Swiss move on taxes to help developing nations

Switzerland's decision to share information on tax matters with other jurisdictions could mean ‘billions of dollars in increased revenues’ for developing countries, according to World Bank.

Marking the end of strict banking secrecy practices, Switzerland earlier this month agreed to automatic exchange of information and mutual administrative assistance in tax matters with overseas authorities.

In a blog, World Bank has said Swiss government's decision to sign OECD's Convention on Mutual Administrative Assistance in Tax Matters is the latest of a series of developments that have radically increased amount and quality of tax information available to governments.

"For developing countries, being able to access and use that information to address tax avoidance could mean billions of dollars in increased revenue, particularly in the extractives sector," World Bank's Otaviano Canuto said in a blog posted on the multilateral lender's website.

Canuto is the Bank's Senior Advisor on BRICS, Development Economics Department.

He has written the blog along with Havard Halland, Economist with the Governance and Public Sector Management Unit at the World Bank.

The OECD convention, which has now been signed by 58 nations, including India, provides for sharing of information and mutual cooperation among all its signatories.

Paris-based Organisation for Economic Cooperation and Development is an international policy-advisory body that sets global tax standards.

Citing estimates from Boston Consulting Group, the blog said that Switzerland's financial sector manages about $2.2 trillion of offshore assets.

According to the blog, dated October 22, Switzerland is one of the main global transaction hubs for the oil, gas and mining sectors, which in many developing countries dominate production and exports.

Companies in this sector, it has been claimed, frequently dodge billions of dollars in taxes payable to developing countries by shifting profits to low-tax jurisdictions, it added.

Attributing to ‘one widely cited estimate’, World Bank said that African countries annually lose $38 billion to abusive transfer pricing, one of the main forms of profit shifting.

"To place that figure in context, it slightly exceeds the flow of development assistance to the continent.

“Other estimates suggest annual losses from corporate tax avoidance for developing countries range from $98 billion to $160 billion," it said.

As per the blog, Switzerland's decision to share tax information is the latest addition to radically increase transparency of tax information over the last five years.

Companies resort to various tax planning avenues that help to artificially reduce profits, obscure ownership, or outright evade tax and includes abuse of transfer pricing mechanism.

Transfer pricing refers to the pricing of goods and services traded within the same company, or groups of related companies.

Since prices for intra-company trade are not set by the market, the same can be artificially inflated to shift profits to low-tax jurisdictions.

Another way is false re-invoicing, that makes use of the secrecy of tax havens to change tax-relevant invoicing information.

"In many developing countries, these practices take place in a tax environment that is already heavily tilted towards the private sector, particularly in the form of large tax incentives for oil and mining multinationals," the blog said.

However, the World Bank observed that many countries are often not able to make full use of tax information sharing agreements.

"Within the existing treaty framework, wealthier countries can reserve the right not to share information with weak tax administrations in developing countries, citing concerns about confidentiality and data protection," it added.