TAX NEWS APRIL 15, 2016

1.      Tax evasion hurts anti-poverty fight: Kim

April 15, 2016

Tax evasion through international tax havens and other illicit transfers of money undermine the fight against global poverty, World Bank President Jim Yong Kim said Thursday. Kim said the bank is "very concerned" about illicit financial flows, amid intense attention on the recent leak of the "Panama Papers" showing how powerful officials and businesses in many countries make use of thousands of anonymous companies in tax-free centers.

"This is a great, great concern," Kim said as he opened the Spring Meetings of the World Bank and International Monetary Fund. "When taxes are evaded, when state assets are taken and put into these havens, all of these things can have a tremendous negative effect on our mission to end poverty and boost prosperity." He said leaders in developing countries regularly ask him for help in tracking down the exodus of cash, whether to avoid taxes or to hide graft.

He said that one answer is increasing transparency. "The message I would send is that transparency is not going to move backwards. The world is going to become only more and more transparent as we move forward. So I would just say, be very careful." The publication early this month of the Panama Papers, a dossier of files on anonymous companies set up by a Panama law firm, has sparked a new push for ending the secrecy offered by tax havens world-wide.

2.      SECP proposes conditions for share issue by way of IPO

The Securities and Exchange Commission of Pakistan (SECP) has proposed conditions for issue of shares by way of Initial public offering (lPO) by the companies under the Public Offering of Securities Rules, 2016.

According to the draft of the Public Offering of Securities Rules, 2016, these rules shall apply to the companies proposing to offer Securities to the public; listed companies proposing to Issue securities through right issue and bonus issue; an offeror proposing to offer securities for sale to the public and sponsors of the issuer and listed companies.

The SECP has also proposed conditions for Issue of shares by way of right offer by a listed company. A listed company may issue shares by way of right offer subject to specified conditions.

Conditions for issue of shares by way of Initial Public Offering (lPO):  A company which proposes to raise capital through issue of shares to the public by way of IPO shall comply with the following conditions, namely:-

Firstly, in case the issuer is a public limited company, the shares being offered are either the right shares declined by the existing members

Secondly, the issuer has obtained approval of the Commission under the first proviso to sub-section (1) of section 86 of the Ordinance; save as provided in sub-section (1) and (4) of section 87 of the Act, the issuer shall, subject to compliance with the provisions of the Act and rules and regulations made thereunder, issue, Circulate and publish prospectus after approval of the Commission under sub-section (1) of section 88 of the Act read with sub-section (2) of section 87 thereof.

Thirdly, the Issue shall be fully underwritten by at least two underwriters and the underwriters shall not be associated companies or associated undertakings of the issuer.

Fourthly, the sponsors of the issuer shall not enter into any agreement or arrangements directly or indirectly with the underwriters with respect to the purchase of shares taken up by the underwriters to the issue.

Fifthly the sponsors of the issuer shall retain their entire shareholding in the company for a period of not less than twelve months from the last date for the public subscription or from the date of commencement of commercial operation or production by the company, whichever is later.

Sixthly, the sponsors of the issuer shall retain not less than twenty five percent of the paid up capital of the company for not less than three financial years from the last date for the public subscription or from the date of commencement of commercial operations or production by the company, whichever is later.

It said that the the sponsors of the issuer may sell their shareholding through block-sale and shall report the sale of shares, on same day, to the securities exchange and notify to the Commission change in particulars of their shareholdings in the form and manner as specified in section 103 of the Act and regulations made thereunder. The shares held by sponsors shall be deposited in an account with a central depository in freeze form.

Provided that charges of opening and maintaining of such account shall be borne by the holder of such shares; and in case capital is being raised for a green field project, balancing, modernization and replacement or expansion.

3.      80 mega tax evasion cases detected in 2 months

April 15, 2016

The Directorate General of Intelligence and Investigation Inland Revenue (IR) has detected over 75-80 major cases of tax evasion, concealments, understatements and tax frauds in real estate sector, super rich individuals and other leading sectors/industries, causing massive loss to the national kitty during last two months.

