Lowtax Network

Back To Top

a very vexed question

Kitty Miv, Editor
21 June, 2017

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

When is a tax haven not a tax haven? It depends. The boundaries between "onshore" and "offshore" have been blurred in the last 20 years, and ironically, the OECD must claim much culpability for this.

While offshore jurisdictions have been encouraged (to put it somewhat euphemistically) to repeal ring-fenced offshore company and tax regimes, which were used exclusively by non-resident investors to pay less tax, they have in the main retained very low or zero rates of tax. In other words, they may no longer be offshore by name, but they feel offshore by nature.

Mauritius, which announced a Budget replete with new tax incentives earlier this month, is a good example. It replaced offshore company forms with the Global Business Company, which allows non-resident business pay tax as low as 3 percent if they structure their affairs in the right way.

Mauritius has been used extensively to channel tax-free investment into major emerging economies around the Indian Ocean, particularly India, and last year it was accused by Oxfam of possessing all the characteristics normally ascribed to a tax haven, with the all the negative connotations that implies. Unsurprisingly, it was a claim that the Mauritian authorities strenuously denied.

Superficially, perhaps Oxfam had a point. After all, a major reason why investors register businesses in Mauritius is to reduce exposure to tax, but without doing much in the way of business in the jurisdiction itself. Indeed, legislation largely forbids GBC1s to undertake business in Mauritius anyway.

But then again, Mauritius is more than just a mere conduit for global cash flows. It has a "real" economy, centered on tourism, sugar production, fishing, food processing, textiles, and, latterly, information technology and communications. The same cannot be said of other IOFCs which, lacking natural and human resources, depend heavily on financial services and tourism.

They too bristle at being labelled as tax havens, especially given that most major IOFCs are well up to speed with international tax transparency standards. Still, perhaps it is unfair to lump Mauritius in with all the so-called tax havens. Its latest Budget shows that it is trying hard to attract more businesses with substance. It also shows that it is unfair to tar all "offshore" jurisdictions - whatever you want to call them - with the same brush.

Indeed, the word substance has become integral to the base erosion and profit shifting project. But it's also one that appears to be causing businesses and tax authorities the world over significant problems.

Of course, one of the core aims of BEPS is to prevent situations whereby taxpayers get away with double non-taxation. However, as the International Chamber of Commerce pointed out last week, the increased focus by revenue authorities on economic substance combined with a lack of clarity on the definition of the term across jurisdictions is leading to more cases of income being doubly taxed, rather than the other way around.

Facing the prospect of being wrongly taxed, taxpayers have little choice but to fight it out in the tax tribunals and appeals courts, which even in the most advanced countries is usually an expensive, time-consuming process, and risky if litigation goes the way of the tax authority. But what's sauce for the goose is sauce for the gander, and the BEPS project appears to have given many tax authorities license to challenge the tax positions of multinationals in court on a more regular basis also.

However, similarly, this litigious attitude also comes with risk attached. For governments aren't guaranteed to win in court, despite often spending vast sums of taxpayers' money in pursuing tax cases. In France for example, the tax authority could be heading for defeat in a high-profile case against Google if judges accept the recent opinion of a court adviser in a case which centers on whether the company had a permanent establishment in France.

This is also further evidence of the unintended consequences unleashed by the BEPS project. And while some observers may feel satisfied that the tax tables are turning on big corporations, the danger is the effect such developments have on trade, investment, and economic growth. And it's dangerous for governments to have things mostly their own way, which is why courts act as a vital check on power in most advanced economies.

BEPS is of course focused almost entirely on tax avoidance by multinational corporations. But this isn't to say that the OECD hasn't taken its eye off the ball when it comes to tax avoidance by wealthy individuals (many of whom may use corporate structures to protect their income and assets from high taxation).

Indeed, there seems to have been a renewed focus on the appropriate level of tax on the rich in recent months. Debate is raging in the United States about the Republicans' tax proposals, and how they might cut taxes for the wealthy. Similarly, a debate was had in the lead-up to the UK general election on the level of income at which an individual is considered well off enough to pay more income tax. In case you're interested, the Labour Party says it is GBP80,000 (USD102,000) per year. Meanwhile, the OECD has released two papers on the matter since April.

It is difficult to pretend that the world isn't unequal in terms of distribution of wealth. According to the OECD, across the grouping, the wealthiest one percent of taxpayers hold 19 percent of total wealth, while the bottom 40 percent holds three percent.

The usual remedy for such inequality is progressive taxation, and the OECD says that diminished progressivity in tax systems as well as increasing tax competition between jurisdictions is putting additional pressure on public finances to fund social programs. It calls for countries to introduce more equitable property taxes; strengthen inheritance and gift taxes; pursue capital tax reforms to reduce rate differentials across assets; and bolster global governance of tax policy.

But, this is a very vexed question, because most countries already have progressive taxation of incomes in place, and the wealthiest few percent tend to pay the bulk of income tax revenue already. Take one recent statistic from South Africa as an example: according to the South African Institute of Race Relations, a free market think tank, 60 percent of personal and corporate income tax comes from just 560,000 individuals and 610 companies.

The counter-argument to “soaking the rich” is that the targets of wealth taxes will merely up sticks and take their income, assets, and employment-supporting businesses elsewhere to be taxed less punitively. This certainly seems to be what the IRR fears will happen in South Africa if a wealth tax is brought in. And given the precariousness of the South African economy, perhaps it does have a point.

The evidence seems to suggest that inequality is still rampant all over the world in spite of progressive taxation. So would even more progressive taxation really help? Perhaps it's time for the political class to seek more imaginative solutions.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

Mauritius substantial

France judicial

Kitty's Execrations

South Africa ill-advised



Tags: Business

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


« Go Back to Blogs

Blog Archive

Event Listings

Listings for the leading worldwide conferences and events in accounting, investment, banking and finance, transfer pricing, corporate taxation and more...
See Event Listings »