TIOL - COB( WEB) - 950
DECEMBER 12, 2024

By Shailendra Kumar, Founder Editor

I would like to begin this week's Column with a few titillating teasers - certainly not strenuously quizzy! However, the only clue I would like to share with you is that this is about one of the erstwhile tax sanctuaries which demonstrated rare obduracy to cooperate with the OECD-mandated tax transparency measures, for pretty stretched period of time! Boo! This tax jurisdiction is one of ONLY two doubly landlocked countries worldwide. Hmm! Let me clue you in by informing you that one of such countries is Uzbekistan. It may sound scintillatingly weird but this country is unique in terms of having more workforce than its total population! Its population is 40,000 but it has a workforce of 42500! Think fast! Let me share another tip-off. It has second highest per capital income in Europe, behind Monaco. Eek! It has only 1500 civil servants - barely 4% of its population unlike other European countries with figures ranging between 11% to 17%. The share of its industrial sector is 42% of GDP - much higher than the average of 15% for EU! And the last hint is that its main bank was the epicentre of the first round of black money-related global headlines during the economic meltdown period!

I am confident that many of you might have sniffed it out - this is Liechtenstein. This is among six smallest European nations - Andorra, Malta, Monaco, San Marino, and Vatican City. Its total area is about 160 sq km. It is nestled in the Alps and is located between Austria and Switzerland. It is a popular winter sports hotspot in Europe. Although its capital is Vaduz but its largest city is Schaan. Its per capita income is USD 197,000! About a century back, it was known as a mirror of penury in Europe! It has more workforce than its population because a large number of people commutes daily - 59% from Switzerland and 37% from Austria. Labour force participation is over 76% - a bit higher than the EU - 74.9%. Its unemployment rate is below 2%. It has a constitutional, hereditary monarchy system of democracy with five-member cabinet nominated by parliament and appointed by the prince for four-year-term. After the first World War, when the rich and wealthy were looking for safe vaults, it adopted the policy of granting freedom for tax and financial privacy and made oodles of money. Like Switzerland, it legislated on stringent bank secrecy law which enabled it to flourish as an elite financial centre in Europe. It grew bigger with incremental relaxation in cross-border movement of capital, electronic payments and progressive easing of withholding taxes. And it emerged as a tough competitor for other tax havens like Monaco, Andorra, Cyprus and Cayman Island.

Back in 2008, it grabbed global headlines when a computer technician of its main bank LGT Group sold the data of its depositors to Germany and Britain. The data siloed in several CDs contained names and nationality of tax evaders from Germany, Britain, Austria, India and many others. The whistle-blower earned a neat sum of USD 4.2 mn by selling the data of 900 wealthy tax dodgers of German origin. Quickly jumping on its feet, the German tax authorities soon recovered over USD 41 mn from 160 social elites. Later German tax authorities arrested dozens of citizens and also recovered taxes with penalty. The then Germany used to lose about USD 30 bn in tax evasion annually and about 15% of it used to enrich LGT Group coffers. German prosecutors launched prosecution against the LGT Group which was later settled for USD 67 mn in fine. Like Germans, hundreds of rich and famous from Britain had also availed tax shelter services from the LGT Group. So, predictably, the HM Revenue also bought CDs from the same informer for an unknown price. A nationwide hunt was launched and an amnesty scheme was also introduced. Finally, tax revenue to the tune of 400 mn pound was collected. Apart from Britain, other countries which also collected data about their own citizens were the US, Finland, Denmark, Belgium, Spain, Sweden, the Netherlands and Norway and all of them benefited.

A few dozens of Indian names were also detected in the database purchased by Germany. Although the data was offered free of cost to India but the political leadership was too wary and suss to barrel quick response. Tut-tut! India was too reluctant to ride on the coattails of successes of German tax authorities. Perhaps, it was because of the impending general election! When the media reported it widely, the CBDT was mandated to collect the names and initiate probe. In total, 88 names with their wealth parked in the LGT Group of banks were received - many turned out to be stock brokers. Though making recovery on the basis of stolen data was a big legal challenge but after culling out other evidences, the Income tax department finally managed to persuade many for self-declaration and also collected some taxes. A few opted for litigation and also won their cases. It is not that the CBDT lost all cases! Worldwide, there are many examples of recovering stolen wealth but India had no such past experiences. Anyway, owing to this controversy, Liechtenstein later warmed up to discuss tax avoidance issues with many countries and inked an agreement with the UK in 2009 and shared data relating to 5000 British customers holding deposits in the range of 2 to 3 million pounds in secret accounts. They were offered lesser penalty if they made voluntary disclosures.

Since then this small tax jurisdiction in Europe has been signing tax treaties with many European countries and has also complied with the FATF and OECD-mandated tax information exchange agreement. All these pro-active initiatives proved grist to its mill and enabled its political leadership to rise to the level where it could muster enough confidence to apply for the IMF full-time membership in May 2023. After due diligence and physical visits by a delegation to Vaduz, the IMF welcomed it as the 191st member on 21st October, 2024. And its initial quota is SDR 100 million - about USD 134.7 mn. Since 2008, it took 16 years for a small tax haven to become transparent and get sucked into the global financial systems for better future growth. However, it does not mirror the general trend for other tax havens which continue to thrive in flock. Though many out of a list of 94 tax havens have opted to transform global perception about their economies but dozens still remain cloaked in secrecy and non-cooperative. They continue to provide tax shelters and harmful tax schemes for the global tax system.

As per Tax Justice Network Report 2024, MNCs and wealthy individuals continue to rob countries of legitimate revenue of about USD 492 billion annually by underpaying taxes. About 43% of such losses are enabled by eight economies which remain pitted against a UN tax convention, and they are the US, the UK, Japan, Australia, Canada, New Zealand and Israel. Sacré bleu! Biggest enablers of global tax abuse are weirdly the biggest losers too - USD 177 bn is lost by these eight economies that recently voted against UN tax convention; USD 189 bn by 44 abstainers, and USD 123 bn lost by 110 countries voting for it. What loudly demonstrates abject failure of OECD's reform bids is the prevailing state of affairs where MNCs are shifting more profit into tax havens and underpaying their taxes. Offshore tax evasion by wealthy individuals may have dropped, but by far less than claimed! Though automatic exchange of information under Common Reporting Standards (CRS) does work but the majority (about 63%) of wealth hidden offshore remains unexposed as all nations do not participate in OECD's tax transparency framework. As per Tax Justice Network, out of offshore wealth worth USD 11 trillion, only about 47% is exposed through Common Reporting Standards so far! Secondly, CRS is far less effective in digging out portfolio investments due to loopholes! In a nutshell, all the efforts made by the OECD since the BEPS days have failed to dismantle the latticework of offshore financial network of tax havens in the past decade! Tant pis!