THE game of hide-and-seek between tax evaders and tax enforcers has been going on forever. The former keep coming up with new ways to conceal their untaxed assets and illicit funds, while the latter keep hunting them down with lawmakers’ help, who keep updating tax laws to plug loopholes and strengthen the enforcement apparatus.

In this context, Pakistan plans to target the ‘beneficial owners’ of untaxed assets for the first time in its history. An amendment has been made to existing tax laws through the Finance Bill for fiscal 2022-23 to give effect to what looks like a watershed change in strategy to deal with evaders.

In technical terms, the beneficial owner is any individual who owns or controls a legal entity or arrangement through shares or voting rights and exercises ultimate effective control over the finances and decisions of that legal entity through direct or indirect means. These direct or indirect means may represent various avenues of control, such as nominee shareholders, veto rights, rights of appointment and removal of directors or managers of the legal entity. They can also be personal and family connections which allow the beneficial owner significant influence over the affairs of the legal entity.

Globally, it is becoming vitally important to track tax evaders as they are increasingly parking their assets in foreign jurisdictions in a manner that obscures their identity as owners of the said assets. These tax havens tend to incentivise tax evaders with zero or low taxation rates, as well as easier terms of incorporation. This allows beneficiaries to form companies, trusts, foundations, etc with a minimal physical existence. While these ‘shell entities’ may exist on paper only, they can legally hold assets in their own names.

Global cooperation is needed to nab tax evaders.

Take the following example of how tax evaders operate. Suppose Mr X, a resident of country A, purchases an immovable property in country B with untaxed money or illicit income that he generated from country A. He places the immovable property under the ownership of a joint-stock company which has been incorporated in country C (a tax haven). The shares of the company are held by a trust registered in country D. Mr X is the settlor or trustee of the trust and thus exercises control over its affairs. This means Mr X is the ‘beneficial owner’ of the immovable property, as ultimately, he controls it through this long chain of ownership.

If the illustration here has been difficult to follow, consider what investigation agencies must go through in order to uncover the identity and ownership details of Mr X. They would have to request and collect information from multiple countries, and uncovering Mr X’s ownership would still only be possible if all countries maintain full records of the beneficial owners of each asset in their jurisdiction.

The severity of the problem offered by such legal arrangements — largely designed for tax evasion, money laundering and terrorism financing purposes — may vary from one country to another, depending upon the level of the formalisation of each economy. However, the challenge is undoubtedly a global one.

There is a strong realisation internationally that the threats and risks arising from such arrangements extend beyond national borders and that this calls for greater international cooperation among tax and law enforcement agencies.

With this in the backdrop, international organisations such as the Financial Action Task Force on Money Laundering, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, and the United Nation’s Tax Committee, etc require member countries to put in place a comprehensive domestic legal and regulatory framework to help government authorities capture the identity and ownership information of the beneficial owners of all legal entities and arrangements that exist in their country. The member countries are regularly reviewed in light of the terms of reference and standards set in this regard to ensure compliance.

As a signatory to the OECD’s Multilateral Convention on Mutual Administrative Assistance on Tax Matters, Pakistan is committed to enforcing a domestic legal framework that requires all relevant government agencies to document the identification details of beneficial owners of all legal entities and arrangements that exist in the country.

Advancing Pakistan’s commitment to the OECD’s Multilateral Convention, the Federal Board of Revenue has proposed, through the Finance Bill 2022-23, several amendments to the Income Tax Ordinance of 2001. The amendments relate to establishing beneficial ownership of all entities and will help in the exchange of information with the FBR’s international counterparts. This will significantly help Pakistan claim an important space on the global stage as a responsible state committed to shared objectives on tax matters.

The writer is a civil servant and a Chevening scholar.

Published in Dawn, June 15th, 2022