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Provisions invoked to check evasion: I&I-IR unearths Rs5b revenue leakage

ISLAMABAD: Pakistani tax investigators have invoked the provisions of Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and the UK to check revenue leakage to the tune of Rs4 to 5 billion through international programmes of foreign universities with local education institutions, involving Rs15 to 20 billion untaxed transactions under International Collaboration Programmes.

As per details, the Directorate General Intelligence and Investigation Inland Revenue Islamabad has unearthed the first of its kind of case invoking relevant provisions of the Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and UK to tax business transactions to the tune of Rs15 to 20 billion per annum with estimated tax evasion of Rs4 to 5 billion under international programmes of foreign universities in Pakistan. The Director I&I Inland Revenue Islamabad is the lead official behind the detection of this unique tax evasion which remained unchecked by the entire tax machinery involving bilateral tax treaties.

The profits and gains of foreign universities accruing or arising in Pakistan are thus taxable in view of Article 7 of the Treaty ibid. The local institutions are required to file Income Tax Returns being a “’dependent agent”’ Permanent Establishment of foreign university, in respect to profits and gains arising out of business activities in Pakistan.

Details of case revealed the Directorate I&I-IR Islamabad has unearthed an area of taxable activity with huge tax potential which hitherto remains obscured. In past (during 90s onwards) Pakistani students were encouraged abroad by the foreign universities (especially UK), but since last few years in pursuance of their respective immigration controls/policies a visible shift has been noticed. The popular slogan of ‘Education abroad’ is now being replaced with International collaboration programmes cultivating partnerships between foreign universities (mainly UK) and Pakistan’s Higher Education Institutions (HEIs). Under the arrangement, the HEIs in Pakistan are responsible for the admission/enrolment and coaching of students for different international programmes of foreign universities. For the local students HEIs also act as liaison office on behalf of their foreign counterparts.

Pakistani students enrolled under the arrangement pay dues at three different levels to three different stakeholders i.e fee (tuition fee, security, Library charges etc.) in Pak Rupees is paid to the local HEI; fee for application handling, registration and Exams entry, continuation registration and research project charges is notified by the local HEI (as determined by their foreign universities) and paid to the foreign universities in foreign currency of the respective country and examination fee is paid to the British Council, in the case of UK based universities.

While most of the local HEIs exist on tax roll and file their returns, foreign universities neither offer tax on their profits and gains from Pakistan source business activities nor IRS field formations enforce the relevant treaty provisions. The agency’s discussions with the stakeholders concerned and relevant departments reveal that a staggering amount around Rs15 to 20 billion is being drained out (through formal as well as informal channels) annually and this quantum is increasing day by day. Loss of tax revenue is around Rs4 to 5 billion annually and above all this huge taxable activity is being conducted in stark violation of prevailing tax regime.

Directorate I&I-IR Islamabad has conducted a detailed sector/study and after exhaustive analysis a case study has also been prepared which explains the whole dynamics of evasion and suggests the way out.

The Directorate I&I-IR Islamabad revealed that in Pakistan and elsewhere education has become a full-fledged business and like multinational companies, foreign universities are in fierce competition with each other as third world has become a coveted market. In Pakistan alone, more than 76 UK universities have entered into formal partnerships and long-term agreements with Pakistani higher education institutions. During 2012-13 alone, 14 new transitional education partnerships between UK and Pakistani universities were agreed. This collaborative arrangement between the both sides may have various modes and forms, which may be either of the following:

 

 

FBR Islamabad Region 2014-04-21
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