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January 30,2018

Panama Papers scandal: Tax amnesties bring huge windfalls after inter-country info sharing pact

Rafique Mangat

Special report

KARACHI: Equipped with international tools for transparency, an increasing number of countries have launched or are weighing bringing in innovative tax amnesty schemes to net dodgers, repatriate assets from tax havens and build and document their economies, a Jang-The News study shows.

About 25 countries had in different eras offered tax amnesty programmes but with minimal success, before 2016, when the so-called Panama Papers detailing how the rich and powerful used offshore corporations to hide money and potentially evade taxes, were leaked to the media.

Since the April 2016 expose, 21 countries have either introduced and netted record windfalls, or are contemplating introducing tax amnesty schemes to broaden the tax base, have illegal offshore assets declared, curb tax evasion and document economy. These countries are Indonesia, Argentina, India, Pakistan, Brazil, Peru, Nigeria, Kenya, Canada, El Salvador, Fiji, Guyana, Turkey, Gibraltar, Honduras, South Korea, Thailand, Tobago, Israel, Russia and the Philippines.

Italians declared 95 billion euros ($136.7 billion) held illegally overseas under a 2009 tax amnesty, providing a boost to Italy’s economy. In 2016, tax amnesty schemes earned Indonesia $367 billion, Argentina $117 billion and Brazil $53 billion in declared assets. In India assets worth Rs652.5 billion ($9.8 billion) were declared under the scheme, implying a boost to government revenue of [Indian] Rs294 billion. In Pakistan, the government has announced its intentions to offer an amnesty scheme soon for Pakistanis to declare their offshore assets.

To back these countries’ initiative is an international instrument that has been the linchpin of a major overhaul of the international tax architecture, whose aim is fighting against tax evasion, ending bank secrecy and tax havens, as well as addressing massive tax avoidance by multinational corporations. 116 countries, including Pakistan, have joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters of the Organisation for Economic Cooperation and Development (OECD). The convention is an instrument for international tax cooperation that provides for all forms of administrative assistance in tax matters: 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.

Only about $500 million has been recouped by tax authorities worldwide after the Panama Papers revelations that have produced an almost daily drumbeat of regulatory moves and actions by financial investigators in several countries to combat offshore financial secrecy. With the files stolen from the Panamanian law firm Mossack Fonseca revealing only two trillion dollars squirreled away in offshore tax havens, the Panama Papers barely scratched the surface by showing up only $2 trillion assets. In a 2012 study, the Tax Justice Network, an international research and advocacy organization, estimated that as of 2010, there was between $21 and $32 trillion kept in offshore holdings.

Critics say tax amnesty schemes do not succeed because these let off holders of illicit money and tax evaders too easily, to the detriment of the honest taxpayers. They say that nobody pays taxes willingly and such schemes fail because most of illegal assets are made with money that comes from corruption and not tax dodging. Holders of such assets do benefit from such schemes once but they come under the authorities’ watch for all times to come. It has also been observed that international financial institutions too, do like such schemes and favour levying heavy taxes.

On the other hand, those in favour of amnesty say that such concessions are needed for widening the tax net and increasing revenue.

During the last two decades, money transfer has not been easy in the face of national and international regulations. International agreements on information sharing too are a big boost to tax amnesty schemes.

Indonesia leads the way

Indonesia is the world’s fourth-largest population at almost 260 million with the richest one percent, according to charity organisation Oxfam, in control of nearly half the country’s wealth. According to a report by the Global Financial Integrity, an international research and advisory organization, illegal assets of Indonesians stashed abroad had crossed $81bn. Transparency International’s Corruption Perception Index ranked Indonesia’s tax department most corrupt and the country’s parliament was considering introducing reforms to improve transparency at domestic financial institutions. People would dodge taxes with impunity.

In 2016, 10.2 million Indonesians filed their tax returns making the gross domestic product (GDP) ratio reached 12%, very low when compared with the tax-to-GDP ratio of developed countries, which usually fell between 25% and 50 %.

