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Tax havens under the scanner

European Union’s latest bid to enforce a greater financial transparency following probes into the secret accounts of a Liechtenstein bank could prove a formidable challenge to the continent’s remaining non-cooperating tax jurisdictions. Globally, the development could further consolidate the wide support among the Group of 20 nations for the 2002 Model Agreement on exchanging information formulated by the Organisation for Economic Cooperation and Development (OECD). The agreement provides for the removal of the so-called domestic tax interest wherein countries consent to furnish information to other states even when such data is of no direct use for them. The EU-wide charge against alleged tax evasion gained momentum when revelations from a whistleblower led German authorities to investigate the secret accounts of high-profile trusts. Thereafter, British, French and Italian governments stepped up their campaign. Under EU law, interest earnings on cash deposits, and government and corporate bonds held outside a person’s state of residence are taxable and accordingly, all member-countries are required to exchange relevant information automatically. Luxembourg, Austria, and Belgium are exempt from the 2005 law for a transition period during which they, instead, collect a withholding tax. So do Switzerland, and Liechtenstein, among others, under separate agreements that obtain with the EU.

While these traditional avenues of evasion may have been effectively foreclosed, trusts and foundations have emerged as major channels of concealed personal wealth. The EU’s largest economy, Germany, whose annual losses due to tax evasion amount to an estimated €30 billion, has already received the backing of the bloc’s finance ministers for proposals to extend the scope of the EU’s law on the savings tax to cover, for instance, other returns such as dividends and capital gains, besides legal entities such as trusts and foundations. A major inroad into the operation of tax havens has been the abolition of anonymous bank accounts in all but a few states. The provision (as in the EU law) for automatic exchange of bank information among countries may prove more effective than sharing of data relating to specific requests as suggested in the OECD Model Agreement. The huge sums held in offshore accounts, estimated by the OECD at about $5,000 billion, have at times led major countries to use strong-arm methods against errant states that protect holders of concealed incomes. But the approach could prove short-sighted given the increasing integration of financial operations in a rapidly globalising world economy.

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