For twelve years now whistleblower Rudolf Elmer has been fighting Swiss banking secrecy, with court case after court case. He’s been imprisoned, victimised, and his family has been harassed. His reputation has been systematically ripped apart in a way that we believe has been intended as a deterrent to other potential whistleblowers. We’ve regularly covered his battles against the Swiss “justice” system. For more background, he wrote a guest blog for us here on how Switzerland corrupted its courts to nail him.
The good news is that in the end the high court in Zurich turned down efforts by the prosecution to convict him of breaking Swiss banking secrecy laws in 2016. Now some may be sleeping less peacefully in their beds in India because he says if the Federal Supreme Court also rules in his favour in the current case going through the courts he’ll release the Julius Baer account data he still holds. He says this data contains the names of Indian politicians, film stars and sports personalities, among others.
Back in January, the UK Chancellor of the Exchequer (the finance minister), Philip Hammond, used an interview with the German newspaper Welt am Sonntag to raise what has become known as the Brexit tax haven threat: if the EU doesn’t give the UK a good deal, the UK will lead a race to the bottom to undermine the EU on tax and financial regulatory standards.
Now, in an interview with Le Monde, the Chancellor has rowed back on that threat – giving the first open acknowledgement that the UK’s ‘recognisably European’ social, economic and cultural model depends on taxation. But even aside from the deep splits within the UK government, it remains unclear whether even Mr Hammond himself is clear on what he means:
An important new study on Offshore Financial Centres (OFCs) from the University of Amsterdam has made some fascinating discoveries, challenging, as the Financial Secrecy Index has, the popular misconception that tax havens are only palm fringed little islands and exposing that in fact major economies play a key role in global tax avoidance. Specifically they’ve mined data that highlights the central role of ‘conduit’ and ‘sink’ havens. Enter stage right the United Kingdom and the Netherlands…
In ‘Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network’ economists and computer scientists in the CORPNET research group have used:
“a data-driven method based on network analysis to identify OFCs. Our data covers over 77 million ownership relations, which together form a large network in which value flows from subsidiaries to shareholders. From it we extract millions of global corporate ownership chains (see Figure 2). The resulting fine-grained insight allows us to not only see where value originates and ends up, but also exactly where it originated. This allows us to identify two types of OFCs:
- Sink-OFC: a jurisdiction in which a disproportional amount of value disappears from the economic system.
- Conduit-OFC: a jurisdiction through which a disproportional amount of value moves toward sink-OFCs.”
There was news this week that Mauritius has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This is an initiative from the OECD to allow countries to take measures designed to stop tax avoidance by multinational companies and put them into their existing network of tax treaties without renegotiating those treaties.
This is a particularly important measure for a countries like Mauritius. Mauritius has a wide network of tax treaties with African and South Asian countries allowing it to act as a conduit for capital to slip tax freely between the West and the developing world. This is commonly called treaty shopping.
So, the signing of the MLI by Mauritius should be seen as good news. Well, not quite. The MLI does not change the relationship between the signatory and all other countries that have a tax treaty with the signatory. Jurisdictions which are not part of the MLI are not included, and even within the MLI jurisdictions can chose not to modify tax treaties with others in the system. This happens through the publication of each country’s ‘preferences’.
A closer look at Mauritius’s ‘preferences’ shows that a number of vitally important treaty relationships are not covered by the jurisdiction joining the MLI, leaving a number of developing countries vulnerable to companies using Mauritius to shift profits in an attempt to avoid tax.
We have been through the list of Mauritius’s ‘preferences’ in the MLI and Mauritius’s existing treaty network. The jurisdictions which currently have a treaty relationship with Mauritius but are not covered by the MLI are as follows:
Countries which are not covered by the MLI or do not match in terms of these preferences have to renegotiate their treaties on a bilateral basis to include clauses which prevent the tax abuse. Here things can get complicated too, as there are a range of anti-avoidance measures available to countries, some better than others. In one key area – the anti-treaty abuse rule – an effective option is to apply a “principle purpose test”. (PPT) This test denies the benefits of a tax treaty if one of the principle purposes of a transaction was to gain that treaty benefit. Mauritius has accepted this test as an interim measure in the countries it will implement the MLI with.
However, in bi-lateral negotiations it has said it prefers the limitation of benefit rule, which applies a large number of more technical criteria to the parties completing a transaction and denies treaty benefits to parties which do not meet those tests. Those tests can be a local ownership requirement, for example.
A limitation of benefits rule is much more complicated to administer than than a PPT test, which causes difficulties for developing countries.
Finally, through the MLI system a country does not need to implement all of the anti-avoidance provisions which form part of the MLI. As well as choosing which countries the MLI applies to, a contracting party can also express reservations on specific policy areas which it does not want to implement. Mauritius has a great deal of reservations about MLI provisions, including on measures such as strengthening capital gains tax from the sale of participations in domestic companies (article 9), the transfer of dividends (article 8), and provisions to prevent tax abuse of income from permanent establishments in third countries (article 10), and the artificial avoidance of permanent establishment status (articles 12 and 13).
So whilst Mauritius (and others) may celebrate the signing of the MLI as a great work of spin for this tax haven island, the weakness of the system still allows this jurisdiction to create significant problems for its neighbours in Africa and South Asia.
We’ve regularly covered the battles of whistleblower Rudolf Elmer against the Swiss “justice” system. As we’ve said before, and as has so often been the case with those brave enough to risk all to challenge injustice and corruption, the bank was the criminal, not Rudolf Elmer. He wrote a guest blog for us here on how Switzerland corrupted its courts to nail him. We’d like to bring you up to date on his heroic struggles.