The government rolled out a bold tax amnesty initiative in 2016. The scheme attracted criticism, with the World Bank even calling these tax reforms as flawed. However, it proved successful. More than 970,000 participants declared assets during the nine-month amnesty period that started in July 2016, with the total amount of declared hidden assets valued at Rp4881trn ($367.9bn), equivalent to about 39% of the Southeast Asian country’s GDP. Indonesia had by then introduced four tax amnesty schemes in 1964, 1984, 2008, and 2015. Under the 2016 programme, which was supported by Finance Minister Sri Mulyani Indrawati’s tax reforms, individuals and companies declaring onshore or offshore assets and income were charged between 2% and 10% in penalty interest, while other declared funds were repatriated. Regulation, tax people’s hard work, taxpayers’ trust, media, nationalism, access to information and political will -- all factored majorly in the 2016 scheme’s success. These factors, combined with the OECD’s global regulatory crackdown, have worked in Indonesia’s favour. The introduction of “Common Reporting Standards”, an international scheme forcing the exchange of information on account holders across different jurisdictions is making it harder to hide from the law.

Argentina: asset raise second highest in world history

In Argentina, the tax amnesty regime entered into force on July 25, 2016 under which assets that existed prior to January 1, 2016 might be disclosed. The amnesty allowed Argentines to disclose previously undeclared funds held abroad or at home without being asked about the sources, and be taxed at a preferable rate if they invested them in the country. More than 245 thousand individuals made use of the tax amnesty opportunity.

Last year, Argentina announced that its citizens had declared $117 billion in undisclosed assets, bringing in nearly $10 billion in extra government revenue. Argentina’s tax revenue rose 54.1 percent in March 2017 in comparison from a year earlier as the amnesty ended. According to the AFIP tax agency, 80 percent of assets declared were from abroad, mostly from the United States and Switzerland. The government collected 149 billion pesos ($10 billion) in taxes and fees from the amnesty. Analysts estimated that some $400 billion in undeclared funds were being held outside Argentina before the amnesty.

Within those assets, 110,000 properties were declared throughout the country, mostly in the province of Buenos Aires. Of the total declared, $93.3 billion, 80 percent, came from overseas; and 23.5 billion from within the country. Argentina’s previous tax amnesty schemes had failed to deliver. The US$ 117 billion asset raise was the second highest in world history, behind Indonesia. The figure broke the estimated US$ 100 billion by quite a margin. According to experts it was unthinkable a few months ago that Argentina could do so.

Among the several reasons for the enormous success of Argentina’s tax amnesty plan, Argentina’s involvement in the OECD-led initiatives like BEPS and the Common Reporting Standard (CRS) stands prominent. It made it harder for citizens to hide funds abroad.

Additionally, Argentina signed an important bilateral exchange of information agreement with the United States, one of several countries that have not yet fully embraced the aforementioned OECD-led initiatives. Donald Trump administration has recently ratified the exchange agreement which was signed under President Obama. It will allow AFIP to gain information about Argentines’ potential rent revenue, professional fees and bank accounts that have been declared to the IRS but not the AFIP.

While some Argentines were encouraged to normalize their assets or bring their money back home by President Mauricio Macri’s business friendly reforms, others were pressured by banks facing stricter regulations. The Argentine government hopes the tax amnesty will help spur domestic investment and economic growth. “We believe that the size and volume of assets that have been declared is a vote of confidence not only in this government but in the country,” Finance Minister Nicolas Dujovne said.

India: a successful scheme

In India, the first voluntary disclosure scheme was announced in 1951 followed by four introduced in 1965, two in 1975 and one each in 1980, 1981, 1985, 1986, 1991, 1997, 2013 and 2016. Out of these, the schemes launched in 1997 and 2016, following the Panama Papers expose, are considered successful. The 1997’s so-called Voluntary Disclosure of Income Scheme (VDIS) aimed at reducing the black money. More than 350,000 people and a few companies had disclosed their income and assets under this scheme. But there was outrage too. A case was filed in the Supreme Court in 1997 arguing that schemes like Voluntary Disclosure of Income Scheme penalised honest tax payers and encouraged errant tax evaders. The government then had to give an undertaking to the court that the VDIS was the last of its kind, and the government would not bring any such schemes in the future.

