Anil Gujadhur

Stirrings of a Global Crackdown on Tax Evasion and Tax Avoidance

— Anil Gujadhur

Mauritius hosted the the 7th Conference of the Asia/Africa International Fiscal Association. It was chaired by Rajesh Ramloll, who has been doing an excellent job for some years now, assisted by a no less competent Advisor, Roy Rohatgi. This conference provides an occasion to make an update on latest fiscal and related developments which may have an impact on the manner of conducting international business from various jurisdictions. Changes taking place in fiscal regimes across the world call for readjustments and this conference is an occasion for the practitioners to share their views on how best to adapt to the changing global environment. Being on the alert with respect to the complications arising in the provision of international services is a must for a country like ours. A commendable piece of regular work is thus being done by holding the IFA conference.

A wave of unpopular budget cuts

The overall background against which the conference was pitched this year is somewhat sombre. The setting is the continuing international economic crisis. It will be recalled that the direct effect of the crisis was for concerned governments, mainly in the West, to introduce a wave of unpopular budget cuts aimed at reducing budget deficits. This has produced a wave of sustained discontent among the affected populations, which is ongoing.

Politicians are therefore keen to show that tax systems are fair, i.e., from each according to his ability to pay his fair share. In the process, attention was caught by the low amount of taxes paid by well-known multinational firms. The UK, for example, has been shouting up that a firm such as Amazon registered sales amounting to £4.3 billion in 2012 whereas it paid tax amounting to only £2.4 million during the year. Another major firm, Google, is said to have grossed up sales amounting to £3.2 billion in 2011 but the tax paid was a mere £6million. In America, Apple is currently being questioned on the amount of taxes it has actually paid and whether this is commensurate with the scale of its business. But these are not the only ones being targeted. The net is spreading out further and wider.

Global action to curb banking secrecy

The tone has been mounting in other places. At the EU Summit of Wednesday last, EU leaders stated that they were committed to tackle tax evasion and to push for global action to curb banking secrecy, which acts as a shield for nationals of different countries to shift their incomes to secretive tax jurisdictions in a bid not to pay taxes thereon at home. The EU has estimated that devices such as tax evasion (having recourse to illegal means not to pay tax) and tax avoidance (employing complex yet legal accounting tricks to minimize tax payment such as electing domicile in low tax jurisdictions), have deprived EU member states of revenues amounting to € 1 trillion a year. Tax avoidance is the result of what is usually referred to as ‘tax planning’ by individuals and a plethora of diverse legal persons. The EU is promising action against what it calls “aggressive tax planning”, i.e., those who employ the full bag of tricks so as not to pay any tax at all or, at worst, the very minimum amount to the home jurisdiction by electing to be at home in other countries.

Networked world

EU leaders realize that this kind of action will not be fully effective in a globally networked world, unless the cooperation of one and all is obtained to chase tax evaders and tax avoiders. They have therefore asked for global standards to be implemented to favour automatic exchange of banking account data. This has already been set down as an item on the agenda of the G8 meeting scheduled for next month in Northern Ireland. The EU is also pressing for automatic exchange of people’s earnings data between tax authorities. This appears to be going in the same direction as the American Foreign Account Tax Compliance Act which came into effect January 1st 2013.

By the same token, the EU parliament passed on Tuesday last a resolution to halve by 2010 the estimated €1 trillion of annual tax revenue lost by the EU states by curbing tax loopholes and directing action against jurisdictions perceived to be tax havens, i.e., countries which offer foreign individuals and businesses little or no tax liability in a politically stable environment. It is clear that some action will be forthcoming against light taxing countries to which declared profits are wittingly shifted by companies. The latter have therefore to be on their guards. The best thing would be to take all action as may be necessary so as not to open the doors to persons who put the country in serious risk of being classified as a tax haven. This job belongs not only to financial regulators but more especially to management companies who are originally in a better position to test the bona fide of their prospective client companies before introducing them in the jurisdiction.

It is well known that British Overseas Territories (Caymans, Isle of Man, Bermuda, BVI, Gibraltar, Anguilla, Montserrat, Turks & Caicos, Jersey and Guernsey) are seen as the world’s greatest facilitators of tax planning by international companies. Since long, companies have been squirreling their profits to those places in a bid to minimize their tax liabilities at home. The British Prime Minister has endorsed the decisions being taken by the EU to tackle the twin problems of tax evasion and tax avoidance. He has consequently urged the British Overseas territories to “get their house in order” and to sign up international treaties on tax which contain protocols to allow the sharing more readily of tax information between signatory countries.

