Financial market, as the most globalized part of business today, should assume some responsibility. Tax havens are undermining heavily several human rights, but few realize the overall effects.
Developing countries are suffering under the drain of money caused by worldwide tax competition. By setting taxes to a very low level, countries like Switzerland, Seychelles, Mauritius and many more deliberately attract global companies. The so-called letterbox offices are not producing notable administrative costs. These are incurred in countries where companies are really established.
194 companies under the same roof
Let us take the city of Zug in Switzerland as an example. Metaphorically speaking, how many companies can be under the roof of a medium-sized house with five floors? In Zug, there are about 194 registered companies. As every municipality in Switzerland can set its own tax level, the competition between the several communities is rather high. Ironically, the local governments are afraid of losing important income from taxes by raising taxes, especially for enterprises or affluent individuals. “In the end, no one is profiting from this competition,” says Markus Henn of the NGO World Economy, Ecology and Development. ”No one except the leaders of big companies.”
Shady system
An important way for companies to avoid taxes is by changing structure internally. By establishing subsidiaries, the companies make it possible to transfer earnings from one country to another. For this internal transaction, the companies pay a certain transfer price, which itself has an influence on the final balance sheet—and therefore on the amount of money a company needs to pay as taxes. The Organisation for Security and Co-operation in Europe (OSCE) has a certain policy regarding costs for transactions within the same company; they should pay a price which is close to those listed on the market. So a company should price an internal transaction as high as a transaction externally. Tracing transactions from parent organization to subsidiaries and back and forth is nearly impossible for tax authorities.
It is getting worse
The tax competition became stronger in the last decades. A study of the Organisation for Security and Co-operation in Europe came up that the average tax rate in 1982 among their member states was a little more than 50 percent. Until 2006, this rate had decreased up to percent. The tax justice network published the Financial Secrecy Index, where Switzerland was the third shadiest financial market, following the Delaware in the United States and Luxembourg. The bad performance of a country from the middle of Europe can be partly traced back to the fact that Switzerland has a special law which excludes certain companies from paying tax on earnings on a state level.
While tax authorities are trying to find hidden money, the constant fight for the lowest taxes violates human rights. While developing countries are carrying costs for infrastructure, companies are not paying for them thorough taxes. The NGO Attac estimates that an amount between 641 USD up to 941 USD is going from to developing countries to the so-called tax havens. The local government in Switzerland is meanwhile still convinced that they are profiting out of the companies only present by letter boxes.
By: Luzia Tschirky
