Hussain Nawaz’s defence!

The much talked about recent interviews of Hussain Nawaz, the elder son of Prime Minister Nawaz Sharif, on the electronic media in which he referred to tax avoidance (as opposed to tax evasion) as a legal recourse available to the taxpayer has generated considerable controversy in the country.

Hussain Nawaz’s claim that tax avoidance is legal while tax evasion is not is certainly a valid assertion. Tax evasion is defined the world over as deliberately misleading the tax authority with respect to one’s income – a criminal offense – while tax avoidance is using available legal means (loopholes) to pay taxes at a lower income threshold. Be that as it may, surveys in countries other than in Pakistan, where such a survey has not yet been undertaken, reveal that tax avoidance is not considered “moral” in the court of public opinion. This may account for several countries passing laws referred to as General Anti-Avoidance Rule statutes which prohibit “tax aggressive” avoidance (defined as deliberately engaging in multi-territory schemes that fall into the grey area between well-accepted tax avoidance schemes such as purchasing municipal bonds in the United States or sending remittances in Pakistan with the sole objective of tax avoidance) and evasion particularly if profits have been shifted from high tax to low tax countries. Since the mid-1990s, prior to Musharraf’s coup, trillions of dollars were shifted from advanced countries, emerging economies and developing countries, including Pakistan, to tax havens (offshore accounts) prompting the passage of anti-avoidance laws in Canada, Australia, New Zealand, South Africa, Norway, Hong Kong and the United Kingdom. Judicial doctrines further established the same principle and in this instance reference to Ramsay case in the UK is pertinent given that the Prime Minister’s two sons are currently engaged in business activities in the UK.

Ramsay verdict given by the House of Lords invalidated tax avoidance in two landmark 1982 cases – Ramsay and Burmah Oil Company Limited versus the Inland Revenue Commissioners (IRCs). The ruling was that those companies that make substantial capital gains but enter into multi-artificial transactions thereby creating artificial losses for the purpose of avoiding capital gains tax, including setting up dummy companies in tax havens/offshore companies, must pay a tax on the transaction as a whole; and that this ruling not be limited to capital gains tax but to all direct taxes. The Ramsay principle was at first confined to tax avoidance in the form of artificial schemes containing steps that were, in effect, self-cancelling however in Furniss v Dawson in 1984 the House of Lords applied the Ramsay approach to a scheme of tax deferral as opposed to avoidance, which was not circular or self-canceling.

Now a look at what Hussain Nawaz claimed in his interviews on the electronic media. First of all he claimed that the steel mill in Saudi Arabia purchased by the Sharif family was at a very low price as the mill at the time of purchase was non-operational. He did not mention the price at which the mill was procured. Hussain then stated that purchase of the cheap mill was made possible through (i) funds from friends and well wishers which the family considered a loan and subsequently fully repaid, and (ii) loans from Saudi banks. As he did not present any papers and refused to provide names of friends and well wishers (which may have been used by opposition leaders to accuse the Prime Minister of favouritism in jobs/sale of public sector entities/tax exemptions through SROs) or identify the Saudi banks or the amount that the Sharif family got from these two sources the public was expected to take his statement at face value. In other words his claim was that the family did not fund the steel mill in Saudi Arabia from their considerable resources in Pakistan.

In this context it is appropriate to refer to the 1992 Protection of Economic Reforms Act (PERA) passed by the Sharif administration which stipulates: “all citizens of Pakistan resident in Pakistan or outside Pakistan and all other persons shall be entitled to and free to bring, hold, sell, transfer and take out foreign exchange within or out of Pakistan in any form and shall not be required to make a foreign currency declaration at any stage nor shall anyone be questioned in regard to the same….and shall continue to enjoy immunity against any inquiry from the Income Tax Department or any other taxation authority as to the source of financing of the foreign currency accounts.” In other words had the Sharif family remitted large sums of money to Saudi Arabia at the time of their departure from the country in 2000 it would have been perfectly legal.

