Double taxation agreements: support for tax dodgers
The new Swiss double taxation agreements with developing countries provide for international administrative assistance against tax evasion by individuals. They simultaneously limit the scope for partner countries to tax financial transfers by multinational corporations.
Annual outflows from developing countries through illicit financial transfers and tax flight capital are running at 800 billion francs. Over half of this consists of transactions internal to multinational corporations that evade profit taxes in the countries where their production is located. This was demonstrated in a recent study published by the renowned Global Financial Integrity research institute, the findings of which are now also being cited by the International Monetary Fund.
The best-known tax trick by the multinationals is to charge fictitious prices for supplies of goods between their various corporate units. In this way they are able to ship out profits at will to low-tax havens like Switzerland. With increasing frequency multinationals are also manipulating the interest rates payable by their subsidiaries on internal company loans, as well as the royalties on their own patents. Many developing countries therefore levy a withholding tax on outgoing interest and royalty payments. This enables them at least to partially offset profit tax losses with income from financial outflows. The tax rates may be as much as 20 per cent.
Pressure on withholding taxes
Switzerland now wants to do away with withholding taxes abroad. In March 2009 it subscribed to the OECD standard regarding administrative assistance in cases of tax evasion by individuals. At the same time, however, in the newly negotiated double taxation agreements (DTAs) it is attempting to force down withholding tax rates on interest and royalties accruing to Swiss investors. Switzerland is not sparing even the few developing countries with which it has concluded new agreements. The Swiss Government has repeatedly underlined its intention to pursue this policy of counterclaims consistently. The interest of poorer countries in mobilising tax revenue for development funding seems forgotten.
The fact is that in all the DTAs signed by Switzerland with developing countries since March 2009 the maximum admissible rates for taxes on royalty and interest payments to Switzerland are lower than the tax rates otherwise foreseen for this in the partner country. Even zero rates were agreed with Kazakhstan and Georgia, a recipient of Swiss development assistance. The result is that neither country can now levy taxes on substantial financial transfers to Switzerland. Instead, the multinational corporations have been given an added incentive to manipulate their subsidiaries' bookkeeping and more or less legally circumvent local profit taxes in the host country as well.
Alliance Sud calls on the Swiss Government to leave counterclaims out of new tax agreements with developing countries, as its policy is contradictory. On the one hand it supports tax reforms in the South – directly and through the International Monetary Fund – so that small and medium-size local enterprises can be taxed more systematically than hitherto. On the other, its DTA policy paves the way for multinational corporations to circumvent tax obligations in their host countries and repatriate their profits to Switzerland. This has nothing to do with a coherent development policy.
Mark Herkenrath, Alliance Sud
Tricks with consequences
mh. The outflow of capital through illicit financial transfers and tax evasion have fatal social and economic consequences in the countries concerned. The British charity Christian Aid reckons that developing countries lose as much as USD 160 billion in government revenues each year because of tax tricks by multinationals. This considerably surpasses the world total for OECD development assistance, which was just about USD 130 billion last year. Investing the lost tax billions in improving public health would save the lives of 350,000 children each year.
Article published in: Alliance Sud News No. 68, Summer 2011