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Corruption Is No Excuse For Incompetence

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Abdul Rauf writes about the ‘corruption mantra’ in Pakistan and says that the government is using it as a pretext to hide its incompetence. PM Imran Khan has been unmoved over corruption allegations leveled against his own party members. 

Developing countries often term corruption the principle cause of their country’s deteriorating situation. This narrative gets edified by scholars, speakers and economists who propagate it across all forums. Pakistan is one of those countries where the ‘corruption’ mantra is used to hide incompetence and bad governance by shifting blame.

Prime Minister Imran Khan recently said, “I do not understand why in this day and age you have these offshore safe tax havens, wondering why rich countries continue to protect tax evaders.” He added that corruption is the main cause of current lamentable economic situation of Pakistan.

Yet, Mr. Khan, who is certified honest and truthful as declared by the apex court, actually submitted a contestable money trail that hid his own offshore company.

He also lectured developed countries on Illicit Financial Flows during a ‘High-Level’ Financing event focused on development at the United Nations in New York. Khan’s statement accusing developed countries of protecting tax evaders and defining corruption as the root cause of Pakistan’s present deplorable condition is factually incorrect.

He understands that sovereign states have the absolute right to introduce and implement laws to attract Foreign Direct Investments. Yet he thoroughly lectured the world, objecting to offshore tax havens and the protection of tax avoiders or evaders. We recognise that the role of FDI is considered to be one of the most pivotal elements in the economic growth and sustainability of any state.

In order to attract foreign investment, sovereign states promulgate favorable laws and offer tax concessions to foreign investors so that they can attract capital to accelerate economic objectives. And this phenomenon is widely employed both by developed and developing countries.

Apart from tax concessions, some countries also maintain secrecy laws and offer favorable environments for income taxes and capital gains protection. This practice is observed by many countries, like England, that offers relatively low corporate tax rates as well as tax benefit offered for setting up foundations and trusts.

In Germany, all income earned from any source outside their country is exempted from taxation; irrespective of whether it is from dividends or holdings through foreign operations. Ireland offers one of the lowest business income tax rates and does not tax income earned by artists.

In the Netherlands, tax laws are also business-friendly and it has been reported that they attracted almost $127 billion of foreign direct investment in 2010. Interestingly, their taxation laws have led to about 48% of Fortune 500 companies to open at least one limited company in the Netherlands.

Sweden has also disposed certain inheritance and gift taxes and has eliminated capital gains taxes on insurance bonds. While Austria promotes its privacy in exchange for funds, Luxembourg offers reduced corporate taxes on dividends. Hence, Foreign Direct Investor(s) and smart capital seek reduced taxes in protectionist regimes.

Finally, laws in Pakistan exist that offer similar advantages to investors. Section 33A of the Banking Companies Ordinance, 1962, ensures the secrecy of banking transactions and customers’ information.

Moreover, the State Bank of Pakistan (SBP), through BPRD circular No. 8 of 2018, requires banks to follow the instructions envisaged in the relevant sections or face violations that lead to penal actions.  Pakistan also offers special tax incentives to attract foreign investments under special tax exempt jurisdictions in Pakistan. Additionally, there is no longer a tax on foreign remittances with certain exceptions and ceilings. Furthermore, Pakistan has also set up special economic zones in the country where foreign investors can take advantage of propitious tax benefits.

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The aforementioned corollary leads to the conclusion that there is nothing wrong in giving tax incentives to foreign investors for the development and growth of the economy. This necessitates the realignment of narratives proffered at the highest levels of government in Pakistan.

When the Premier picks on developed countries for protecting of tax avoiders, it shows his lack of understanding about tax evasion and tax avoidance. If he really knew the difference between the two, then he ought to realise that article 18 of the Constitution of Pakistan give every citizen the right to freedom of trade, profession and services and they also have the right to adopt legal parameters to avoid taxes.

 

When it comes to tax evaders, developed countries have very strict laws to counter tax evasion. In the UK where Imran Khan has spent most of his life, strict penalties for tax evasion are imposed up to 200% of the tax due, along with fines and a maximum sentence of up to seven years. The punishment for evading VAT carries fines between 5,000 to 20,000 pounds.