Sources told Business Recorder here on Thursday that for last two months big cases have been detected and legal action has been taken against fraudulent units. Recovery of billions is under way from the defaulted units. Despite immense pressure from certain quarters, the Directorate General of I&I IR has taken a bold initiative to unearth massive concealment of income by an influential real estate developer of Karachi. Through analysis and investigation of records, preliminary data exposed concealment to the tune of billions by the said real estate developer. Such actions against big sectors have pointed towards the seriousness of the agency to assist the FBR in achievement of the assigned revenue collection targets for 2015-16.

Keeping in view sensitively of some big cases, the agency has completed the legal formalities of taking prior permission of high-ups and availability of irrefutable evidence for taking action against the units. For the first time in the history of FBR, the Directorate General of Intelligence and Investigation Inland Revenue has continued its investigations in real estate sector to ensure recovery of concealments involving billions of rupees. As a result of these actions, the Directorate General of Intelligence and Investigation IR has been emerged as a lead agency in detection of tax frauds in the country, sources maintained.

Another key initiative of the Directorate General of Intelligence and Investigation IR is the action against high net worth individuals who have made huge investments in real estate assets which involve understatements of the value and tax evasion. The agency detected tax aversion in paper and paper board sector, petroleum sector, manufacturers-cum-retailers and other sectors. The agency has also taken serious action against local manufacturers of cigarette in cases where evasion of Sales Tax and Federal Excise Duty is taking place.

In petroleum sector, the agency has carried out detailed analysis of the available records and detected huge amount of tax evasion by one of the leading petroleum companies. Directorate General of I&I-lR, Islamabad had credible information that a petroleum company was involved in suppression of sales by not declaring Sales Tax invoices in their returns. It was observed that a number of invoices against which input tax was claimed/adjusted by have not been declared by the petroleum during the period January 2013 to June 2015. In response to notice u/s 37 of the Sales Tax Act, 1990 issued by the Directorate General of Intelligence & Investigation-IR the taxpayer could not substantiate that invoices amounting to Rs 1093 million were declared in the Sales Tax Returns. Subsequently, the taxpayer filed revised Sales Tax returns and declared the said invoices therein. In the original returns Sales Tax payment was declared at Rs 891,397,264 whereas in the revised return filed on 14.02.2016 the Sales Tax payment has been shown at Rs 2,276,705,202 thereby an amount of Rs 1.093 Billion has been found recoverable on account of tax evaded along with default surcharge u/s 34 of the Sales Tax Act, 1990. Accordingly the contravention report in the case has been sent to the Chief Commissioner-IR, LTU, Karachi for necessary action.

The special teams of the agency found an illegal activity of filing of multiple sales tax returns on a single date in violation of provisions of Sales Tax Act, 1990 and unearthed a number of units involved in such activity. Accordingly the names of thirteen (13) black listed taxpayers, seven (7) suspended registered persons and thirty two (32) cases of operative registered persons involved in such activity have been found and communicated to concerned RTOs for necessary legal action in the cases.

Three leading computer vendors of Islamabad have already been arrested by the agency and further investigation would also be instrumental in detecting tax evasion by computer vendors in Karachi and Lahore.

In another major case, as per work orders issued by District Officer (Roads) and District Officer (Buildings), Faisalabad, many contractors were awarded contracts for different development works worth millions of rupees. The perusal of the work orders revealed that the contractors purchased taxable goods for execution / completion of the contracts. The FBR data highlights that majority of these contractors have no STRN/NTN despite the fact that contracts as awarded to them involved purchase of taxable goods. This office issued notices u/s 176 of the Income Tax Ordinance, ''2001 to these contractors to inquire about payment of taxes on purchases. During the inquiry some contractors submitted their NTNs along with partial detail of purchases, whereas, the remaining failed to provide any NTN/STRN and detail of purchases. The approximate calculation of sales tax on amount of work as mentioned in the contracts has been analysed along with detailed particulars of work orders awarded to the contractors.

The directorate is also analysing data to take action against the units involved in misuse of zero-rating regime, fake invoices and claim bogus sales tax refunds on fake exports.

