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Wither Panama/Bahamas leaks

By Sardar Aminullah Khan

Pakistan is rich in Gates, starting from famous histo-cultural monuments like Bhati gate, Lohari gate, Khyber gate, and Paradise gate etc. but so many scandalous gates too such as Memo Gate, Panama gate and now the Bahamas Gate. All the leaks are significant and their ostensible purpose is mostly ignoble. Tax heavens have big role in developed and developing countries alike in fiscal crimes, explosive outburst and immediate action in some areas and the global pulse against banking system, money laundering, tainted financing, tax evasion and visible future international cooperation environment, there has arisen an opportunity by default for fixing the institutional infrastructure and bleeding tax systems.

Panama Leaks

The Panama leak of 11.5m files of 214,000 offshore clients of Mossack Fonseca with 600 Pakistanis certainly sheds light on the way wealthy individuals use secretive offshore tax havens to hide their money from public & fiscal scrutiny that has led to widespread calls for action & greater transparency.

Panama Leaks jolted the world like Wiki Leaks but lost the momentum, except very few countries, in terms of real action taken against the real/beneficial owners of the foreign bank accounts maintained in the offshore jurisdictions.

Seeking information from websites has been rendered difficult through a complicated access procedure. Thus the basis on which entire edifice of leaks is being built is shrouded in mystery and will impact the results considerably.

Bahamas Leaks

The same company has now revealed the leaks regarding 175,000 offshore companies in Bahamas situated near USA and enjoying special status and providing platform to primarily those having untaxed money from unexplainable sources. There are around 1000 Pakistanis in total who use fake offshore companies to hide their money and evade taxes.

Generally, it is now certain that many of the world’s top’s banks aggressively worked to help-provide their interested clients with secrecy-cloaked companies in the offshore hideouts like Panama and others. In the process, well-paid accountants, middlemen and managers helped them shroud their true identities and business interests, and may be providing shelter in many cases to money laundering or other kinds of un-authorized activities. Before this, the Liechtenstein tax scandal/leaks and WIKLI leaks took the world by surprise.

Fonseca’s clientele has a staggering number in its repository, and if multiplied by the estimated 800 firms worldwide carrying out the business of setting up shell companies, it would speak of secret universe of colossal stealth wealth. A recent research indicates that worldwide more than $7.5 trillion is squirreled away in offshore tax havens, which roughly account for 8 percent of the world’s financial wealth. Just a small part of it is perhaps properly declared and about 80 percent, or $6 trillion, is hardly subjected to tax.

Besides involvement of politician and filthy rich class, there is appears involvement of the banking system, money launderers, and the use of secret clauses and technology which aids and abets out-flow of funds from the country through money laundering, trade flows and remittances by very powerful forces including some multinational companies through a rather “parallel” system which is working at global

level for privilege and benefits of given number of people and institutions who very conveniently wriggle out of tax obligations and other liabilities under various laws. Global reaction has been severe followed by resignations, enquiries and formulation of rules for cooperation in domestic and international taxation including exchange of information and right to seek the assets.

Apathy of Taxation in Pakistan

State of taxation is very bad in Pakistan. Federal tax collection is around three trillion out GDP of 270 billion dollars; only one million odd people file the tax Returns including public sector salaried class and business executives. There are more than 10 million vendor of about 2,00,000 withholding agents comprising of government agencies, public and private sectors, hundreds of thousands of shareholders of public limited companies with huge dividend payouts, more than estimated twenty million residential and commercial/industrial properties, sizable rented but return of property income filed by less one lac property owners withholding in some cases lower rate.

In public and private sectors, there may be more than 5-6 million gainfully employed at income above minimum taxable limit, thousands of schools and hospitals having millions of enrolled students and visiting patients and generally taking refuge under the trust laws, transactions of billions on Pakistan Stock Exchange with sizeable earnings, mindboggling investments in local and foreign real estate markets, multi-national and hundreds of thousands of property owners and undocumented business enterprises yield large profits but their finances, property and products values are hardly fully factored into the GDP due to lack of documentation, governance constraints, enforcement, transfer pricing and absence of arms-length dealings. Just an abysmally low number of businessmen declare income more than 5,00,000 per year that today an ordinary fruit seller must be earning in a year.

There have been repeated act of write-of around 600 billion loans of rich and influential with no consequential effect on taxation where interest has already been allowed as an expense and even on intervention of the apex court.

We observe a nominal tax contribution by wholesale, retail, advertising, construction, manufacturing, services and mining sectors; a huge under-invoicing in trade, transfer pricing by MNC’s and rebate mimics by unscrupulous exporters; thus in nutshell, our domestic and international economic spheres are deeply influenced by organized and unorganized tax evasion worth billion that freezes the tax contribution at less than 10% of GDP, fifth lowest in the globe. There are hardly 20,000 service providers who are regular Return filers with the provincial Tax Authorities in total even after years of their respective establishment after 18th amendment in the constitution in 2010. This amendment was spearheaded by a committee having not a single expert on Fiscal Decentralization, global best practices were not followed and the results are visible in various shapes of consequent problems faced by the federation as well as the provinces in fiscal matters.

Needless to mention, money laundering takes place by taking advantage of loop holes in regulatory to law enforcement system by taking different professions and transactions. They apply simple schemes of manipulation of money to serial international sophisticated measures through networks in domestic and international market in several jurisdictions. Financial Action Task Force explains different stages with no economic or occupational origins disclosed Money is transferred from domestic informal to financial system to havens for disguising the trail to foil the possible pursuit by presenting the sums involved as an apparent legitimate source.

Therefore, some of the fiscal malaise like this is visible conspicuously because Pakistan is a tax-evasion friendly country for activities of tax havens like Panama and Bahamas etc. by transferring untaxed wealth, low tax culture and accountability. Documentation is bliss and you can buy a costly house, manage ostentatious living & a seven series BMW, a Land Cruiser or a Benz car in cash, and maintain benami bank accounts without there being any serious risk of being caught and executed for sources. Tax evasion is a national pride while tax avoidance is a way-of-life of the most engaged in money making activities through right or wrong means. Untaxed money then finds its way to safe havens.

Immature Re-action & Wishes

The way we have reacted to Panama and Bahamas Leaks has exposed us in the world as a corrupt nation and missing intelligence and high qualities of heart and mind to tackle serious situations like this. Deliberate hue and cry has been made, Commissions have been proposed & resignations have been sought. Renowned tax and legal experts, who are fully aware of the real legal course of action. Still, melo-drama of Commissions, Courts, Task forces, Parliamentary Committees and Terms of Reference for enquiry have been created with huge fun-fare and these are regular discussions on media regarding wrong acts by shell company’s owners., with no one getting down to the real issue.

Even superior courts have been contacted for intervention and necessary action by Hon’ble judges although investigation and assessment is someone else’s job and it is hardly possible for courts to take on thousands of fiscal crime cases at the highest level. The bills have been moved in the legislatures the ostensible purpose of which is very clear now. We all know, none has denied the ownership and nothing needs to be proved.

The real issue is how to bring back the illicit non-taxed foreign assets/looted money (reportedly more than 200 billion dollars in total) and subjecting them to taxation and action required by law. This is possible through collection of information and timeliness of seeking complete information, its proper analysis and proceedings under various laws by agencies holding the rightful jurisdiction. The domestic laws and international conventions facilitate the process with certain challenges such as capacity constraints, limitations in tax laws for assessment, legal protection to exemptions like remittances, foreign investment, Foreign Exchange Bearer Certificates and other exemptions under investment and tax laws, and bilateral conventions etc.

Basic jurisdiction for taxation of income and assets has been assigned by the constitution to FBR which can take action and complete the due process of law within stipulated period. Other agencies including NAB, FIA and SBP can carry out investigations in different situations under their respective laws.

We have now signed agreement with OECD while we are already signatory of many double tax agreements and UN Convention including one on Money Laundering. Action is possible by invoking the Mutual Assistance Clause for exchange of information and can rightfully claim return of un-disclosed assets even from Tax Havens. Domestic tax laws can be amended any time for facilitating the ultimate action.