And so, in the 2013 budget, the Indian government announced an amnesty scheme for service tax offenders, termed Service Tax Voluntary Compliance Encouragement Scheme.

According to the Global Financial Integrity estimates, Indians sent $343bn of assets abroad illicitly between 2002 and 2011. The Income Declaration Scheme, which ran from June through September 2016, allowed citizens to report assets previously undeclared to the tax authorities, without risk of prosecution. The four-month amnesty resulted in 64,275 declarations of hidden assets worth Rs652.5bn ($9.8bn), implying a boost to government revenue of Rs294bn.

In December 2016, the Indian government said that tax-dodgers had until the end of March 2017 to come clean under a new scheme. Under the scheme, a person making the declaration would have to pay 50 percent in taxes and surcharges. The individual would also have to park a quarter of the total sum in a noninterest bearing government deposit for poor people for four years.

According to official data, only 37 million individuals filed tax returns last year in India, a country of 1.3 billion people. Out of these, 10 million people showed an income that did not fall under any tax slab. The number of people declaring an income of more than five million rupees in the country is only 172,000. Only 2.4 million people in the country have declared that they earn more than one million rupees a year.

Other countries that offered tax amnesty after Panama Papers

Brazil reaped $53bn in a 120-day tax amnesty it announced in 2016. In another phase that ran from March 3 to July 31, 2017, the country raked in $517 million.

South American country Guyana has announced a tax amnesty and tax cuts in the territory’s recent 2018 budget. Corporate and individual taxpayers who file outstanding returns and pay any tax due on or before June 30, 2018, will have all interest and penalties waived, while taxpayers who file and pay all principal taxes between July 1, 2018, and September 30, 2018, will benefit from a 50 percent reduction in interest and penalties. The amnesty takes effect from January 1, 2018, and runs through to September 30, 2018.

A total of 32 tax remissions have been implemented in Turkey since the foundation of the Republic in 1923. A recent scheme that was to end in December 2016 was extended till June 30, 2017.

In Kenya, people holding undisclosed funds abroad have until June 2018 to declare the money and repatriate it to remain eligible for a government tax amnesty. The East African nation initially proposed the amnesty in its 2016-17 budget, which said the revenue agency wouldn’t question the source of the funds or levy taxes on assets returned before December 2017.

In the Philippines, the government may implement this year a tax amnesty programme aimed at improving taxpayer compliance and boosting government revenue. A previous such concession was offered in 2007. The OECD said in a recent report that the Philippines recorded tax-to-GDP ratio of 17.0% in 2015.

Central American country El Salvador’s Congress approved a three-month tax amnesty program on October 10, 2017, to allow taxpayers to comply voluntarily with their tax and customs obligations. The amnesty period that began on October 27, 2017 will end on January 27, 2018.

In Nigeria, the acting president of the country, on June 29, 2017 signed an executive order authorising the Federal Ministry of Finance to set up a Voluntary Assets and Income Declaration Scheme. The Scheme provides a 9-month window from July 1, 2017 to March 31, 2018, for Nigerians to ensure compliance.

In Peru, the Executive Branch issued a decree on December 11, 2016 providing for a temporary tax amnesty regime to regularize unreported assets. The benefits of the tax amnesty regime, that remained effective from January 1, 2017 to December 29, 2017, were the abolition of fines, sanctions and any past income tax liabilities related to the unreported assets.

Huge capital outflows in 2014 and deteriorating relations with the West over the Ukraine conflict as well as weak oil prices led Russia to offer the amnesty for those returning capital to the country in 2015. The amnesty, which expired in 2016, dropped responsibility for past taxes and currency violations for those who declared assets abroad. Russia, that has previously launched concessionary tax regimes in 1993, 1996, 1997 and 2007, is likely to offer another tax amnesty this year to stimulate capital repatriation for at least 12 months.

