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Pakistan joins OECD convention to tackle offshore tax evasion and avoidance

Pakistan has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters of the Organization for Economic Cooperation and Development (OECD) in Paris, recently. The convention is an instrument for international tax cooperation that provides for all forms of administrative assistance in tax matters. This is exchange of information (EOI) on request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection. It also guarantees extensive safeguards for the protection of taxpayers’ rights. By signing the convention, Pakistan has shown its commitment to fighting offshore tax evasion and avoidance.

Finance Minister Ishaq Dar has signed the convention along with OECD Secretary General Angel Gurria in Paris, which the government claims is a testimony of its commitment to adopt international best practices in the field of tax matters. This is a positive step but a lot will depend on the domestic laws of respective member countries. The convention will not come into force immediately. The OECD plans to roll out the multilateral treaty gradually.

The federal cabinet has given approval and its ratification will now be required before Pakistan becomes an active beneficiary of the convention. It will take at least one year to complete the procedural requirements from both sides. More than 103 countries have become signatories of the OECD Convention on Mutual Administrative Assistance in Tax Matters. 54 countries will put in place their domestic mechanisms in 2017 for the first exchange of information. Another 47 countries will start first exchange of information in 2018. Pakistan may get the first access to information by either the end of 2018 or early 2019. Pakistanis are perceived to be hiding their wealth will start exchanging information in either 2017 or 2018 with the OECD member countries. Among them, tax havens like British Virgin Islands, Isle of Man, Jersey, Liechtenstein and United Kingdom will start exchange of information. Switzerland and Malaysia will start exchange of information by September 2018, according to the information available on the OECD website.

The convention would facilitate international cooperation on national tax laws and provide administrative cooperation among member countries to combat tax evasion. The OECD and the Council of Europe jointly developed the convention in 1988 and amended by Protocol in 2010. It is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance but with its own limitations. It is not a multilateral convention in its true spirit, as member countries are governed by their domestic laws. The availability of information would depend upon the domestic banking laws of each member country.

There is also limitation on fiscal exchange of information, as it is not wide open as generally is grasped. Despite having legal provisions, the FBR has so far failed to obtain information about Pakistani bank account holders due to resistance by domestic banks. Against this background, enhanced cooperation between tax authorities through Automatic Exchange of Information (AEOI) is critical in bringing national tax administration in line with globalised economy.

The OECD emphasizes upon confidentiality of the tax returns and taxpayers information. It also seeks assurances on secrecy of information exchanged by the member countries. Pakistan is a member of the Base Erosion and Profit Shifting (BEPS) framework and will automatically exchange country-by-country reporting as required by the BEPS package. The Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD has carried out a peer review of the implementation of the international standards in practice in Pakistan. It rates Pakistan as largely compliant with the international standard. Pakistan’s legal framework ensures that ownership, accounting and banking information is available and can be obtained in line with the standard.

The main findings of the report reveal a room for improvement in supervision and enforcement of obligations by ensuring the availability of ownership and accounting information. Organization for Economic Cooperation and Development (OECD) Secretary General Angel Gurria has stressed the need to bring the issue of beneficial ownership to the forefront to tackle tax evasion.

Beneficial ownership was not yet a discipline like the way the world was treating other tax evasion issues, said Gurria while speaking at a session on “Taxation without borders: A fair share from multinationals.” It was organized with a focus on Panama Papers leaks that placed loopholes in the international tax regime squarely at the top of public agenda.

The OECD is currently leading a global campaign to curb tax evasion and tackle tax avoidance by bringing transparency. Gurria said more than 100 countries had signed the exchange of information convention, which would make a difference. He stressed that signing of the multilateral treaty would not be sufficient and the countries would have to enforce these conventions.

According to some estimates, more than $240 billion in revenues are lost every year due to the shifting of profits by companies away from the places they earn. Pakistan is facing a similar situation where rich are getting tax breaks while poor are overburdened with indirect taxes. The OECD would work to modify all those multilateral and bilateral agreements that facilitated tax avoidance.

Panama Vice President Isabel de Saint Malo insisted that her country was doing whatever needed for transparency and automatic exchange of information. She said it was wrong to assume that Panama was not cooperating to curb tax evasion. Malo said fighting tax evasion was the global responsibility but cautioned that while making rules for promoting tax compliance the interests of the countries that were currently treated as tax havens needed to be taken care of.

The Federal Board of Revenue (FBR) has issued detailed procedure for Automatic Exchange of Financial Account Information with other tax jurisdictions or OECD (Organization of Economic Cooperation and Development) member countries under Multilateral Competent Authority Agreement. In this regard, the FBR has issued SRO 951(me) /2017. According to the notification, Pakistan has become a signatory to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information on June 7, 2017.

According to sources, the FBR had compiled a list of 88 countries including Switzerland to ensure reporting by financial institutions to the said participating jurisdictions from July 1, 2017 under global treaties on automatic exchange of information. Pakistan has signed the Multilateral Competent Authority Agreement (the CRS-MCAA) on 7th June, 2017 and its Annexure-E consists of a list of participating jurisdictions for automatic exchange of information.

Pakistan signed Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MC) under the aegis of OECD (Organization of Economic Cooperation and Development), on September 12, 2016. As the keystone of the OECD’s Base Erosion and Profit Shifting (BEPS) project, country-by-country reporting (CBC) requires multinational enterprises to report detailed financial and tax information relating to the global allocation of their income and taxes, among other indicators of economic activity. It is of major significance for developing countries like Pakistan, due to their heavy reliance on corporate income tax, particularly from multinational enterprises.

Therefore, countries like Pakistan have more to gain from exchange of CBC reports as quite a number of multinationals are assessed here.

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