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Is there any option?: Declaration of undeclared and under-declared offshore assets

The Finance Act 2018 has become a law. Now the Foreign Assets (Declaration & Repatriation) Ordinance, 2018 and Local Assets (Declaration) Act, 2018 has become a part of the Finance Act, 2018. There is no change in the contents of the Ordinances issued on April 8, 2018 and the Act now passed by the National Assembly. Now there is no further legislative process required. Gazette of the law is available on the official website.

This article attempts to describe in brief the basis of conclusion that it would be highly advisable for the Pakistani citizens to declare their undeclared or undeclared foreign assets and avail the concessions, protection and immunities laid down under the law. The purpose of the contents of this article is to identify the reasons of the aforesaid assertions.

This advice is essentially based on the international developments on the matter of exchange of information, the changes in the Protection of Economic Reform Act, 1992 [relating to Foreign Exchange Accounts] and fundamental changes relating to foreign assets as introduced in the Finance Act, 2018. In short, it can be stated that situation has totally changed and the past practices of non-disclosure is totally an unviable option. The world has changed.

Why should someone declare undisclosed assets? 

The first question generally asked is the reason for declaration and consequences of non-declaration. The question commonly asked is whether there is any possibility of any questioning of such assets by the jurisdictions where such assets are located and if so whether any such information will be exchanged with the Pakistani tax and foreign exchange authorities? The resultant option, for evasion/avoidance is the possibility of transfer of such assets to person, mostly being siblings who are not subject to reporting to the Pakistan tax authorities or non-disclosure as was the case earlier.

A totally non-technical answer to this question is that the way international financial market is developing and the change in fiscal policies that are taking place around the world, it would not be possible especially for citizens of Pakistan origin to maintain, operate and own financial accounts and transactions in the international market if the assets are not declared in Pakistan or any other jurisdiction. We are on special watch-list. International banking system, which is essentially governed via New York and London require all banks accounts and other portfolio managers to confirm that transactions have been reflected in the fiscal records of owner of that bank account or the portfolio owner appropriately. This statement is required to be confirmed by recognized auditors and financial advisors. This requirement does not relate to the issue of exchange of information. It is a part of regular standard operation process of the banking system. In this situations, in the cases of financial assets it is expected that by the end of the year 2018 the requirement of submission of disclosure in the respective jurisdiction of the owner of the account will be there for all the persons. This matter does not end here. The concept of ‘beneficial ownership’ of such accounts, through trust and other pass through entities in tax and corporate heaven jurisdiction is now almost transparent. The nominee trustee and trustee companies have generally refused to operate such accounts unless the confirmation is available of appropriate disclosure in the respective jurisdiction along-with the beneficial ownership. This means that other than Common Reporting Requirements (CRS) it is virtually impossible now, and will be further strangulated in future, to operate and maintain a financial accounts in the international finance system without disclosure of beneficial ownership.

Common reporting standards 

Pakistan as a country is obliged to be fully compliant to CRS. The provisions relating to the same have been incorporated in our legislation. There may be views about the timing when automatic exchange system will be operative practically however the farthest period is not more one year away. Whether or not such exchange of information will be utilized in the manner desired is a separate question however from another viewpoint it is clear that kind of scrutiny the countries like Pakistan and its citizens are facing for desired and undesired reasons it would not be possible to avoid availability and exchange of information. It is correct that CRS is limited to financial assets only however a scrutiny of financial transactions may and could lead to other non- liquid assets. After taking into account these two factors it would be suicidal not to disclose the foreign liquid asset under the proposed scheme. This is all the more relevant as there is no requirement of mandatory repatriation.

Middle Eastern jurisdictions 

The UAE and other middle-eastern jurisdictions are extremely relevant in Pakistan’s context. UAE and other middle-eastern countries are used as destination or a conduit for a substantial number of transactions by Pakistanis. Pakistanis own substantial undeclared real estates, portfolio accounts and trading and manufacturing concerns in such jurisdictions. At present, the corporate, fiscal and foreign exchange regimes in the UAE are in evolutionary stages however, being a part of international financial system, it is not virtually possible for the UAE to isolate itself from international system. Gestation period may not exceed a year or so. This means that it would be a futile thought to consider that financial transactions and assets in the UAE and other jurisdictions will not be exposed to international and Pakistani authorities.

The real estate in the UAE is a bigger problem. It is a common knowledge that ownership of real estate in the UAE is a publicly available information, not through official sources, but through commercial reasons. The developers of such properties in the UAE, as a commercial system disclose, intentionally or intentionally the ownership to cater for their marketing strategies. There had been instances where name-wise details of ownership of properties held by Pakistanis were displayed on public media in Pakistan. These factors therefore summarily conclude that perceived ‘secrecy’ will not continue to exist in future in the UAE and other middle-eastern jurisdictions.

