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Tax havens and tax evasion: Letting in more light

18 June 2015   (0 Comments)
Posted by: Author: Ruan Jooste
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Author: Ruan Jooste (Financial Mail)

There have been a few initiatives aimed at stopping Switzerland from creating tax havens through its tight banking-secrecy rules.

Following revelations earlier this year that HSBC’s Swiss banking arm helped wealthy customers dodge taxes, and the recent arrest of a number of high-ranking officials of Fifa, which is based in Switzerland, the matter has become more pressing than ever.

The European Union and Switzerland have already signed a deal to stop EU residents holding undeclared income in Swiss bank accounts. The European Commission said at the end of May that the transparency agreement would be introduced at the start of 2018, and would allow Switzerland and the EU to share information relating to Swiss bank accounts of respective EU citizens, including names, addresses, birth dates and tax identification numbers.

This transparency should not only improve member states’ ability to track and tackle tax evaders, but should also deter tax evasion , the commission said .

Similar agreements are being negotiated between the EU and Andorra, Liechtenstein, Monaco and San Marino. These are expected to be completed by the end of the year.

Scandals around perceived tax havens are not new. The Tax Justice Network (TJN) highlights that before the BBC Panorama investigation into Fifa’s alleged bribes in 2010, the tiny European secrecy jurisdiction of Liechtenstein was in the spotlight. "This explains why TJN has been campaigning to end financial secrecy in football through our Offshore Game project," the project’s website says. "One only has to look at the vast amount of money collected by Fifa, often extracted from countries tax-free, and where it ends up, to conclude not all is well in the financial governance of sport."

The US beefed up its disclosure policies after the landmark tax-dodging case against UBS, which resulted in the Swiss bank paying US$780m in fines, penalties, interest and restitution to settle charges relating to 17 000 US clients hiding $20bn in 2009.

Agreements and initiatives such as the EU Savings Directive, the US Foreign Account Tax Compliance Act and OECD Common Reporting Standard are aimed primarily at tax evasion by individuals. They entail co-ordinated efforts to gain a truer picture of individual income and assets worldwide.

The OECD’s G20 Base Erosion & Profit Shifting (Beps) project has also thrown a spotlight on illicit activities in perceived tax havens. But multinational companies are still heavily reliant on using them, according to a report in the Financial Times.

The report quotes research from MSCI, which says 16,3% of the companies in its world index are located in tax havens or have a majority-owned subsidiary in one. The Cayman Islands, Hong Kong, Luxembourg, Switzerland and Singapore are identified as the most common locations.

According to MSCI, companies in developed world economies are avoiding $82bn in taxes through tax haven subsidiaries. If such strategies were outlawed, the 243 companies with a large tax gap would see returns to investors slashed by 20%, it adds.

Despite the controversial headlines for the likes of Amazon, Google and Apple in recent years, the IT sector is not the major culprit, according to the report.

The health-care sector ranks the highest, with 37% of companies meeting the high tax gap criteria. Energy and materials companies follow closely behind the IT sector, with one in every four firms involved.

But more OECD countries are playing ball. An initiative in Spain calls on local governments to exclude companies that use tax havens from their procurement processes. The initiative is promoted by the Platform for a Just, Environmental & Socially Responsible Fiscal Policy.

Last year a group from the UK, France, Germany, Spain, Norway, Sweden and Finland launched a movement to get cities to become tax-haven free.

Even non-OECD countries are making strides. The Convention on Mutual Administrative Assistance in Tax Matters protocol, a convention developed by the OECD and the Council of Europe, which regulates information exchange regarding tax matters, has more than 60 signatories, including SA, Ghana and Nigeria.

"Traditionally, arrangements for exchanging information have been bilateral, based around tax treaties and information exchange agreements," says Logan Wort, executive secretary of the African Tax Administration Forum (Ataf). "However, the [convention] allows in principle for unilateral, bilateral and multilateral exchange."

Wort says Africa’s contribution to the global process of developing new standards for cross-border taxation has taken on its own flavour. The first draft of a model double-taxation agreement specifically drawn up for African countries was approved at Ataf’s second Africa consultative meeting on Beps in April.

African countries have also come together to influence revisions by the OECD to its transfer pricing guidelines (the price related companies charge each other for their products and services) — specifically relating to the pricing of commodities, the continent’s greatest export; as well as the promotion of country-by-country reporting by multinational corporations. As an example, Wort says if 5 000t of copper were underpriced by 10%, close to $95,5m would be lost in taxes to that exporting country. "That is the kind of unique issue Ataf and African states are trying to tackle," he says.

Winnie Byanyima, Oxfam International’s executive director, said in a recent media release: "African leaders must not sit by while international tax reforms are agreed which give multinational companies free rein to sidestep their tax obligations in Africa. Political and business leaders must put their weight behind the ever-louder calls for the reform of global tax rules. African nations must also introduce a more progressive and democratic approach to taxation — including calling a halt to tax exemptions for foreign companies."

Trade mispricing is just one of the ways multinationals avoid paying their share. According to the UN Conference on Trade & Development, developing countries lose an estimated $100bn/year through tax avoidance schemes involving tax havens.

The Davis Tax Committee in SA called last month for input for the second interim report on Beps by August 31. The first report was released late last year.

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