The SBP website notes the amendments made subsequently to PERA and valid today, “authorised Dealers may, without prior approval of the State Bank, open with them foreign currency accounts of the following….(a) Pakistani nationals resident in or outside Pakistan, including those having a dual nationality…. These accounts are free from all Foreign Exchange restrictions. In other words, account holders have full freedom to operate on their accounts to the extent of the balance available in the accounts either for local payments in Rupees or for remittance to any country and for any purpose or for withdrawals in the shape of foreign currency notes and travellers cheques.” Incidentally this is still applicable which should make dollar couriers like Ayyan Ali’s activities redundant.

The next step in Hussain Nawaz’s reportage was his contention that the steel mill did a roaring business thereby generating huge profits that he attributed to his expertise in running steel mills prompting his father’s critics to suggest that he take over the Pakistan Steel Mills. Again no annual statements of the mill procured in Saudi Arabia were presented during his interview. The Sharif family, Hussain Nawaz then contended, decided to sell the steel mill, a decision which he claimed he did not support but was over-ruled. The profit from the sale was considerable given the steel boom of 2005. Hussain Nawaz acknowledged that he personally procured another steel mill in Saudi Arabia. Again no supporting documents were made available.

The amount from the sale of the mill was then transferred to the UK where two flats were purchased in Park Lane with Maryam Nawaz holding the trust as well as a house in the UK (not mentioned where which would have enabled a guesstimate of value) with the trust held by his mother Kulsoom Nawaz through two offshore companies namely Neelson and Nescor Limited. The three properties, Hussain added, were mortgaged 12 years ago though he did not mention how much or for how long or which bank or building society holds the mortgage.

In this context it is relevant to note that Pakistani laws as noted in the SBP website under the title Off-Shore Foreign Currency Dividend Account stipulate that, “(ii) a monthly statement in the form prescribed at Appendix V-5 will be submitted for each account separately along with a certificate from the company’s auditors to the effect that the payments made from the accounts are strictly in accordance with or covered under the IA, Power Purchase Agreement or other agreements, if any, approved by the Government….(iii) Interest earned on balances held in these accounts will be repatriated to Pakistan; (vi) Authorised Dealers will ensure that Income Tax, wherever due on payments made through the accounts, is duly deducted and paid to the Income Tax Authorities….(v) Any earnings from dealing in currency/exchange should also be repatriated to Pakistan.” Instead of making this specific to the IPPs perhaps the government may consider applying this for all off shore accounts held by Pakistani nationals.

Remittance income whatever the amount – be it a thousand dollars or less sent by our emigrants or in hundreds of thousands of dollars sent by rich politicians and their families – is exempt from taxes and in the event that the Sharif family remits money to the UK and pays taxes there then too under double taxation laws they are legally exempt from paying taxes in Pakistan. Or in other words legally allowed avoidance is being abused to evade taxes in Pakistan.

Hussain Nawaz further revealed that his brother Hassan Nawaz was operating as a real estate developer in the UK – he buys properties in London, refurbishes them, and sells them for a profit. The money for these transactions is being provided by Hussain Nawaz which he rightly pointed out was not “illegal”.

The entire financial empire of the Sharifs outside the country is therefore from loans and not from any money remitted from Pakistan, a defence that evokes memories of Ishaq Dar’s claim that he gave 40 crore qarz-i-hasna (interest-free loan) to his son, money that he had saved during his implausibly exorbitantly over paid job in the Emirates. It is perhaps relevant to note one tax exemption allowed under SRO 1065/2013 – the year Ishaq Dar took over the Finance portfolio – which include apart from remittances, profits and gains from an industrial undertaking set up between 1 July 2015 and 30 June 2016 with Hussain Nawaz revealing that Suleman Shahbaz is engaged in setting up an industrial enterprise.

The question whether the UK tax authorities are probing the Sharif family’s tax returns is considered moot and the consensus is that at the time when the Sharif family began transferring their considerable resources from Saudi Arabia to the UK they were able to satisfy UK authorities that their wealth was sourced to legal activities.

To conclude, to convince the Pakistani public Hussain Nawaz would need to present documents for all his claims. A court of law is hardly likely to accept his assertions as evidence while the court of public opinion too is unlikely to accept it; and even if some of the PML-N supporters do accept his proof-less revelations they cannot convince the rest of the population that for the Prime Minister’s son to proclaim that tax avoidance is legal implying that the family is engaged in this activity is morally right.