movement is unstoppable. The best recourse is deregulation with proper compliance. The answer lies in allowing gold import and refining it in a deregulated form. This will bring the price of gold in Pakistan equal to that in the UAE discouraging any illegal trade. I have been told that difference nowadays is over Rs. 8000 per 100 grams.

The last subject is review of the Agreement of Avoidance of Double Taxation between the UAE and Pakistan. In general, a tax treaty for avoidance of double taxation is made between two jurisdictions that have taxation regimes and consequently there is a possibility of double taxation. This possibility does not lie in the case of the UAE and Pakistan. Nevertheless in this situation within the treaty framework conditions are to be laid down by the respective governments so that treaty provisions are not abused for evasion of taxes. For example, misconceptions are there on account of rental income in the UAE.

In the light of the aforesaid discussion it is suggested that the following subjects be taken up by the government immediately:

1. A declaration by the tax filer whether or not he/she has an ‘Aqama’ in any other country where there is no income tax;

2. Gold import and its refining be allowed in Pakistan and it should be ensured that there is no major difference between the gold price in the UAE and Pakistan markets;

3. The misconception that ‘rent’ of properties located in the UAE is exempt from Pakistan tax if that person has declared that property in Pakistan.

Karachi, which used to be the epicenter of business and trade, can become the same again if it is provided an opportunity to compete with regional financial centers in an environment of a level playing field. In the last 40 years this financial capital has suffered because we abandoned the city and the people around the world and those nearby provided a better economic environment. Nevertheless, natural advantages cannot be denied provided there is a long-term vision in policymaking. Major events like the FATF compliance, diplomatic ties between Israel and the UAE and close cooperation between India and the UAE have changed the paradigm of economic relationship between the UAE and Pakistan. There is a need for consolidation of economic ties in a new paradigm. Everybody in Pakistan has a right to enjoy the benefits of facilities now available in the UAE. However, international standards have to be met.

Syed Shabbar Zaidi, "Consolidating relationship with UAE post-FATF," Business Recorder. 2021-01-13.
Keywords: Economics , Economic growth , Economic development , Economic transformation , Economic regulations , Afghan war , Economic relations , UAE , FATF , OECD

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