Treasure Islands - Nicholas Shaxson [90]
The rich countries’ model is dominant today. Not only has this problem of double nontaxation of multinational corporations been allowed to happen, but billions of dollars in tax that would in a fairer world be paid in poor countries is paid in rich countries instead, quite legally.
It is worth briefly examining another role played by tax havens in the weird and wonderful world of international tax that enables companies to knock out their tax bills. Let’s say a German bank or company invests in Tanzania. Under a tax treaty between Germany and Tanzania, the African country may well agree not to tax the company’s local earnings for fear that otherwise German companies will simply invest elsewhere. But now even with this treaty in place, the German corporation has not solved its problem yet. The treaty may have knocked out the Tanzanian tax charge on the company’s earnings, but if it sends these untaxed earnings straight back to Germany they will still be taxed there. So it sends the earnings to a so-called conduit or treaty haven, which will have a wide network of treaties, including one with Tanzania. The treaty haven also agrees not to tax these untaxed earnings: What has happened here is that the haven serves as a stepping-stone for these profits to emerge, along carefully constructed tax-free pathways, out from Tanzania and into the wider world, often via yet another haven where the income will not be taxed at all.
“Like two closely marked football players passing the ball to a third one who is unmarked,” explains Professor Sol Picciotto, a tax haven expert, a conduit haven “can create major gaps in the defenses of tax authorities.” In this case both Tanzania and Germany are deprived of tax revenues, courtesy of offshore. And this is quite legal. Many tens, and potentially hundreds, of billions of dollars of tax revenue are at stake in this game, vastly increasing the hunger for foreign aid among the world’s poorer nations. South Africa’s finance minister Trevor Manuel put the problem neatly. “It is a contradiction to support increased development assistance yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country.”36
Over twenty-five hundred tax treaties are in place around the world—an extensive but very poorly understood counterpart of the global trading and investment regime.
The Netherlands, with a wide network of tax treaties, is a good example of a treaty haven. The two biggest sources of foreign investment into China in 2007 were not Japan or the United States or South Korea but Hong Kong and the British Virgin Islands.37 Similarly, as of 2009 the biggest source of foreign investment into India, at over 43 percent of the total, is not the United States or Britain or China but the treaty haven of Mauritius, a rising star of the offshore system.38 And here lies another odd tale.
Mauritius illustrates how the British spiderweb is no imperial relic but a modern and self-renewing system. Although French-speaking, the country has a long history of British colonial involvement.39 Mauritius set up its offshore center in 1989 under the tutelage of experts mostly from the City of London, Jersey, and the Isle of Man. Rudolf Elmer, who worked as a senior offshore practitioner in Mauritius from 2006 to 2008 for Standard Bank, says he trained in Jersey and the Isle of Man before being sent to Mauritius. “There is a lot of British influence,” he said. “Major banks like Barclays and HSBC have built up major operations and multistory buildings in Cyber