#ParadisePapers: How Tax Havens Harm the South

Political article
«Switzerland is very attractive to enterprises operating on the fringes of the law», says our tax expert Dominik Gross in an interview with the online platform watson.

Mr. Gross, what do the revelations from the Paradise Papers show us?

Dominik Gross: The revelations show partly criminal, partly legitimate business practices from the shadowy side of global finance, the offshore industry. In the cases so far revealed, enterprises and private individuals have tried to conceal capital from the public by placing it beyond the reach of government authorities.

And what do you conclude from these practices?

The Paradise Papers again confirm the findings from earlier data leaks such as the Panama Papers or the Offshore Leaks: people who have to work for a living pay taxes, which go to fund schools, hospitals and basic infrastructure. On the other hand, people living on very large incomes or on earnings from their assets, as well as transnational corporations, pay little or no taxes at all, thereby jeopardizing the public sector and hindering the sustainable development of the planet.

What is Switzerland's role in the latest data leak?

It emerges clearly yet again that Switzerland's low taxes on big corporations and, compared to other countries, its lax regulations on tax avoidance, money laundering and corruption are very attractive to a certain category of enterprises, namely those operating on the fringes of legality and unwilling to take part in the life of our community by paying taxes on their profits.

Is this legal?

In Switzerland, this parasitic business model on which our country relies to attract capital that is really due to others is often downplayed as a reputational risk to our financial centre.

Why do you think this notion is inaccurate?

It conveys the impression that the political powers-that-be who keep this business model operating for our economy are doing so involuntarily – and that the same applies to the companies profiting from it. This is not so. The policy framework in question and the resulting corporate business practices are based on deliberate decisions taken by individuals. Most of them know exactly what they are doing: for them, corruption, money laundering and tax avoidance are simply part and parcel of doing business. And for as long as politicians fail to stop these practices, nothing will change.

Research to date shows that Switzerland has played a key role in at least two cases: in the machinations of commodities giant Glencore in the Congo and in the network of companies belonging to the Swiss-Angolan businessman Jean-Claude Bastos. What is the connection between these two cases?

In the view of the international tax justice movement, both these cases are about diverting funds from the public purse into private hands.

Can you be more specific?

In the case of Glencore, capital evaded the Congolese public sector because mining permits were issued much more cheaply than planned – the difference allegedly being paid as bribes to politicians. In the case of the Angola connection, the political clans running the country appropriated for their own use some of the national wealth invested in the sovereign wealth fund, shifting those funds to a place with the lowest taxes – the Canton of Zug. Here too, some funds were diverted from the public realm into private hands – for example, by being transferred to Swiss asset manager Jean-Claude Bastos or to José Filomeno Dos Santos, son of Angola's long-standing President.

The pattern is the same: money migrates from the Global South to the North, into Switzerland.

The matter is more complex than that. It is not simply a question of «evil whites» despoiling «poor blacks.» The fact is that there are people all over the world who, by virtue of their financial and/or political clout, are able to smuggle funds past the fiscal authorities. One has to be able to afford tax evasion.

That sounds cynical.

In almost all societies this benefits a handful of people while being detrimental to countless others. But the difference between Switzerland and Angola is that the Swiss economy as a whole benefits from these practices, whereas Angola is harmed by them.

How should the international community tackle tax evasion?

The way that Nobel Prize Laureate Joseph Stiglitz and Swiss criminal lawyer Mark Pieth have formulated it is basically true: «In a globalized world, so long as there is still a secret wallet somewhere, money will flow through it.» The goal must therefore be to eliminate all tax havens worldwide.

How is this to be done?

Regrettably, the relevant UN bodies have so far been very weak on this question and in the OECD and G20, which are leaders on international tax policy, the countries of the Global South have virtually no say.

Against this backdrop, unilateral action by Switzerland will therefore achieve nothing.

Unilateral action, no. But Switzerland has a special duty, as the world's biggest offshore financial centre and a leading low-tax area for corporations. In no other country is there as much money under management for foreign clients as in this one.

What are you asking for?

In international organizations like the OECD, Switzerland always lobbies very strongly for the most lax regulations possible. Conversely, it could also advocate for strict rules and maximum transparency in tax matters. As the biggest offshore financial centre it would be sending a very strong signal in favour of a worldwide paradigm shift. Constantly lagging behind others is not a law of nature: in other international projects such as the Bologna Process for higher education reform or the free trade agreement with China, Switzerland was years ahead of other countries.

