Provisions invoked to check Rs4-5bn revenue leakage

SOHAIL SARFRAZ

ISLAMABAD: Pakistani tax investigators have invoked the provisions of the Avoidance of Double Taxation and Prevention of Fiscal Evasion between Pakistan and UK to check revenue leakage of Rs 4-5 billion through international programmes of foreign universities with local education institutions, involving Rs 15-20 billion untaxed transactions under International Collaboration Programmes.

The FBR sources told Business Recorder here on Sunday that 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 Rs 15-20 billion per annum with estimated tax evasion of Rs 4-5 billion under international programmes of foreign universities in Pakistan. Director Intelligence and Investigation 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 of profits and gains arising out of business activities in Pakistan.

Details of case revealed Directorate I&I-IR Islamabad has unearthed an area of taxable activity with huge tax potential which hitherto remains un-tapped. Previously (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 this 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. Course curriculum is developed by the foreign universities, exams are conducted in the supervision of British Council and finally Degrees/ Diplomas/ Certificates are awarded by foreign universities. British Council in Pakistan coordinates (on behalf of UK based universities) all such collaborations and examinations.

Pakistani students enrolled under the said arrangement pay the dues at three different levels to three different stakeholders i.e.; fee (i.e. 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 concerned stakeholders and relevant departments reveal that a staggering amount around Rs 15-20 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 Rs 4-5 billion annually and above all this huge taxable activity is being conducted in stark violation of prevailing tax regime, a top FBR official added.

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 sector study conducted by 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. Third world is the coveted market. In Pakistan alone so far, 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:

i) A campus entirely run by a foreign university without a local partner and award degree by a foreign university identical to degrees given to on-campus students at principal seat.

ii) Local campus franchised by a foreign university for award of a foreign degree where students are assessed and evaluated locally and degree awarded by a foreign university;

iii) A campus managed by a local partner but academic programme run under split-degree basis or twinning arrangements wherein part of study is completed in a local institution and remaining part in a university abroad or whole of programme is completed in Pakistan and evaluation and assessment is carried out under supervision of authorized agency like the British Council in case of British Universities.

iv) External degree programme for which tuition/facilitation is provided by a local institution, while the course of study, study materials, question paper and assessment is done by universities/institutions under supervision of 3rd party like British Council.

Exhaustive analysis conducted by Directorate I&I-IR Islamabad reveals that while option above is seldom exercised, the remaining three are being widely used especially option ii and iii are quite popular. While inherently there is nothing wrong with either of the aforementioned options, it is the glaring incidence of tax evasion which warrants intervention by IR’s field formations. Directorate I&I-IR Islamabad has developed a case study which not only highlights the issue in hand but recommends the legally tenable way out as well. Details are worth sharing with FBR and its field formations.

In one case, the agency has found that the local institution is engaged in the business of providing educational services in Pakistan through the said local Institute. This institute has established its campuses in various cities of Pakistan. The local institute is working as an affiliate of University of London for providing education in the legal field. LLB (Hons) and Diploma in Law leading to LLB programmes as developed by foreign university are offered at the three campuses in Pakistan. After the completion of courses at local campus, degrees and diplomas are awarded by the foreign university. As per given arrangements, students desiring for admission approach local institution and on fulfillment of the required criteria, local institution admit these students to institution. The local institution arranges for the teaching staff and other facilities by admitting the students to various courses whose degrees/diplomas are awarded by foreign university.

The local institutions have entered into contract with the students. These contracts bind both the parties’ i.e. the students and foreign University with regard to rights and obligations arising out of these contracts. Thus local institution habitually exercises an authority to execute contracts in the name of University of London. Exercise of the authority makes the local institution a dependent agent permanent establishment of the foreign university, in view of paragraph 5(b) of Article 5 of the Treaty for the avoidance of double taxation and prevention of fiscal evasion between Pakistan and the United Kingdom. The profits and gains of the said foreign university accruing or arising in Pakistan are thus taxable in view of Article 7 of the Treaty ibid.

The local institution is requested to file Income Tax Returns for Tax years 2009 to tax year 2013 being a dependent agent Permanent Establishment of the foreign university, in respect of profit and gains arising out of the business activities in Pakistan.