Income is taxed on the basis of its source in Pakistan. A non-resident person is only taxed to the extent of Pakistan-sourced income. He is not required to pay tax on foreign-sourced income or disclose his assets held abroad.

The tax residence status in Pakistan is determined on the basis of the physical stay of 183 days or more. Resident Pakistanis have sometimes been involved in offshore tax evasion. Significant amounts of capital continue to flow from Pakistan to other countries through offshore companies located in tax havens such as Panama, Bahamas, British Virgin Island, Seychelles, Samoa, Mauritius, Niue, Jersey and Anguilla.

This happens because income earned in Pakistan, whether taxable or not, can be officially converted into foreign currency and remitted out of the country contrary to the provisions of foreign exchange laws.

Panama Leaks showed that 444 individuals from Pakistan owned 270 entities. After actively engaging in outbound investment through offshore companies for many years, resident Pakistanis have stashed large amounts of earnings in offshore bank accounts.

The quantum of untaxed Pakistani wealth abroad can also be estimated by looking at the fact that under the tax amnesty scheme of 2018, about 5,363 entities declared foreign assets worth Rs1,003bn

According to an estimate, Pakistani nationals have more than 152,500 offshore bank accounts with deposits of $11 billion. It is believed that more than half of the earnings stashed in the offshore accounts is undeclared and, hence, untaxed. Hidden assets of Pakistani nationals in different tax havens abroad are estimated to be worth $350bn.

The quantum of untaxed Pakistani wealth abroad can also be estimated by looking at the fact that under the tax amnesty scheme of 2018, about 5,363 entities (individuals and companies) declared foreign assets worth Rs 1,003bn with a major share of assets located in the United Arab Emirates.

A considerable amount of tax-evaded money is laundered every year. For example, according to the US State Department’s International Narcotics Control Strategy Report, Pakistan loses over $10bn every year in trade-based money laundering. According to an estimate, around $40bn was sent abroad in the last 40 years with the aid of money-changers and exchange companies.

In order to deal with the challenge of offshore tax evasion, several amendments have been introduced to the Income Tax Ordinance 2001 in the recent past.

The definition of an “offshore asset” includes any movable or immovable asset held, any gain, profit or income derived, or any expenditure incurred outside Pakistan. The “offshore evader” is a person who owns, possesses, controls or is the beneficial owner of an offshore asset and does not declare or under-declares or provides inaccurate particulars of such asset to income tax authorities.

A penalty of Rs100,000 or an amount equal to 200pc of tax sought to be evaded has been prescribed in the law for an offshore tax evader involved in offshore tax evasion.

A new section has been inserted in the income tax law to prescribe prosecution for the concealment of an offshore asset. Any person who fails to declare an offshore asset or furnishes inaccurate particulars of an offshore asset — and the revenue impact is Rs10m or more — will commit an offence punishable on conviction with imprisonment of up to three years or a fine of up to Rs500,000 or both.

The definition of an “offshore enabler” includes any person who enables, assists or advises any person to plan, design, arrange or manage a transaction or declaration relating to an offshore asset, which has resulted or may result in tax evasion.

A penalty of Rs300,000 or an amount equal to 200pc of the tax which was sought to be evaded has been prescribed for an offshore enabler. Prosecution for enabling offshore tax evasion has also been provided by inserting a new section into the law. Accordingly, enabling offshore tax evasion is an offence punishable on conviction with imprisonment of up to seven years or a fine of up to Rs5m or both.

“Asset move” means the transfer of an offshore asset to an unspecified jurisdiction by or on behalf of a person who owns, possesses, controls or is the beneficial owner of such offshore asset for the purpose of tax evasion. An “unspecified jurisdiction” means a jurisdiction, which has not committed to automatically exchange information under the Common Reporting Standard (CRS) with Pakistan. Any jurisdiction that has committed to automatically exchange information under the CRS with Pakistan is defined as a “specified jurisdiction”. A penalty of Rs100,000 or an amount equal to 100pc of the tax is prescribed in the income tax law for a person involved in the “asset move” from a specified territory to an unspecified territory.

A new sub-section has been inserted in the law to empower the income tax authorities — on the basis of information received from any offshore jurisdiction — to freeze any domestic asset of any person if the income tax authorities have reason to believe that such a person who is likely to leave Pakistan may be involved in offshore tax evasion.

Another section of the income tax law has been amended to enable the FBR to publish the names of offshore tax evaders who have evaded offshore tax equal to Rs2.5m or more and offshore tax enablers who have enabled offshore tax evasion.

Published in Dawn, The Business and Finance Weekly, August 26th, 2019