Time To Probe Swiss accounts
Ikramul Haq July 28, 2010
Tags:Huzaima Bukhari and Dr. Ikramul Haq
Unscrupulous Pakistani individuals and companies can no longer hide their untaxed Swiss bank accounts—succumbing to international pressure Switzerland has recently ended its 300 years obstinate banking secrecy. Like Liechtenstein, Luxembourg and Andorra, Switzerland has now agreed to share information
regarding bank accounts on request from foreign governments. Pakistani tax authorities—knowing fully well that there exists a treaty of avoidance of double taxation and exchange of tax information with the Swiss government—have not yet taken any step to probe into hidden Swiss accounts of Pakistanis.
The Swiss House of Representatives following the Senate on June 9, 2010 accepted the demands of the Organisation for Economic Co-operation and Development (OECD) that it would follow Article 26 of the OECD’s Model Tax Convention, vide which countries agree to share relevant data in cases of suspected tax fraud. In practical terms, Switzerland from now on cannot restrict its administrative assistance to cases of presumed tax fraud (which involves the falsification of documents). It is legally bound to provide information where tax evasion is suspected – in other words, where money not declared to national tax authorities has been deposited in a Swiss bank.
It is well-established that Pakistani tax evaders/avoiders have been transferring huge amounts of money to Swiss banks—generated through illegal activities by some avaricious politicians, corrupt bureaucrats, Jihadi-terrorist-drug-for-arms networks and greedy businessmen. Pakistan is facing a grim challenge of measuring and countering enormous revenue leakages and black money—its size estimated to be three time the regular economy. Till today, no effort appears to have been made by the National Accountability Bureau (NAB), Federal Board of Revenue (FBR), Federal Investigating Agency (FIA), Anti Narcotics Force (AFN) or Narcotics Control Board to conduct an in-depth study to quantify the magnitude of black money and amounts shifted to Swiss banks. According to an estimate, it is not less than 200 billion dollars—four times the external debt of Pakistan.
The process of dent in Swiss banking secrecy started when US Department of Justice (DOJ) took the Swiss bank UBS to court to obtain the names of 52,000 clients of the bank: US citizens who, the US government claimed, did not declare to the Internal Revenue Service (IRS) all details of their financial information. NAB and/or FBR have learnt no lesson from this move by the US authorities.
“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” said John DiCicco, acting Assistant Attorney general for the DOJ’s tax division. In the wake of US success, the European Union also announced its intention to seek a similar agreement with Swiss banks, to release the names of clients who are citizens of EU countries.
According to an estimate, the money lying in Swiss banks of Pakistanis is to the tune of US $ 200 billion which appears plausible as parallel economy is growing at an alarming rate of 20% per annum. Every fifth rupee transacted in Pakistan is black. The volume of black money generated in the year 2008-09 alone was not less than US$ 40 billion. This is still not final. It does not account for kickbacks in foreign trade, smuggling and foreign exchange racketeering, apart from trade in narcotics and other criminal activities by terrorist Jihadi outfits. According to various studies, the underground money generated through smuggling in goods and narcotics trade alone is between US $ 50-70 billion.
Pakistani policymakers must realize that a sound development strategy seeks to reduce the size of the informal economy and bring into the open resources that lie in the form of black money. Apart from such mechanisms as foreign exchange and tax amnesties; and exercises such as demonetizations, taxation is used as a tool to tap the resources inherent in these areas. According to a conservative estimate, tax evaders in Pakistan annually deprive the country of revenue of over US $ 10 billion—but the government, instead of putting them behind bars, encourages their unlawful activities. Our politicians, policymakers and tax managers during the last many years have miserably failed to tap untaxed money despite borrowing a whopping US$ 100 million for Tax Administration Reforms Programme (TARP)—every year billions of rupees are transferred from Pakistan to Zurich, Dubai, Johannesburg and elsewhere.
A survey carried out by a reputed Lahore based academic institution a few years back, as a part of tax reformation drive, concluded that out of every Rs. 100 taxable amount, the highest amount of Rs. 38, of course goes to the taxpayer, a typical Pakistani businessman. The taxman, an officer in income tax department, gets Rs. 16 for his services to the taxpayer in helping him to conceal his real income. The middleman who is a tax practitioner, advisor or a lawyer gets Rs. 10. If these estimates are taken as true, then the annual national tax loss for fiscal year 2009-2010 was not less than Rs. 500 billion—half of which is transferred to Swiss banks.
It is not possible to determine the precise amount of revenue loss and size of black money or shifting of money abroad. Revenue loss on account of smuggling of Afghan transit trade alone, as estimated by the World Bank, amounted to US $ 35 billion in 2008-2009. Apart from direct monetary costs of corruption, both Pakistani and international literature pin point many other costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment.
When the presence of black money is so apparent, its criminal accumulation and generation are not revealed and the offenders punished, is a question which continues to baffle honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and corrupt tax administrators, or the weak political system, or the ineffectiveness together with defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?
The ugliest face of black money emerges in the corridors of power, political as well as administrative. Pakistan is passing through the worst financial crisis of its history, i.e., the crisis of resources manifested in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The Government therefore needs to introduce asset-seizure legislation to confiscate the mammoth reservoir of the untaxed black money—huge chunk of which is lying in the Swiss banks. It is now time to seek information from Swiss government as has been done by USA, EU countries and many other countries in Asia and Africa. In case swift action is not taken to seize money and property arising out of corruption, tax evasion, narco-arms-trade and other unlawful activities, the day is not far when our tolerance towards ill-gotten wealth leads to self-annihilation.
The writers, tax consultants and authors of many books on Pakistani tax laws, are visiting Professors at Lahore University of Management Sciences (LUMS).