4.      Baggage examination to start at Torkham soon: Customs

April 15, 2016

Collector, Customs, Peshawar, Qurban Ali Khan, on Thursday said that computerised clearance system (WeBOC) has already been launched at Torkham Customs Station and the checking of passenger baggage will also start soon. He said that two baggage scanners have already been established at Torkham for this purpose. He was talking to a delegation of National Logistic Cell (NLC) which called on him here at Customs Collectorate.

The delegation was comprised Director, Dry Ports of M/s NLC Brigadier Nadeem Iqbal Raja (Retd) and Senior Manager NLC Khyber Border Terminal Lieutenant Colonel Iftikhar Shinwari (Retd). During the meeting, various matters relating to Customs Station, Torkham were discussed. The Director Dry Ports NLC informed the Collector Customs that the establishment of a modern and state-of-the-art terminal at Torkham is in the final stage.

The contract has been awarded to NLC and physical work is scheduled to be started by the end of 2016. The said complex will have all the facilities for swift customs clearance of the trade with Afghanistan. Speaking on the occasion, the Collector Customs, Peshawar assured the NLC of its complete cooperation with regard to Customs Station Torkham.

He also informed that in order to redress the complaints of delay in the clearance of perishable consignments like fruits and vegetables, special measure has been taken and fruits and vegetables will be handled on priority basis to facilitate the traders. He further informed that in case of breakdown of WeBOC due to low Internet speed, the goods will be cleared through the old One Customs System.

5.      PMEX proposes imposition of 5 percent tax on capital gains

April 15, 2016

Pakistan Mercantile Exchange Limited (PMEX) has proposed Federal Board of Revenue (FBR) to impose 5% tax on capital gains instead of the current tax of 0.05% on margins and deposits, reduce tax on import of gold and amend tax laws to enable the exchange to develop an Islamic money market, providing a platform for the Islamic Financial Institutions (IFIs) in budget (2016-17).

According to the budget proposals of the PMEX for 2016-17, Pakistan Mercantile Exchange Limited (PMEX) was established primarily to build efficiency in the agricultural commodity trade in Pakistan. Accordingly, if PMEX is provided with the recommended incentives, it can play its due role as a catalyst in documentation of the agriculture sector as well as supplement Federal Board of Revenue's (FBR) efforts to increase revenue collection.

However, PMEX over the last eight years has tried to bring such market participants to its trading platform but has been unsuccessful as the players in the value chain of agricultural commodities have no incentive to trade at the Exchange. From this perspective, PMEX has prepared certain tax proposals, keeping in mind the government's tax collection targets, which will encourage documentation of the economy resulting in increased revenue collection in the long-run from agriculture commodity trade.

A summary of PMEX tax proposals revealed the imposition of 5% tax on capital gains instead of the current tax of 0.05% on margins and deposits. Secondly, clarification on imposition of withholding tax on the settlement of futures contract at PMEX similar to the clarification issued for sales tax. This clarification by the FBR would be the corner stone to bring the agricultural commodities trade on the Exchange platform. Thirdly, reduction in tax on import of gold which would generate Rs 70 million to Rs 150 million in new tax revenue for the Government. Moreover, to document the gold sector and increase the tax revenue collection, we propose to only allow import of gold via PMEX and resultantly allow export of gold bars in unworked condition through the Exchange, which was initially imported for selling at PMEX.

Fourthly, clarification for recognition of sale for the purpose of Murabaha transactions carried out at PMEX. The issuance of such a clarification will enable the Exchange to develop an Islamic money market, providing a platform for the Islamic Financial Institutions (IFIs) to be at par with the conventional Banks in terms of treasury operations. The existence of such a money market will further propel such IFI's to achieve their industry target of 20% banking share by 2020.

It proposed that the present tax regime provides for taxation of trading at PMEX as speculative gains with exception of hedging. However, there is no mechanism whether all speculative gainers have paid their due tax. To avoid above situation, in Finance Act, 2015, section 236T was inserted making PMEX responsible for collection of advance tax @0.05%, which is unfair as loss making traders are also liable to pay same tax.

