I have not written in a while. But Financial Secretary Dev Manraj’s speech in the 8th Asia/Africa IFA Conference made me want to write again. Finally, an advocate for the Mauritius IFC speaks out loud and clear. Pity Indian (or for that matter, Mauritian) journalists were not here to listen. “Is it a sin to tax less?” he asks, “It is not because of a few accidents that we have to scrap the motorway,” “Are they protecting their own rights and preventing us from climbing the social ladder?” “When people think we are a rogue nation, it hurts us,” “India can now stand on its own two feet. How? By money coming in through Mauritius, it is Mauritius that helped towards India’s rapid development,” “Don’t kill us off with bad publicity” …
It has never struck me more how much taxation, and all the debate around it, was a political issue. It was highlighted by Dr Rama Sithanen during the conference that it is perhaps not a coincidence that international tax developments / issues such as Base Erosion and Profit Shifting (“BEPS”), Transfer Pricing (“TP”), US FATCA, and GAAR Provisions came at the forefront of global agendas just when most of the G20 countries were crumbling under debt and the financial crisis was unraveling. Below is the Hitchhiker’s take on the so called tax issues international organisations have been lamenting about for the past decade or so.
The core issue here is globalisation. We live in a global world, intelligent businessmen have figured out that, by shifting production elsewhere, they could enjoy cheaper labour, cheaper land, cheaper facilities, and thus make more profits. The global community became so interconnected that it was soon realised that more cost optimisation could be achieved by shifting profits “offshore”. This can be viewed as an outsourcing of services: secretarial, accounting, management, administration, consultancy. The small jurisdiction gets administration fees, young graduates are happily employed in “finance”, multiplier effect for the economy, the businessman is saving money, everybody is happy. But now, boom! G20 countries are heavily indebted and they realise that their only salvation lies in plugging tax loopholes: making sure that the Taxman is not missing on any collectable cent, and even going to the extent of making the noncollectable cent become tax money due! So the OECD and co. ( which are incidentally funded by the G20 “rich” club ) have started massive campaigns against what they call “aggressive tax planning”.
OECD defines BEPS as BEPS (Base Erosion and Profit Shifting) looks at whether or not the current rules allow for the allocation of taxable profits to locations different from those where the actual business activity takes place, and what could be done to change this if they do. But really, take Google, Apple, Starbucks. How do you allocate profits when the copyright belongs to one country, the manufacturing in another, the customer base in another? Professor Philippe Malherbe asks if sovereign tax rates are still applicable in the global era of today. Isn’t it time to think about some form of “global” tax rate? A utopia, you say? For now, maybe…
In a very interesting slide, Caroline Silberztein quotes “Multinational corporations, stateless income” by Sinclair Davidson – RMIT University (Australia): is the corporate tax base really being eroded? The paper shows that corporate income tax rates have reduced quite substantially over time – yet corporate income tax revenue has not: the average OECD corporate income tax rate has decreased from 50.5% in 1983 to 29.6% in 2010; yet, revenue collected from the corporate income tax as percentage of the GDP increased from 7.6% in 1981 to 8.6% in 2010. So what is all the fuss about base erosion?
Oh well, what can I say about FATCA? It makes me think of the big octopus state of Uncle Sam spreading its tentacles all over the world. Cumbersome reporting requirements, criminal offense for non compliance, suspicious software being installed all over the world. Soon, the only place one would feel really free from the prying eyes of the IRS would be on Mars.
First of all, how DUMB are NGOs like ActionAid and Oxfam? Or more importantly, how dumb do they think people are? I have been racking my brain to see the connection between tax havens and poverty in Africa. Say, Mr Rich Guy decides not to pay heed to his tax planner’s advice and pays his taxes to the IRS or to HMRC fair and square. Where in the world is the guarantee that this tax money is going to Africa to “help the poor”, especially when these countries are themselves sinking in debt by the minute? In my opinion, this is a huge PR campaign (of very bad taste) to prepare the world for FATCA, BEPS action plan, and whatever comes next. Mauritius and other targeted IFCs are mere collateral damage in the process.
The issue of substance is a fleeting concept. A walk in Ireland would make you think you are in Silicon Valley. It is not an issue to prove that management and control emanated from an IFC, especially in today’s era of interconnectedness. Board meetings, place of registration of company, office premises, qualified employees. You name it, the IFC has it. Will the Taxman stop the definition of “Substance” here? Let’s wait and see…
What should Mauritius do?
What does not kill us will make us stronger. The only thing we need is to know where we want to go and have the political will to stand by it. Switzerland or Singapore did not get to where they are today by bowing down to international pressure. The opportunities other than focusing on taxation treaty benefits abound. We must get the fragile balance between sound regulation and competitiveness right. If India decides it no longer needs us, so be it. Africa is rising, and it is starving for capital…
Disclaimer: This post reflects personal views only.