In America, penalties for tax related crimes can also be severe. Any attempt to evade or defeat paying taxes will is considered a felony and guilty parties can be sentenced to jail for maximum 5 years with penalties ranging from $250,000 for individuals and $500,000 for corporations, plus the cost of prosecution. Switzerland is famous for strict bank secrecy laws and delivers severe punishments for cases of tax evasion and tax fraud including breach of procedural obligations. Germany and Ireland also inflict serious penalties for tax evasion.

Developed countries not only have internal strict laws to counter tax evaders, but they have also introduced The Convention on Mutual Administrative Assistance in Tax Matters (the Convention) was developed by the OECD.

The Convention offers better cooperation on national tax laws between the states in assessment and collection of taxes and shares information about tax evaders. In 2016, Pakistan also signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters. By ratifying this convention, Pakistan can now seek administrative assistance in tax matters including the exchange of information upon request, spontaneous exchange, automatic exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection.

However, politically motivated requests are not allowed, rather they ask for proof of tax illicit funds or tax evasion. Can Imran Khan share with people of Pakistan any examples in writing where his government sought help from the Convention to uncover irrefutable proofs and seek help against tax evaders?

Since our Premier himself is a beneficiary of offshore tax havens, his proclamations blaming evolved states for being the guardians of illicit proceeds seem disingenuous. It appears that the Prime Minister deliberately hid facts and spread misconceptions about offshore tax havens to divert questions about his ailing governance.

Another claim that Imran Khan promotes at various international forums including United Nations is that corruption is a core reason for Pakistan’s reduced economic solvency and credibility. This also seems to be incorrect based on the facts.

According to a United Nations report, global crimes proceeds are 3.6 percent of global GDP.  Mr. Yury Fedotov, head of U.N office of drugs and crimes, while speaking at the opening day of the international Commission on Crime Prevention and Criminal Justice (CCPCJ), said that of these proceeds, $40 billion comes from corruption and $32 billion comes from human trafficking.

He added that traffickers’ gross profit from the cocaine trade stood at around $84 billion in 2009. Income generated from cocaine was concentrated in North America ($35 billion), followed by West and Central Europe ($26 billion).

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Now if we critically analyse Mr. Fedotov’s statistics, we know that the total contribution of proceeds from corruption to GDP is only $40 billion globally. Yet, Pakistan’s GDP suffered a humongous loss from $312 billion in 2018 down to $236 billion in 2019 due to Khan’s inefficient governance and poor policies based on a vague understanding of how to run the economy.

This loss of approximately $104 billion in one year is more than twice the Global Proceeds from corruption globally. As a result of his weak governance, Pakistan is experiencing double digit inflation and high interest rates. The Dollar remained constant during Mr. Ishaq Dar’s tenure and Pak Rupee was the most stable currency in the region. However, within a year, it has crossed the PKR 150 from PKR104, which is impacting our foreign debts, imports, and is badly affecting our defense budget.

The PMLN government had increased the defense budget by up to 80%. In Shahid Khaqan Abbasi’s premiership, a record increase of more than 19% was made and total defense budget reached up to $11.5 billion. However, due to rise in the dollar rate, it has again retreated to its position in 2013.

Moreover, unemployment went up, FDI reduced, and circular debt increased. So the consequences of all these mistakes and mismanagement are beyond repair.

PM’s act of accusing developed countries of protecting tax evaders and illicit proceeds is nothing but an attempt to cover up his own incompetence. Although PM Khan calls for regulations to ensure tax evaders are not protected, he himself was the beneficiary of an amnesty scheme introduced by General (r) Pervez Musharraf. Later, his sister Aleema Khan was also found guilty of benefiting from an amnesty scheme introduced by the PML-N government.

After assuming Premiership, Imran Khan’s government introduced another amnesty scheme to clean questionable assets of his close cronies. Journalists Fakhar Durrani and Ahmed Norani disclosed undeclared properties of Imran Khan’s cabinet member Faisal Vawda, but the PM remained unmoved. Also, Imran Khan took no action against Jahangir Khan Tareen when his offshore company and a transfer of funds in Shiny view came to the fore.

Another close friend of the PM’s, Mr. Zulfi Bukhari, who is a British Pakistani that also owns offshore companies and is facing NAB inquiries, was included in the government after bypassing all rules. Doesn’t it strengthen the impression that the accountability drive in Pakistan is selective?

Therefore, instead of maligning developed countries for protection of illicit funds, the PM needs to improve his governance because Pakistan has already suffered tragic losses in span of a just one year. It might take decades to recover from these losses.

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