Black money across the border: Why Pakistan’s elite are quivering as UAE demands tax information

According to unofficial estimates, more than $2 billion has flowed into Dubai real estate from Pakistanis every year for the past three years.

Last week, account holders in a major UAE bank began receiving letters alerting them that soon they would be required to furnish information “with a view to determining where they are resident for tax purposes”. In days to come, customers with other banks will start receiving the same letter.

The effort is part of a programme to bring UAE banks into compliance with what is called the Common Reporting Standard agreed upon by a group of signatory countries under the umbrella of the OECD, which aims to curb tax evasion through offshore havens.

According to bankers in Dubai who are directly involved in ensuring compliance matters and spoke in the background only, as of January 1, 2017, all existing high net worth individuals will be asked to furnish details of their permanent residency and the citizenship they hold, and their tax status in their own countries. High net worth individuals are those who hold an account with a balance of $1 million and above, and the disclosure will be required from residents and non-residents alike.

All new customers for any bank or other financial institutions (including brokerage), will be required to furnish the same information regardless of their net worth.

From January 1, 2018, this requirement will become mandatory for everyone, “regardless of who you are”.

As banks and other financial institutions remain in discussion with the country’s central bank, some changes can still be expected in the detail.

Registered companies will also be required to furnish the same details if there is one controlling interest, they said. According to the Common Reporting Standard guidelines, if a company has a dormant account, details of its beneficial owners will need to be compiled by the bank. It is not clear yet how the central bank intends to treat the many companies registered by outsiders within its jurisdiction.

Since the news broke, a wave of anxiety has swept through Pakistan’s wealthy elite, and for good reason. For a number of years now, ads have been appearing in Pakistani media inviting people to invest in Dubai property, and unofficially sourced data from the Dubai Land Authority has fed a steady news flow claiming that more than $2 billion has flowed into Dubai real estate by Pakistanis every year for the past three years.

Since the data apparently includes overseas Pakistanis, it may not tell the story of massive capital flight from the country that many impute to it. Nevertheless, for many years now it has become common knowledge that at least a portion of the vast hordes of black money accumulating in Pakistan has been parked in Dubai.

Now come the letters, following the UAE accession to the Common Reporting Standard, with the warning that compliance will become mandatory from January 1, 2017. “Don’t worry,” said the HSBC, one of the largest banks in the emirate. “We will contact you if you are affected and will confirm what you need to do to make sure that we correctly identify where you are tax resident.”

Alarm bells

There are grounds for many to worry, though. Even though Pakistan is not yet a signatory to the Common Reporting Standard, it signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters in September as well as an earlier framework that allows for the automatic exchange of tax-related information. The mechanisms for such automatic exchange of information have not been built yet, nor has the enabling legislation been passed.

Since 2009, the OECD has been working on a new global framework that allows for the rapid exchange of tax-related information of individuals and companies, including account information as well as beneficial ownership of companies. The latest in this series of steps is the Common Reporting Standard, which mandates it upon banks and branches of foreign banks operating in jurisdictions which have acceded to the Common Reporting Standard to gather tax-related information of all “reportable” accounts, which includes “individuals and entities” (which includes trusts and foundations)”.

It also requires banks and other financial institutions, including brokerages, to “look through passive entities to report on the individuals that ultimately control these entities”.

According to the OECD publication that details the Common Reporting Standard, “[t]he financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets”.

A standard format for reporting financial data and its exchange between countries has been developed by the OECD. But the Common Reporting Standard needs to be translated into domestic law before a signatory country can avail of the automatic exchange of information that it allows. Until then, individual countries can collect the information and bilateral requests for sharing can be made through relevant treaty arrangements.

In the past the UAE government has not cooperated with such requests from Pakistan, according to Federal Board of Revenue sources, even though a bilateral treaty for the exchange of financial information for tax matters exists between both countries.

But that can change. “This could shake Pakistan’s economy to its foundations,” says Shabbar Zaidi of Fergusons, who has campaigned for years against the accumulating hordes of black money in the country. “It is a very positive step.”