Storm unleashed

These developments show that the storm to bring to book citizens who default on their real tax liabilities at home has been unleashed. It will no doubt be picked up by developing countries as well which feel that they ight also be losing out a share of their legitimate tax collections to countries with low taxes and light touch regulation. The strains imposed by the prevailing economic crisis will present them a good justification to generalize the contemplated action, whether or not offshore business proves finally to be as resilient as it has been for several decades even before Mauritius ever embarked on this area of activity.

Improving transparency

Mauritius is not considered a tax haven but in their fury and folly, the more powerful countries of the planet and some vociferous lobbyists from their fold can give a dog a bad name and hang him for it. To avoid falling in this trap, we need to clean up our slate to the maximum extent possible; sometimes, it helps to concede wherever it is necessary to do so and to take corrective action where one may have gone too far, in order not to put a whole sector of otherwise sound activity in danger. The effort one needs to make consists essentially of improving transparency in a spirit of shared but un-destructive international cooperation.

We ought to have been thinking about the necessary engineering we should have undertaken each time the stress surfaced up but, it appears, that was not part of the plan to make us genuinely fool proof instead of employing legal fine points to show that we are beyond reproach. ‘Substance’ can stand up to a higher standard of proof than the highest prayers one can offer at the altar of ‘form’. If we have a sufficiently strong fallback position, no matter which decisions are taken at the international level, we may consider having done our homework properly against the background of successive threats that are being laid at the doorsteps of countries suspected to be undermining the effectiveness of their international tax collections at this time of widespread economic crisis. A good reputation is earned after a lot of hard work; it can be destroyed with one or two stray examples of misbehaviour. We don’t deserve that.

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Road safety: You can get better results through self- persuasion

Many persons concede that a tangible improvement has been achieved in our driving standards since the introduction of the penalty point system as from Friday 10th May. The additional speed cameras installed have no doubt also helped towards this improvement. And perhaps an increasingly no-nonsense attitude adopted by our traffic police vis-à-vis road offenders who now risk accumulating negative points on their driving licences. The government has shown that it will not bend before lobbies against the introduction of the penalty point system. That has sent a valuable signal to all that the inflationary spiral of road misconduct will no longer be tolerated.

Reckless drivers

The fact that the penalty point system is directed against reckless drivers may create the false impression that they alone are to blame for our deteriorating road conditions. This is not always true. Other road users, such as pedestrians jaywalking or crossing streets intermittently where there are no pedestrian lights, display standards of misbehaviour and recklessness that would be unthinkable in civilised places. Some cross the busy streets while fully engaged in mobile phone conversations, mindless of the danger they are putting themselves into as well as the unfortunate drivers who may have the misfortune to come across such irresponsible persons on their way.

A couldn’t-care-less attitude

Goods vehicles loading or unloading their wares right in the middle of main arteries, surrogated as temporary parking lots, throw up another signal of the same couldn’t-care-less attitude. There are several places where road markings have simply vanished. Some of our roundabouts (e.g., the one at Jumbo going towards Phoenix and the one at Trianon shopping centre in the direction of Quatre Bornes) have been so badly designed that even though, unlike the French, we drive from the left, the vehicle on the lane to the right fully obscures the road view of the driver to the left. He has no visibility of oncoming traffic until the vehicle to the right has departed. This adds to driver impatience and road stress.

Besides, all our roads taken together no longer have the capacity to seamlessly accommodate the huge fleet of vehicles that has kept increasing from year to year without any sort of planning about road capacity use at peaks. Thus, various imperfections contribute to the chaotic state of affairs on our roads which have been claiming so many lives without interruption. Not reckless drivers alone.

While the threat of penalty seems to have, for the moment at least, brought a greater semblance of order on our roads, the question is whether it should have come to that. It would have been far better to inculcate the right attitude among all concerned since long rather than for the authorities to have no alternative than to have recourse to strong deterrence, like the penalty point system, to make our roads more conducive to safety. For, as careful observers may have repeatedly noticed, several road users even now throw caution to the winds once they know they are out of control zones. This would imply that one would have to litter the entire landscape with speed cameras, for instance, to keep vehicle speeds within the allocated limits.

Strict surveillance

That would be a bad signal. It would imply that unless you keep someone under strict surveillance all the way, his natural tendency would be to transgress the bounds of what is reasonably acceptable. In that case, it would be sufficient for one defaulter to give the bad example for others to take the cue and misbehave just as well. There is something at the core, the moral core, which has gone amiss. No matter how much fear we instil to get things right, the correct way of achieving enduring results in the domain of public conduct is by giving the example of right conduct and demonstrating through peer pressure the fruits of self-imposed good conduct. The penalty point system will for the present curb unruly habits which have infested our roads – and it will form part of the arsenal we need to deal with serial wrongdoing – but the long term solution against generalizing misconduct on the roads is to inculcate a sense of deep responsibility among all road users. Let it be said however: the penalty point system is a step in the right direction.

Anil Gujadhur

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