Information about the encashment proceeds of FEBCs’, Bank Deposits, Dollar Accounts, remittances, physical assets, sham company structures including data about beneficial owners and other necessary particulars etc. etc. will be required. This will depend upon the attitude and time frame set by the law firm which will hardly divulge much information about their clients in to timely manner that could form the basis and collaborative evidence for action by investigating agencies in limited number of cases per their jurisdictions or through a special but focused campaign with clear roles and responsibilities. Besides, interfering in the forex and investment related exemptions will be a double edge razor on account of sensitivities involved in the economic incentives in an era of forthcoming foreign investment and the foreign remittances.

We failed in the past even in some blatant cases of financial crimes and hefty amounts have been squandered after courts judgments and money has been taken out of the Bank Accounts and transferred elsewhere without the knowledge of the authorities and investigators or even courts. The UN Conventions will therefore has to be pursued for quick response & with adequate capacity to identify, collate and analyze the information in a very professional manner for leading to logical conclusion.

A section of our society may consider off-shore company’s leaks a new thing but fact remains that disclosure of assets is a universal phenomenon and challenge for tax authorities. Global perspective has changed after 9/11 and new laws and structures have come into place. Tax evasion and foreign investments have been taken to task. Information has been purchased, special schemes have been announced through offerings regarding control of assets and taxation thereof, and international cooperation has been extended between the member states for exchange of information and subsequent actions. Some of the renowned schemes include IRS’s Offshore Voluntary Disclosure Initiative, “The Liechtenstein Disclosure Facility” leading to agreements between the Governments of Liechtenstein, Germany, United States and the United Kingdom and Tax Amnesty schemes implemented in India and Indonesia etc.

In view of above and the existing scenario of the tax and exemption provisions as contained in different laws, the following course of action could be considered by the government;

  1. Introduction of a Special Amnesty Scheme through an Act of Parliament, following the global best practices, some of which were mentioned above.
  1. Amendment of Economic Reforms Act, 1992, Foreign Exchange Bearer Certificates, Forex Laws, and provisions limiting the authority and penalty provisions of the Income Tax Ordinance, 2001, including introducing a “whenever detected” clause for concealment of assets and deliberate nondisclosure( as was recommended by Committee to Revise the Income Tax Ordinance in 2001 but never implemented).
  1. Amendment in Government Servants Conduct Rules, 1964 and Efficiency & Discipline Rules, 1973 for providing enabling environment, one time protection and accountability of the employees of the agencies involved in the matters related to leaks and offshore companies and other concealed assets, domestic or abroad.
  1. Mutual Assistance clauses of all bilateral agreements and UN conventions may be invoked for seeking information regarding off-shore companies and investments in foreign banks etc. and for retrieval of the looted assets back to Pakistan.
  1. Information should be purchased, if delayed by concerned countries the way Germany and some other countries recently did and succeeded in collecting revenue (three billion pounds collected in UK alone)

Structural reforms on leaks and tax matters will be an acid test for politician to see as to whether they bring in the Acts of parliament or not for redressal of the given situation. If not, it will be a serious joke with innocent people. It would mean that the real purpose of the Panama like scandals and resultant hue and cry is not aimed at reforms and real taxation; and common man of this country is being hood-winked in a chorus represented by treasury and the opposition benches alike.

I would like to quote the following from one of the books “Money Laundering Counter Measures in EU”, wherein the author states that;

“If you through a stone in the water; and when the stone sinks deeper, ripples will fade and by the time it reaches the bottom, any traces are long gone and stone itself may be difficult to find. This is what happens in money laundering”

In fact it has actually happened in Pakistan already in well-known cases.

A section of society already states that expecting the political parties to introduce an act of parliament for removing the exemptions and other limitation in respective laws would amount to signing their own death warrant themselves and in a country like ours it is next to impossible thing to happen! If it is so, then wither Panama and Bahamas Leaks, the people of this country should stay be-fooled and no real further action will see the light of the day. These scandals and Gates will also die their natural death like many before.

*The author is ex-Member, Federal Board of Revenue.


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