ISLAMABAD: The Federal Board of Revenue (FBR) announced to include offshore income and asset’s under the scope of the tax amnesty scheme, changing the goalpost just two days before close of the window, a move that is likely to create more confusion among applicants.
The tax machinery continued giving explanatory notes on the offshore and domestic assets amnesty schemes, due to expire coming Saturday. The changes made 48 hours before the expiry indicate that the FBR has mishandled the government’s endeavour.
FBR spokesman Dr Mohammad Iqbal told The Express Tribune that the tax machinery was not considering giving an extension at this stage even as changes continue to be made.
For the first time, the FBR has brought foreign income under the scope of the domestic tax amnesty scheme. It explained that for a resident person, income required to be disclosed in Pakistan includes, both Pakistan-source as well as foreign-source. Therefore, persons eligible to file declaration under the Act may include, both Pakistan-source and foreign-source income, it added.
It is for the first time that FBR has brought the concept of a resident person under the scope of the scheme. The Act of parliament offers the scheme to Pakistani citizens. But the FBR has excluded non-resident Pakistanis from the scope for the purpose of declaring their offshore-earned income.
Also, the original scheme had been offered on the principle of location of the asset but this time the FBR has brought the concept of income into it. The original scheme was asset-driven. The Foreign Assets Declaration Act was only limited to the disclosure of the asset, said Dr Iqbal. He explained that foreign source income is not part of the foreign asset.
The FBR ignored the concept of the location of the asset while bringing the foreign source income under the scope of the amnesty scheme, said Ashfaq Tola, a tax expert.
Through another explanation, the FBR also maintained that declaration under the Voluntary Declaration of Domestic Assets Act, 2018 also includes cash in foreign currency being held in Pakistan.
However, on the thorny issue of valuation mechanism of the foreign asset, the FBR again reiterated its previous stance of evaluating the assets at the prevailing exchange rate.
The FBR explained that historical cost of a foreign asset in foreign currency has to be converted into Pak Rupees at the SBP’s rate applying between the said currency and the Pak Rupee on the date declaration is made. It added that this is because the value of foreign asset is the fair market value under section 5(2) of the Act and the fair market value as defined in section 2(d) is the price, which at minimum is cost of acquisition.
The FBR had first announced this change last Friday, which invited criticism from legal and tax experts.
We hold our opinion and do not give weight to what tax experts say on the matter of exchange rate for valuation of foreign asset, said Dr Iqbal.
In its explanation, the FBR further said that for the purpose of declaring a foreign hidden asset the cost of acquisition is the historical cost. But that historical cost will be worked out at today’s exchange rate, which has increased the effective tax rate far higher than the announced 5% rate.
The FBR also made an explanation of the State Bank of Pakistan part of its set of frequently asked questions.
The FBR maintained that the central bank will accept those amnesty declarations after the deadline where the payments were made before closing date and funds were remitted to SBP on or before the closing date of June 30, 2018.