Is declaring offshore firms in tax returns enough?

LAHORE: After the emergence of Panama Leaks in April 2016 and the Paradise Papers in the subsequent year, many would have expected that poor countries like Pakistan would draw a distinct line between tax avoidance and tax evasion in line with their specific conditions, but it has remained an elusive notion until now.

Being a developing country, Pakistan’s case is quite different than a developed state like the United States, where loopholes in the tax code allow most Fortune 500 corporations with largest revenues to move their domestic profits in foreign countries with lower tax rates.

Instead of contributing at home, these American corporations allegedly and reportedly exploit offshore tax havens to pay lower or no taxes abroad on profits generated at home. However, many instances of tax haven abuse in the USA are either legal or at least difficult to enforce under the existing laws of the country.

As compared to the USA, it is believed in Pakistan that offshore companies are meant to stash huge ill-gotten wealth in shell corporations abroad by wealthy and affluent people, not just to avoid taxes, but to hide it and buy properties with it.

As recently revealed by Pandora Papers regarding many Pakistanis having offshore companies, most of them may have declared their shell corporations in their Income Tax returns deposited with the Federal Board of Revenue (FBR). The queries related to money-trail, transaction modes, and foreign holdings need to be answered.

In case, somebody opened an offshore company and did not use it any way or closed it down without making any business transaction through it, he or she should not be haunted because there is nothing illegal in just owning an offshore firm with marginal capitals. However, there is no harm in seeking money trail. Similarly, questions pertaining to flight of capital are also more pertinent than posing queries about tax declarations.

Since, many Pakistani individuals named in Pandora Leaks have come up with clarifications that they have declared their offshore companies with the FBR, the justification is certainly not enough. They must be asked to furnish details about the transacted amount, dates and mode of transactions, in addition to, the way the amount was earned at home. It is of paramount importance for country's future in the wake of looming threat of FATF grey or black lists.

As far as the United States is concerned, it is still struggling to stop companies from avoiding levies they should actually be paying at home.

The April 12, 2021 edition of renowned American business magazine “Fortune” had written: “President Joe Biden’s infrastructure plan, announced March 31, would stop companies from avoiding taxes on their domestic profits and their offshore profits and work with foreign governments to institute a global minimum tax. The President’s call to increase the statutory rate from 21% to 28% for domestic corporate profits will receive most of the attention. But his plan for ending offshore tax avoidance is equally important. “

The media house had added: “The stakes are high because the biggest and most profitable companies have been shifting their US income into foreign tax havens for decades. By 2016, multinational corporations had stashed $2.6 trillion offshore, avoiding an estimated $750 billion in US taxes. While former President Trump and Congress claimed to have a strategy for ending income-shifting in their 2017 tax overhaul, it didn’t work out that way.”

Later, the June 7, 2021 edition of the “Fortune” magazine had revealed that in 2020, some 55 Fortune 500 companies had paid Zero income tax in the USA. In its April 12, 2019 edition, the “Fortune” magazine had published a few more startling revelations: "In 2019, of the Fortune 500 companies that have already filed their 2018 taxes, 60 were profitable and yet avoided all Federal income tax.

The list, according to this media house, included names such as Amazon, Chevron, General Motors, Delta, Halliburton and IBM etc.According to an American NGO "Citizens for Tax Justice,” renowned British media outlet “The Guardian,” the BBC News, the Bloomberg, another British newspaper “The Independent,” yet another NGO-cum-thinktank “The Offshore Shell Games” and the US Institute on Taxation and Economic Policy etc, about 73 per cent Fortune 500 companies were using off-shore tax havens to avoid taxes by October 2017 at least.

Most of these afore-mentioned institutions also believe that the off-shore cash hoarded by these Fortune 500 companies now totals $2.6 trillion, and they are avoiding up to $752 billion in U.S. taxes. or exactly the same figures cited by the April 12, 2021 edition of the “Fortune” magazine, ” and which have been cited in the upper half of this story.

The “Fortune 500” is an annual list compiled and published by the “Fortune” magazine that ranks 500 of the largest American corporations by total revenue for their respective fiscal years. The concept of the Fortune 500 was created by Edgar Smith, a “Fortune” editor, and the first list was published in 1955. A study of the reports prepared by most institutions mentioned above shows that Apple Computers tops the list of Fortune 500 companies with the biggest offshore holdings.It has offshore assets of $181.1 billion. Other familiar names on the list include Messrs Microsoft, Google, JP Morgan and Walmart etc. All these companies have billions in offshored assets, and deferred taxes.

Following is the list of these companies with deferred taxes:Apple’s deferred taxes would have paid for more than two-thirds of the US Federal budget for Education, Training and Employment (67.4% to be exact).

Messrs General Electric’s deferred taxes alone would have paid for 1/25th of the total American Social Security expenditures.

If Microsoft had kept all its assets in the US, the taxes thus generated would have covered one-fifth of Federal spending on Veterans Benefits and Services (20.8%, actually). The deferred taxes of pharmaceutical giant Pfizer would have covered almost nine-tenths of the federal budget for Agriculture (87.7%). IBM’s deferred taxes represent almost a third of what the federal government spends on the Administration of Justice (32%). Google’s deferred taxes are equal to 1.5% of the federal budget for Health and Medicare.

ExxonMobil’s deferred taxes would have paid for a quarter (25.7%) of the federal budget for International Affairs. Oracle’s deferred taxes are equal to just over 40% of the federal budget for Science, Space and Technology. The deferred taxes of Messrs Caterpillar equal to more than one-eighth (13.8%) of the US Federal budget for Natural Resources and Environment.