Fighting tax evasion: Is the South being left behind?

Mark Herkenrath, Alliance Sud

In recent months, prominent offshore financial centres including Switzerland have signed dozens of revised Double Taxation Treaties (DTTs) as well as new Tax Information Exchange Agreements (TIEAs). They are reacting to the ominous OECD list of uncooperative tax havens and the threat by the G-20 to impose economic sanctions on the countries on the list. The new agreements reflect the current OECD standard. That means that they provide for sharing bank information on possible tax evaders in cases of reasonable suspicion.
However, only a fraction of these agreements concern countries in the South. A study by the German charity Misereor shows that of all double taxation agreements worldwide that provide for international administrative assistance in cases of both serious tax fraud and simple tax evasion, only 6 per cent include a developing country.  There are no TIEAs with developing countries. Although the countries of the South urgently need higher tax revenues for poverty reduction and development financing, the offshore centres of the North have hardly given them any support so far in the fight against international tax avoidance.

Switzerland’s inglorious role
Switzerland is no exception in this regard. Of the eleven newly negotiated DTTs which it has now signed, one concerns the OECD member Mexico, but not a single one any poorer developing country (as of end-February). But there is more. In the new strategy for the financial centre published last December, the Swiss government makes discrimination against developing countries into an official guideline. It notes that OECD countries continue to have priority in the ongoing revision of DTTs. The countries of the South therefore clearly take second place. The report makes no mention of the earlier offer by the Federal Council to grant to developing countries an agreement on taxation of savings income similar to that with the EU.
In the upcoming peer review by the OECD Global Forum on Taxation, such discriminatory practices could have negative consequences. No decision has yet been taken regarding the precise procedure for these reviews. But non-governmental organizations from around the world, including Alliance Sud, have jointly called for the inclusion of development policy evaluation criteria. Not only should account be taken of the number of countries with which the reviewed tax havens have agreed to provide more extensive administrative assistance, but also how many of those agreements affect developing countries. As things stand, Switzerland would come off very badly here, but might do well to emulate the British example. The island nation, which does indeed contribute to the concealment of international financial transfers through its anonymous trusts, is currently examining the conclusion of a multilateral TIEA with a range of developing countries.

Double taxation agreements with developing countries

Disadvantages feared

The fact that since last March Switzerland has not signed a single revised or new double taxation treaty (DTT) with developing countries is not attributable only to its discriminatory priority setting (see main article). According to the tax authority, hardly any inquiries have so far been received in that regard either. For although the countries in the South do have every interest in expanded administrative assistance, renegotiating a DTT represents a considerable administrative burden on them.

Developing countries with which DTTs already exist must also fear disadvantages to themselves in exchange for extended administrative assistance. One example could be a reduced source tax rate on dividends from Swiss companies’ foreign affiliates. In the revised DTT with Mexico, that rate on dividends was reduced from 10 per cent to zero. That is a high price to pay for a mutual assistance provision whereby Mexico must already know the name and bank details of putative tax evaders in order to obtain further information from Switzerland.

Mark Herkenrath, Alliance Sud

Article published in: Alliance Sud News No. 63, Spring 2010