Real estates in Western countries

The most important destination of Pakistani wealth abroad is a residence in the UK and other places in the western countries including Canada and the US. On account of local circumstances, not being common reporting and international treaty provisions, authorities in these countries are seriously interested in knowing the ‘beneficial ownership’ of such properties. There are many reasons for this changed strategy. Which is not the subject here. In UK in 2017 there was a regulation ‘Unexplained Wealth Order’ [UWO] that required disclosure of sources of income of residential properties held by person in the UK. There will be many such regulations in future and it would be embarrassing to face enquiries there.

Canadian and Australian citizenship had been acquired by many Pakistanis by investing the requisite sum in Canada. A substantial part of that money remitted is the one that was not the par of tax record of that person. The people who migrated and their siblings may or may not be Pakistani tax resident. In Canada there is was no specific requirement to disclose the sources of funds at the time of seeking immigration. Now the changed regime is gradually asking for disclosure of asset over and above certain amount; the next stage will be the identification of sources followed by exchange of information.

Assets held in Pakistan through offshore entities 

There are large number of cases where Pakistani own offshore entities and trusts which own Pakistani listed and unlisted companies. In many cases the ownership/ beneficial interest in such entities is held by a Pakistan citizens and such interest has not been declared as asset in Pakistan. The foreign asset declaration scheme specifically provides a mechanism for such disclosure. It is highly advised that such assets be declared in Pakistan inter alia for the reasons that corporate law regulations as prescribed under Companies Act, 2016 require disclosure of ‘beneficial interest’ of the shareholders. The foreign entity being a shareholder if held by Pakistanis would therefore attract the provisions of Section 452 of the Companies Act 2016 leading to issues other than income tax and foreign exchange regulations. In these situations it would be a wrong decision to keep such companies/ entities / structures out Pakistan’s declaration. The scheme announced appropriately cater for such situations and it is right time to avail the opportunity provided under the law.

Controlled foreign entities 

All the decisions about declaration about foreign asset require appropriate understanding of changes introduced in the Finance Act, 2018. The most important change is introduction of the concept of ‘Controlled Foreign Entities [CFC].

The possibility of accumulation of earning outside Pakistan, held through a foreign entity has finished. Now such entities are taxable in Pakistan even if such amounts have not been distributed. This means that corporate veil previously available has been uplifted. This is not a unique law. This system is now prevalent in most of the developed countries and USA was the first jurisdiction to undertake this basis. In summary it can be stated that in future it would not be possible to avoid Pakistan taxation in the hand of a resident in Pakistan only for the reason that such income has been earned by a legal entity incorporated outside Pakistan. In this connection there is no negative inference of CFC in a taxed jurisdiction as taxes paid in such jurisdiction will be allowed due credit under the Pakistan law. This therefore requires proper declaration of CFC in Pakistan, especially those in tax heavens and middle-eastern jurisdictions and then placing the same in appropriate civilized tax jurisdiction.

Foreign assets’ wealth statement 

One of the major step undertaken in the Finance Act, 2018 is the introduction of a separate foreign asset wealth statement as prescribed under Section 116A of the Ordinance. This statement is not a formality. The law provides that any assets that was required to declared and not declared will carry a penalty equal to 2 percent of the value of asset other than regular penalty and prosecution. It is important to note that people are not taken into account the future scenario that will emerge after June 30, 2018 when Section 116A will be applicable.

Do not bother your children 

In many cases there are perceptional differences about the scheme and law that would be applicable after July 1, 2018. In some situation there is a perception that such assets may be transferred without declaration to the children who are not subject to taxation under the Pakistan law. Firstly this options is not legally available as the law has crystallized the ownership on or before April 10, 2018. Secondly, based on international tax practice it can be advised not to bother the children. The tax legislation in western countries do not require, except US asset records, however it would be completely a wrong idea to place the assets in the name of children not being inheritance, for which the source cannot be identified by the parent. There will be problems in future.

In summary it can be stated that there is effectively not option except to declare the asset under the provisions laid down in the law. The legislature has provided an opportunity, which is appropriate and as at the same time it has introduced many changes in the income tax and foreign exchange regulations, other than international developments, which will virtually make it impossible to keep offshore assets out of Pakistan’s declaration.

Syed Shabbar Zaidi, "Is there any option?: Declaration of undeclared and under-declared offshore assets," Business Recorder. 2018-06-01.
Keywords: Economics , Protection of economic reform Act , International banking system , Common reporting standards , Middle Eastern jurisdictions , Income Tax , Finance act 2018 , Pakistan , New York , CRS

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