It is proposed to delete section 236T. Further, we propose to tax the annual capital gains from trading of commodity future contracts @ 5% on similar model adopted in case of Stock Exchanges. Keeping in view the model of equity market, following entities should be exempted from proposed 5% tax on capital gains: Market makers at PMEX, a mutual fund, and an approved Income Payment Plan under Voluntary Pension System; approved Pension, Provident, Superannuation and Gratuity Fund; banking company, insurance company, modaraba any other person or class of persons notified by the FBR.

Presently, capital gain on listed shares at stock exchanges in Pakistan is exempt from tax or taxed at reduced rates based on the period of holding. Period of holding beyond life of a contract is not possible in PMEX hence there can never be an exempt situation, and single rate would apply on all gainers.

Tax revenue generation: Gainers would pay tax @ 5%. Investors, currently operating in the grey forex market, would be inclined to trade on PMEX which is a regulated and organised market. As a result, there will be more trading activity at PMEX, leading to increased income for both PMEX and its brokers thereby increasing tax revenues for the government.

Promotion of tax culture: It will help promote trading on PMEX; facilitate documentation of the economy and development of organised commodity market in line with best international practices.

Corporatization of economy: Once the investors, currently operating in the grey forex market start to use the regulated & documented PMEX platform the countrywide futures market traders will corporatize and come into the documentation net. Greater National Economic Agenda: PMEX is a national institution and poised to play its due role in the national economy. A small incentive, which is also available to stock exchanges, would attract commodity traders currently operating in the grey market to trade at the documented platform of PMEX.

Meanwhile, a joint letter of the PMEX and the National Clearing Company of Pakistan Limited has been issued to the FBR on the issue computation, determination, collection and Deposit of Capital Gain Tax ("CGT") arising on trading of commodity futures contracts of Pakistan Mercantile Exchange Limited ("PMEX").

In order to achieve objective, the NCCPL was directed by the FBR to prepare and present a joint proposal by the NCCPL and PMEX. Accordingly, NCCPL and PMEX have conducted detailed discussions to review the process utilized in computing and collecting the CGT applicable on disposal of securities at trading of shares at PSX to include CGT on trading of futures commodity contracts of PMEX. The expected benefits to be derived by investors and Federal Board of Revenue (FBR) from the extension of CGT regime to the futures commodity contracts of PMEX were also discussed. The NCCPL and PMEX have agreed in-principle on the proposal of implementing the CGT on trading of futures commodity contracts of PMEX.

To achieve the above stated purpose, it is proposed to delete the existing section 236T. Moreover, capital gains in PMEX may be taxed @ 5% with certain exceptions eg market makers, mutual funds, pension, provident, superannuation and gratuity funds, banking & insurance companies etc as the similar exceptions are available to such entities in PSX.

The above rate of 5% is proposed keeping in view that unlike stock exchanges, holding period in case of commodity futures contract cannot go beyond the tenor of the contract which generally is three months. Therefore, there is no possibility of different slab rates depending on duration of holding period prevailing in PSX including 0%.

For this purpose, we are in the process of designing a detailed mechanism for the computation and collection of CGT, including the required changes in Income Tax Ordinance, and Income Tax Rules for inclusion of investors of futures commodity contracts of PMEX in NCCPL, CGT regime. We shall submit the same once the proposal is agreed by FBR.

The benefits of the proposals revealed availability of an accurate, standardised and centralised database catering for the computation and determination of CGT liability on disposal of securities listed on PSX and trading of futures commodity contracts of PMEX which will ultimately lead to improved documentation. The NCCPL has been computing, collecting, determining and depositing CGT for capital market investors and the same shall be extended to investors of futures commodity contracts of PMEX. Moreover, timely submission of returns to the FBR pertaining to CGT collected and deposited on trading of futures commodity contracts of PMEX similar to disposal of listed securities. Provision of accurate data to facilitate assessment of income tax returns filed by investors and to support any periodic investigations undertaken by the FBR in respect of capital gain and tax thereon with respect to futures commodity contracts of PMEX

The benefits of the proposals disclosed that similar to the capital market investors, unit holders of mutual fund will be able to obtain direct adjustment / refund of tax on capital gain/loss on future commodity contracts and listed securities based on the net tax liability determined during the year by NCCPL for the entire portfolio.

