Saturday, April 11, 2009

The G20's pledge to crack down on tax havens

The most significant outcome of the recently concluded G20 summit is perhaps its resolve to crack down on tax havens – unprecedented as it is, its implications are not entirely clear.

In the communiqué of April 2, the G20 promises to “take action against non-cooperative jurisdictions, including tax havens” and declares that it stands “ready to deploy sanctions to protect our public finances and financial systems”, since the “era of banking secrecy is over”. The sudden concern is not surprising – for example, recent reports have suggested a clear link between tax havens and the financial crisis, and France for example is reported to have seen money worth several times its GDP disappear to these financial institutions. French President Nicolas Sarkozy reportedly threatened to walk out of the Summit unless strong action was promised against tax havens. The OECD has been for a few years publishing a list of “non-cooperative jurisdictions”, and the worst offenders have been Costa Rica, Malaysia, the Philippines and Uruguay in terms of sharing information.

Following the pledge at the G20 summit, all nations, including the four mentioned above, have been taken off the ‘non-cooperative’ list. This now entails a commitment for several nations to share information that was hitherto undisclosed, bringing with it the distinct possibility that these States will no longer attract the sums of money that they have been. While India is not directly affected by this decision, since it is not a tax haven, it is important to note that India’s biggest source of FDI is Mauritius, a tax haven. Mauritius accounted for two-fifths of India’s FDI in 2007, with investment of $11 billion.

What counts in Mauritius’ favour is that its recent OECD-compliance record has been improving, and it is now classified in the ‘least-risky’ category. Furthermore, given that this move applies equally to competing tax havens as well, it is possible that Mauritius’ investments do not dip as drastically as one might expect. This, of course, remains to be seen.

The communiqué released by the summit is available here. This report carries an excellent analysis of the summit in general, and HT examines the implications of the summit for India. Other comments on the summit and tax havens are available here and here.

1 comment:

vswaminathan said...

The annexed comments may be noted to be of relevance to the Post:

BL 21-4-09 -Editorial - Laundering votes
"The BJP’s new found crusade against money laundering is both relevant and naïve. India after all, has suffered from its pernicious effects in the past and will have to guard against its potential dangers as it opens up even more. Yet, it is naïve to call it the “dirty outcome of modern capitalism” alone. India has been a very safe and hugely profitable haven for unaccounted money given the high-value professions and occupations that still fall outside the taxman’s net. Maybe that’s the best place to start the battle. "


One firmly believes / takes it that, -
any such 'editorial' in a daily paper is intended not merely for the so called 'intellectuals' or 'economists' or ‘experts’ but also for the common mortals but still interested in knowing what is the sum and substance of its contents. For instance, the purport of the cited paragraph has not at all been readily understood
Be that as it should, one has the following crucial points to focus on, for deliberation by those really concerned:

1. Going by the information in public domain, one gets the impression that the Big Brother, US itself, contrary to the common belief, is yet another country that has come to be recognized / branded as one of the 'tax havens' (whatever that really or in essence means) across the globe.
2. All the lately published material in the print media (of course, besides the stunningly bold but shamelessly shallow utterances of the professional politicians on the eve of the forthcoming vexing elections) seem to make no distinction whatsoever between - "tax financial havens" (such as, Switzerland - primarily used as a convenient route for 'tax evasion'), and "tax havens" (such as, Mauritius - normally known to have been used for 'tax avoidance'). Should, according to one's well considered belief, there be a vital distinction between the two concepts - 'evasion' and 'avoidance', then as a corollary, there are, in any body's contemplation, essentially two materially different types of "tax havens" .

V Swaminathan