What reforms would help eliminate tax havens?

First and foremost there is need for transparency in the offshore system so that the appropriate policy steps can be discussed. When we look only the amounts escaping the public purse, it is clear that corporate taxation is the biggest problem. This is where reforms would be most effective. In this sphere, tax avoidance occurs mostly through trading between companies in the same corporate group. These dealings make up an estimated 70 to 80 per cent of overall world trade. This is about transfer price manipulation.

That is too complicated. Can you simplify?

Here is how it works. Two companies in different countries belong to the same group. One sells a service to the other. In the case of firms entirely independent of each other, the market will determine the price of that service. If the companies belong to the same group, the responsible managers are largely free to determine the price of the service, even if in principle they should be guided by the market price. But the market does not operate in many instances because intra-group trade predominates.

And how does that aid tax evasion?

In that, a subsidiary, let's say located in an African country where the profits are actually generated, buys a service from a parent company located in a low-tax country like Switzerland at an exorbitant price. In so doing the group has already shifted profits, thereby saving millions in taxes that should otherwise be going to benefit the people of the African country.

According to the Tages-Anzeiger, thanks to a complex international company construct in Switzerland, Nike pays a mere 360,000 francs on net profit of 1.3 million francs. And this although, according to experts, the sports retailer makes sales worth over 100 million francs in this country. Is Switzerland also a victim of tax evasion?

Yes. Although from an economic standpoint, Switzerland is largely a beneficiary of tax evasion and offshore dealings by virtue of its low-tax business model, the Swiss tax authority can of course also fall victim to tax evasion given the dysfunctional international tax system.

Who is to blame?

Swiss politicians. They are not implementing the measures proposed by the OECD to address the loophole that Nike is exploiting. Most Swiss politicians always assume that corporations located here – and hence our country itself – stand to gain if we can always implement only the minimum of international minimum standards. In this way, Switzerland itself is further weakening these international rules, sometimes to its own detriment. What is basically true, however, is that whether Swiss, Dutch or Angolan – if you are neither a group of companies nor a millionaire, tax loopholes are harmful to you.

What can be done about this?

For about 15 years now, NGOs have been calling for the introduction of what is known as public Country-by-Country Reporting (CBCR). This would require firms to publicly disclose their key accounting figures in all countries where they operate. That would reveal whether a company group is actually paying taxes in the country where it generates its profit or if it is simply doing so where taxes are lowest.

And is this idea being well received?

The OECD has indeed taken up the idea. Under its project to combat tax evasion by multinational corporations, CBCR was declared as the international benchmark. Switzerland too will be introducing CBCR next year. However, the OECD rules are already very watered-down by comparison with the demands of the tax justice movement. Switzerland is implementing only a minimum of the OECD minimum.

Why do the OECD rules not go far enough in your view?

We the NGOs called for CBCR reports to be mandatorily made public. The OECD, however, only wants them to be circulated among the tax authorities of the various countries. This gives rise to a far from level playing field, as most headquarters of worldwide corporate groups are located in OECD member countries in the North – not in Africa or Latin America.

And this means?

The countries on those continents therefore remain dependent on whatever company data OECD countries are prepared to share with them. The failure to make CBCR reports public is also damaging to civil society in poor countries. It denies them the possibility of establishing transparency about what happens to profits made by international corporations in their country. Tax authorities and governments often do not work in the interests of the population at large.

In the wake of the Paradise Papers, centre-left parties and NGOs introduced the Responsible Business Initiative as a solution. Similar causes like the initiative against food speculation have failed in recent years. Why should things be any different this time?

Progressive causes with global aims, which at first glance do not seem to favour the interests of individual citizens, generally do badly at the polls. But so much is in flux today. I see signs that make me optimistic. Switzerland is changing, including as a financial centre. Automatic information exchange signals that banking secrecy – for years held as sacrosanct – is at least half-dead. And in February, voters rejected Corporate Tax Reform III as much too pro-big business, even though it was supported by business associations, the Federal Council and a parliamentary majority.

You are optimistic.

Yes, things are happening. Alliance Sud too gathered signatures for the Responsible Business Initiative. Many people in the street understood the issue right away and signed without hesitation.

Interview: Christoph Bernet (watson)