This will simplify the process of income tax return filing being followed by investors of PMEX. A consolidated annual CGT certificate will be developed and issued to investor depicting the CGT computed and collected in relation to futures commodity contracts and listed securities. This annual certificate will serve as conclusive evidence with respect to CGI amount collected and deposited.

Customer Support Service department, of NCCPL, well versed with the CGT regime, shall be available to facilitate the investors of futures commodity contracts with respect to their queries and concerns pertaining to computation, determination and collection of CGT. Furthermore, detailed reports showing the inventory comprising of listed securities and futures commodity contracts and CGT computation shall also become available to the investors, thereby, minimising the requirements to maintain records.

Direct access to the FBR through NCCPL for resolution/clarification of anomalies and difficulties faced by investors with respect to CGT regime. The prompt reply of the FBR would enable us to timely initiate the requisite system development and regulatory changes to ensure implementation of regime by July 01, 2016 after promulgation of Finance Act. 2016, the letter added.

6.      IMF, World Bank focus on tax evasion

April 15, 2016

The IMF and World Bank focused Thursday on Britain's possible EU pullout and widespread tax evasion as key threats to the global economy as they opened their Spring Meetings. Laying out a broad spectrum of risks, from refugee crises and rising protectionism to climate change, the leaders of the two powerful global development banks called for the most developed countries especially to take "immediate" action to stimulate growth to avoid backsliding into a world-wide stall.

"In the global economy, there are not many bright spots," said World Bank President Jim Yong Kim. "The weakening global economy threatens our progress toward ending extreme poverty by 2030." International Monetary Fund Managing Director Christine Lagarde refused to call the downturn a "crisis," but stressed the urgency of a response all the same. "We are on alert, not alarm," she said. "The current policy responses that we are seeing need to go faster and need to go deeper."

Both noted the rise in the need to support weak economies, many battered by the crash in the prices of oil and other commodities. "The demand for our services has never been higher outside of a crisis period," Kim said, saying the Bank expects middle income countries will need some $25 billion in loans this year, $10 billion more than the bank had previously anticipated.

The IMF has also seen a rise in demand for its emergency government financing. Last week Angola, its finances battered by the plunge in oil prices, requested a three-year bailout program from the Fund. The IMF opened the week by cutting its forecast for world economic growth for the third time in six months, saying growth has been "too slow for too long."

The Fund lowered its growth forecast for 2016 to 3.2 percent, compared to the 3.8 percent it expected a year ago. "Lower growth means less room for error," IMF chief economist Maurice Obstfeld said. "The weaker is growth, the greater the chance that the preceding risks, if some materialise, pull the world economy below stalling speed." The IMF said the risks include public debt in advanced economies that are at the highest levels since the end of World War II and unsustainably high corporate debt in emerging economies. It estimated that in China alone, banks hold $1.3 trillion in "at risk" loans from public companies.

If not countered with more pro-growth measures, the combination of low growth, low inflation and high debt could combine to push the world economy toward the edge of recession, the IMF warned. One key danger, Lagarde said Thursday, is the possibility of Brexit, a British exit from the European Union. "It's been a long marriage between members of the European Union," she said.

"It's really my personal hope that it doesn't break. Like all marriages, good talks can actually help and I hope that the dialogue can continue." Kim said an expansion of the conflicts and refugee crises in the Middle East and North Africa are a particular worry. "We're not just looking at the Middle East and North Africa, we're also looking at the Sahel and the Horn of Africa."

An expansion of the crises to those poor and heavily populated regions, he said, would foment "a threat of unprecedented proportions." Both Kim and Lagarde were pressing the powerful finance ministers and central bankers from around the world to take firm action to spur economic growth and create jobs, with more government spending, and growth oriented reforms.

Meanwhile, the group was expected to take aim at the problem of tax evasion, in the wake of the Panama Papers leak, which exposed the widespread use of anonymous companies in tax havens by powerful people around the world. "When taxes are evaded, when state assets are taken and put into these havens, all of these things can have a tremendous negative effect on our mission to end poverty and boost prosperity," said Kim.