ISLAMABAD: The Federal Board of Revenue (FBR) has traced out an organised alleged tax evasion of multi-billion rupees by international contractors in multilateral and bilateral donors funded projects in Pakistan that is continuing unabated for the last several years.
Official documents available with The News also prove modus operandi involved and its operational mechanism first time in the country’s history by the tax department that how aid money of millions of dollars went back into pockets of donors and their attached international contractors through different ways and means instead of being utilised here on the poor and vulnerable segments of society in recipient countries especially in case of Pakistan.
A complete tale of this unearthed alleged scam done by the FBR on the USAID funded projects came on surface when the FBR conducted recent exercise to trace out “high net worth” cases of tax evasion in its ongoing efforts to broaden the tax base.
At a time when the FBR is facing massive tax shortfall of over Rs100 billion in first five months of the current fiscal and the government is considering introducing mini budget before the Parliament next month, the international contractors are allegedly found involved in tax evasion through huge payment to expatriate employees without tax deduction at source, inadmissible head office expenses and non-compliance of withholding tax regime in Pakistan thus evading billions of rupees due taxes.
An investigation by the FBR on alleged tax evasion by international contractors revealed that one corporate entity based in Islamabad was registered with the FBR since 2013 and had undertaken seven projects with allocated amount close to $400 million. This contracting firm hires expatriates for senior management positions in Pakistan like country representative, chief of party, deputy chief party and director programmes etc. The FBR found that due to their prolonged stay in Pakistan, these employees are resident for tax purposes and their income and assets are liable to be declared here in Pakistan. As they derive their salary income here in Pakistan so the tax deduction should be done here in the country. Neither any tax was deducted under section 149, 152 or 153 nor paid by the employer on behalf of expatriates.
The FBR also found that this entity set apart 29 percent of its Pakistan-based project money for its headquarters in the US under the head of “Negotiated Indirect Cost Rate Agreement (NICRA). The FBR’s investigation revealed that this ratio was exceptionally high keeping in view Section 105 (2) of Income Tax Ordinance 2001 that deals with taxation of a permanent establishment in Pakistan of non-resident persons.
Section 105(2) of ITO reads out that no deduction shall be allowed in computing the income of a permanent establishment of a non-resident person chargeable to tax under the head “income from business” for a tax year for head office expenditures in excess of the amount as bears to the turnover of the establishment in Pakistan the same proportion as the non-resident’s total head office expense bears to its worldwide turnover”. Pakistani tax officials argued that this ratio should not be more than 8 percent but in this particular case it stands at around 29 percent which is being transferred back to its headquarters located in USA.
In a bid to conceal particulars of expatriate employees, annual withholding statement under section 149 are not filed instead only monthly withholding statements are submitted giving figures of gross payments and tax withholding only. No tax was deducted from the salaries of expatriate employees, tax deduction regime in respect of senior Pakistani employees also demonstrated short of deduction in terms of tax payment.
For instance, the head of this international contracting firm was given hefty salary along with all perks and privileges amounting to annual salary of $207,452 or $17,287 per month basis including annual salary of $110,760, annual housing allowance $27,600, annual danger allowance $38,772, annual post hardship differential $27,696, annual rest and recreation (R&R) $1,214 and annual home leave $1,410.
The investigation further showed that there were eight positions in this international contacting firm in case of one project where the salaries are being paid to those employees who are based in US but certain amount is marked to project accounts from Pakistan in addition to NICRA and reimbursed amount under heads of TA/DA. The salary of director level position stands at $20,635 per month and $443 per day as danger pay allowance during his travel to Pakistan. The other positions included specialists, programme managers, travel specialists, finance officer, advisers and others. So total amount for all these positions including salaries and perks and privileges stood at $557,623 in case of just one project alone and payments were made without any tax deduction under section 149,152 and 153.
When contacted, a representative of INGOs working for a USAID funded project in Pakistan told this correspondent that they were fully tax compliant in the county but there could be some exception and could not be guaranteed on their behalf. On case to case basis, he said, it would not be appropriate to label all international contractors as tax evaders as their accounts were duly audited by internal and external auditors and found them fully compliant on account of tax laws in Pakistan.
