ISLAMABAD: Showing concern over mega investment of untaxed money by Pakistanis in other countries, Federal Board of Revenue (FBR) Chairman Tariq Bajwa has directed the International Tax Department to expedite negotiations with other countries to bring the untaxed money in the tax net.
“Pakistan has double taxation treaties with some 63 countries,” a source told Customs Today. He said that double taxation was the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), assets (in the case of capital taxes), or financial transaction (in the case of sales taxes).
“This double liability is often mitigated by tax treaties between countries,” the source said, adding that the term “double taxation” was additionally used, particularly in the US, to refer to the fact that corporate profits were taxed and the shareholders of the corporation were (usually) subject to personal taxation when they received dividends or distributions of those profits.
The source said that several countries had agreed to mitigate the effects of double taxation (Double Tax Avoidance Agreement) because tax treaties covered income taxes, inheritance taxes, value added taxes, or other taxes.
“Besides bilateral treaties, also multilateral treaties are also in place as European countries also entered into a multilateral agreement with respect to value added taxes under auspices of the EU, while a joint treaty on mutual administrative assistance of the Council of Europe and the Organisation for Economic Cooperation and Development (OECD) exists open to all nations,” the source said, adding that tax treaties tended to reduce taxes of one treaty country for residents of the other treaty country in order to reduce double taxation of the same income, however, provisions and goals vary highly; very few tax treaties were alike.
“Being pressed by the mega untaxed black money invested by Pakistanis in Dubai, Malaysia, and some other countries, Pakistan is re-negotiating on double taxation treaties with the US, African countries, United Arab Emirates (UAE),” the source said, adding that Pakistan was pressing on the clause to give more weightage to taxing exchange of information as well as tax information related transaction or investment.
“The purpose of this agreement is to promote international cooperation in tax matters through exchange of information and it was developed by the OECD, a Global Forum Working Group on Effective Exchange of Information,” he said.
He also added that agreement grew out of the work undertaken by the OECD to address harmful tax practices and lack of effective exchange of information was one of the key criteria in determining harmful tax practices.
The source said that Pakistan faced this problem in Dubai, Kuala Lumpur as double taxation treaties with these countries didn’t cover exchange of information despite the fact that black money out-flowed to those countries from Pakistan and invested by Pakistanis, but remained out of tax net or was not taxed either here in Pakistan or in those countries.
The source said that goals for entering into a treaty often included reduction of double taxation, eliminating tax evasion, and encouraging cross-border trade efficiency and tax treaties improved certainty for taxpayers and tax authorities in their international dealings.
“Almost all tax treaties provide a specific mechanism for eliminating it, but the risk of double taxation is still potentially present and this mechanism usually requires that each country grant a credit for the taxes of the other country to reduce the taxes of a resident of the country” the source added saying that treaty might or might not provide mechanisms for limiting this credit, and might or might not limit the application of local law mechanisms to do the same.
The source said that international juridical double taxation, generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods, had harmful effects on the international exchange of goods and services and cross-border movements of capital, technology and persons.
“With the objective to remove this obstacle to the development of economic relations between countries, as well as of the importance of clarifying and standardizing the fiscal situation of taxpayers who are engaged in activities in other countries, the OECD Model Tax Convention on Income and on Capital provides a means to settle on a uniform basis the most common problems that arise in the field of international juridical double taxation” the source observed.
Chairman Bajwa issued an order to International Taxes department headed by Chief Dr Tariq Masood and Zubair Yousfani that exchange of information article should be negotiated with those countries which were receiving heavy investments from Pakistanis.
However, it is a lengthy and time taking process as at first problems faced by a country are conveyed to the other countries and views and comments are sought which sometimes take months,” the source said, adding that foreign governments were independent and they acted freely and some time they mind repeated reminders, therefore reminders were sent through diplomatic channels.
Once a country responds to the request forwarded by other country regarding negotiations on tax treaties, then tax experts hold negotiations, exchange notes” the source observed adding that exchanged notes were granted approval by cabinets and then placed before the parliament to make them laws here in Pakistan.
“As it is a lengthy process, therefore Chairman Bajwa has ordered the department concerned to initiate the process for timely completion as well as to have re-negotiated double taxation treaties,” the source said.