Countries that launched tax amnesty schemes before the Panama Papers

Ptolemy V Epiphanes introduced tax amnesty in Egypt around 200 BC. After this and preceding the Panama expose, Australia introduced tax amnesty schemes twice during the 80s. Austria launched its schemes in 1982 and 1993; Belgium in 1984 and 1985; Columbia in 1987; Finland in 1982 and 1984; France in 1982 and 1986; Ireland in 1988 and 1993; Italy in 1982, 1984, 2001 and 2002; Netherlands in 1934, 1940, 1945 and 1955; New Zealand in 1988; Portugal in 1981, 1982, 1986 and 1988; and Spain in 1977 and 2012. Between 1971 and 2013, Bolivia, Uruguay, Chile, Costa Rica, Ecuador, Mexico, New Zealand, Panama, Sri Lanka, Switzerland and Bangladesh brought in 18 such programmes. The 2013 and 2014 tax amnesty schemes announced by Bangladesh remained successful in which 205 people coughed up 180 million taka (Bangladeshi currency).

An overview of tax amnesty schemes in Pakistan from 1958 to December 2016

According to an estimate, in Pakistan, a country of 208 million people, there are only a million taxpayers, about two thirds of them being salaried persons. Trade chips in 20 percent to the country’s GDP. Yet only 140,000 traders out of the total four million, are in the tax net, contributing only 0.05 percent to the state kitty. Similarly, the agriculture sector which has a 21 percent share in the GDP is out of the tax net.

The concept of tax amnesty is not new to Pakistan. First tax amnesty scheme was announced in Pakistan in 1958, about a decade after the country was founded. Civilian and military governments introduced several such programmes aimed at broadening the tax base and legalising hidden assets, though not without inviting criticism from several quarters. The successive governments, however, defended the schemes as a tool to promote tax culture.

* Military ruler Ayub Khan launched the first tax amnesty scheme, which took Pakistan’s revenue to seven percent of the GDP and enrolled 71,289 individuals in the tax net.

* The second amnesty granted by Gen Yahya Khan in 1969 contributed only 1.52 percent to the GDP and brought 19,600 persons into the tax net.

* Zulfikar Ali Bhutto offered the third scheme that collected 2.2 percent of the GDP in revenue. No figures are, however, available on the number of people who were brought into the tax net.

* The fourth scheme was launched during Gen Zia-ul-Haq’s regime in 1986 which did not yield satisfactory results.

* In 1992, the Nawaz Sharif government introduced Protection of Economic Reforms Act, which courtesy its sections 5 and 9 and section 111(4) of the Income Tax Ordinance, 2001, allowed people to legalise their money by paying a 1.5% to 3% premium. Section 111(4) of the Income Tax Ordinance, 2001 offers a perpetual way out to making illicit money legal.

* In 1997, the Nawaz Sharif government raked in more than 140 million rupees. A petition moved against the scheme in the Lahore High Court’s Rawalpindi bench is yet to be decided.

* The military government of Gen Pervez Musharraf launched a tax amnesty scheme in the year 2000. Under the scheme, 79,411 declarations were filed.

* A tax amnesty scheme, launched by the Pakistan Peoples Party government in 2008, yielded Rs2.8 billion in revenue.

* In April 2012, an amnesty programme was introduced for funds invested in stock exchange.

* In 2013, an amnesty scheme was brought in for non-duty-paid cars benefiting about 50,000 owners of such vehicles.

* In 2013, an amnesty scheme was introduced for traders investing in green field industries.

* In January 2016, the government announced for traders a tax amnesty scheme titled Voluntary Tax Compliance Scheme (VTCS) that remained in force from February 1 to March 15, 2016. The scheme provided traders an option to pay only two paisas in tax on every hundred rupees if they declared a turnover of up to Rs50 million and 15 paisas in tax on every hundred rupees if they showed a turnover of Rs 250 million or more in their tax returns. In return, they were exempted from declaring the source of their income and were spared from an audit till 2018. The latest amnesty announced was for the realty sector in November 2016. The Income Tax Amendment Act 2016 granted legal cover to the scheme that allowed property owners to whiten money parked in the real estate sector on payment of three per cent tax. Under the scheme, people whitening the black money invested in the real estate sector would not be asked to mention their source of income. The law did not, however, allow whitening of the black money kept in banks, lockers and homes. A filer buyer was to pay two percent and a non-filer one four percent of the value of a property whenever it was sold. According to an estimate, Rs 7,000 billion of black money is invested in the Pakistan real estate sector without paying any tax.


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