Beneficial owners.

THE game of hide-and-seek between tax evaders and tax enforcers has been going on forever. The former keep coming up with new ways to conceal their untaxed assets and illicit funds, while the latter keep hunting them down with lawmakers' help, who keep updating tax laws to plug loopholes and strengthen the enforcement apparatus.

In this context, Pakistan plans to target the 'beneficial owners' of untaxed assets for the first time in its history. An amendment has been made to existing tax laws through the Finance Bill for fiscal 2022-23 to give effect to what looks like a watershed change in strategy to deal with evaders.

In technical terms, the beneficial owner is any individual who owns or controls a legal entity or arrangement through shares or voting rights and exercises ultimate effective control over the finances and decisions of that legal entity through direct or indirect means. These direct or indirect means may represent various avenues of control, such as nominee shareholders, veto rights, rights of appointment and removal of directors or managers of the legal entity. They can also be personal and family connections which allow the beneficial owner significant influence over the affairs of the legal entity.

Globally, it is becoming vitally important to track tax evaders as they are increasingly parking their assets in foreign jurisdictions in a manner that obscures their identity as owners of the said assets. These tax havens tend to incentivise tax evaders with zero or low taxation rates, as well as easier terms of incorporation. This allows beneficiaries to form companies, trusts, foundations, etc with a minimal physical existence. While these 'shell entities' may exist on paper only, they can legally hold assets in their own names.

Global cooperation is needed to nab tax evaders.

Take the following example of how tax evaders operate. Suppose Mr X, a resident of country A, purchases an immovable property in country B with untaxed money or illicit income that he generated from country A. He places the immovable property under the ownership of a joint-stock company which has been incorporated in country C (a tax haven). The shares of the company are held by a trust registered in country D. Mr X is the settlor or trustee of the trust and thus exercises control over its affairs. This means Mr X is the 'beneficial owner' of the immovable property, as ultimately, he controls it through this long chain of ownership.

If the illustration...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT