Foreign educated business executives and financial experts have been maintaining that while tax evasion can be actionable and criminal, tax avoidance is smart.
Foreign trained chartered accountants, who save their companies large tax payments in this manner, are prized by their companies and rewarded very well.
If the companies and their advisers are richer for such large tax avoidance the governments are poor, particularly those in the developing countries which desperately need larger resources to develop the economy at one end and fight dire poverty at the other.
But now that corporate bonanza may be coming to an end as the governments wake up to such large loss of revenues through the mistaken notions about tax evasion and tax avoidance. And the initiative has not come from the developing countries but from the most developed countries, like the US and Britain which are setting up an international task force to grapple with tax avoidance. The task force may get really busy by summer, with far more countries joining the lucrative exercise.
Western countries whose public finances are under continuing pressure feel the need for far larger revenues and to focus on the pervasive tax avoidance to boost their revenues.
Senior tax officials from Canada and Australia too joined the tax officials from the US and Britain last week in Williamsburg, Virginia, while their ministers were attending the spring meeting of the World Bank and the IMF in Washington.
And they hope to rope in France, too, in their collective endeavours, and finally sell their anti-tax avoidance scheme to the far larger OECD with over 20 members. Thereafter the scheme will become universal, like the anti-money laundering campaign led by another international task force.
The advantage for Pakistan can be that the rules formulated to fight tax avoidance can be applied to foreign companies in the country, and what is applied for foreign companies have to be made applicable to Pakistani companies as well. All that will enable Pakistan to enlarge its tax revenues as the World Bank and the IMF have been urging constantly.
The officials have agreed that at the operational level the head-quarters of the task force will be in New York and it will be staffed initially by the anti-tax avoidance experts from the four countries led by the US and the UK.Britain is the most experienced in identifying and uncovering tax avoidance schemes, particularly in respect of VAT (value added tax), which became a major issue in Australia recently after it levied sales tax in the year 2000.
The role of cell companies in the West, which have been set up by Pakistanis as well there and of tax advisers will be looked into by the task force. Many of the tax advisers are international bodies and what they practice in one country successfully they try to practice in other countries.
The scrutiny of the tax advisory companies with their international spread can be extremely useful to developing countries like Pakistan. The task force will create a web-based information portel which can keep a real-time tab on avoidance schemes and shell companies. The public can have access to such information.
The task force's main priorities will be to identify tax dodges and firms that provide them to share expertise, techniques and best practices, to enable collective action across international boundaries and to look at industry developments to anticipate emerging problems.
The US is the acknowledged expert on corporate and income tax avoidance and off-shore tax shelters, and is the pioneer of disclosure regime. The Americans are very serious about what they propose to do in this area says a British expert.
The task force will share techniques in analysing corporate structures and tax avoidance schemes and monitor industry trends and activities of tax advisers, many of whom have international operations. This is a new approach to get closer cooperation among tax authorities on day-to-day tax administration and information- sharing.
In the US the tax avoidance planning schemes must be reported to the tax authorities so that they can decide whether they are legitimate. And a similar scheme is being introduced in the UK. So if Pakistan too has a similar scheme which, the large Tax Payers Unit of the CBR will deal with, foreign companies can't have any objection.
Commercial and financial operations of companies around the world are being scrutinised and controlled more and more by international agencies, particularly after 9/11. The UN Convention Against Corruption is there, signed by 106 countries by now, to prevent corruption and bribery; the new Patriot Act of the US bars bribing of foreign companies by the Americans or of Americans by foreigners.
The Basle Committee on Banking regulates banking around the world and sets standards for them, which are respected by all good banks, particularly the central banks around the world. The task force on preventing money laundering around the world has become very active after 9/11 and even centres of heavy monetary transactions like Dubai have begun scrutinising the money flowing into Dubai and going out of there. Now comes the task force on tax avoidance to help boost the revenues of the government. And reduce smart tax evasion or avoidance tactics.
There are 500 international companies in Pakistan of which 300 are multinationals, says Mr Waseem Haqqi, chairman of Investment Promotion Bureau. And 65 of them are quoted on the stock exchanges of Pakistan.
If the new tax avoidance schemes are applied to them following what is done in the West, the government's revenues can increase a good deal. Usually the Central Board of Revenue increases its budgetary target for next year by 10 per cent over the previous's year's revenue. But in a country with a population growth of 2.5 per cent, of whom 40 per cent live below the poverty line of a dollar a day, that much annual increase in revenues is too small.
But a higher rate of revenue growth sought in recent years has been a failure and the target had to be revised downwards time and again. Only last year and in the current year are the revenues equal to the target or marginally higher. So the World Bank wants the governments fix a higher revenue growth target for next year.
In such an environment the task force for ridding the system of tax avoidance will be extremely helpful to the government. And that can be all the more welcome to the government when the initiative for that comes from the West whose companies predominate in the foreign investment sector in Pakistan, like those of the US and Britain which are now in the lead in fighting tax avoidance.