Mauritius: The Future Of International Financial Centres: Special Focus On Switzerland And Mauritius

Last Updated: 25 April 2001
Article by Ludovic Charles Verbist

International Finance Centres (IFCs), also sometimes called Offshore Centres or Tax Havens, have recently been pressured to change. Several international organisations have taken initiatives to curb the activities or alter the way these IFCs are working. We will try to show the likely consequences of international institutional pressure upon the future of these IFCs.

The Attacks

From an institutional point of view, attacks on the existing environment have been coming from several direction, namely taxation, disclosure of bank information, global financial stability and money laundering.

Indeed, the Organisation for Economic Co-operation and Development (OECD) targets tax issues, and what it views as "harmful tax practices". It first published in 1998 a report on harmful tax competition; 47 countries were targeted as tax havens to be investigated according to the following criteria:

  • no or nominal taxation, in conjunction with;
  • lack of effective exchange of information;
  • lack of transparency absence of any real economic activity

35 countries were included in the list published on 26 June 2000. Switzerland and Mauritius are not on this list. A second list will be published in July 2001, giving them the names of countries who have not been co-operative and targeted with sanctions.

The OECD also issued a report "Improving access to bank information for tax purposes". It stresses the importance of the elimination of anonymous bank accounts and the need for exchange of information for criminal tax cases; it lists initiatives to achieve access to bank information for civil tax cases. A spokesperson for the Swiss Government insisted that Swiss bank secrecy was not negotiable.

The Financial Action Task Force (FATF) looks at anti-money laundering laws. It issued a report on 14 February 2000 on "Non-Co-operative Countries or Territories", which defines procedures to target those not having or not putting in place effective anti-money laundering laws and procedures. A blacklist was consequently published; Switzerland and Mauritius are not included.

The Financial Stability Forum (FSF) is concerned by the global financial stability. It set up a working group in April 1999. This group published a report on 5 April 2000, which included a list of three groups of "Offshore Financial Centres", according to the perceived degree they followed international standards, group 3 being the worst. Switzerland was included in group 1, Mauritius in group 3. Switzerland later issues a statement saying that it did not consider itself an "Offshore Financial Centre", and should thus not have been included in this list.

The UN, through its Offshore Forum, also follows enactment of anti-money laundering legislation. But it monitors all countries and not just IFC.

The EU aims to see all its residents taxed in similar ways, regardless or their residence. It therefore pursues tax harmonisation and seeks to impose upon all its members a minimum level of taxation, but also communication on tax matters. This will also be "negotiated" with non-members, such as Switzerland, for example.

Finally, the Internal Revenue Service (IRS) of the US has enacted new rules, under which any US paying agent of dividends, interests, royalties or proceeds of sale must know the identity of the beneficial owner (BO); the purpose of which is to ensure that all taxes due by US citizens are indeed paid. The BO must fill forms provided by the IRS, to make himself known. However, starting on 1 January 2000, under certain very strict rules, agreed foreign playing agents (Qualified Intermediary-QI) can certify that the BO is a non-US citizen but without communicating his identity to the IRS, and then get tax relief on his behalf.

The Responses

What is the reaction of IFC to these wide and strong attacks? In fact, up until late spring 2000, the almost unanimous reaction of the targeted jurisdictions was to try to ignore these attacks, under the following ARGUMENTS:

  1. we are all sovereign States. Why would these (rich and developed) countries impose upon us laws against our will, which would certainly infringe upon our sovereignty?;
  2. these countries all supposedly want to establish a world where free competition should be the rule, under the auspices of the World Trade Organisation. Why, in that case, can they not accept tax competition?;
  3. rather than force upon us increased levels of taxation, would these countries not better reduce their own level of taxation, often seen as the first reason for their residents to try to keep income or wealth untaxed or less taxed in OFC?

But today, these arguments are not heard any more. All blacklisted IFCs want to be removed from these lists. Indeed, regardless of the validity of the above mentioned arguments, the sanctions to be enacted upon such IFCs, under the various initiatives would likely include one or more of the following: full disclosure of all parties involved in any bank transfer, the refusal to accept any bank transfer, freezing such funds is some suspicion was raised, financial sanctions administered by the International Monetary Fund (IMF). Such sanctions would basically threaten their very survival as IFCs; it is indeed hard to imagine how such countries would be able to operate in the financial arena if bank transfers were rendered impossible.

Presumably, the need for bank control and regulation, in order to avoid any kind of disruption to the global financial stability, cannot be seriously challenged. It will probably be more a matter of agreeing on rules, procedures and staff training for Central Banks of IFCs. These days Switzerland is viewed as having the necessary legislation in this domain; ?Mauritius is working with the IMF to further strengthen its existing controls and procedures.

Similarly, most if not all countries will be ready to follow the injunctions with regard to money laundering. It is safe to assume that no single country would want to be known of as promoting or even condoning money laundering. It is safe to assume that no single country would want to be known of as promoting or even condoning money laundering. This includes all such actions derived from drug money, prostitution, serious crime and arms trafficking. Appropriate legislation has been passed in this area of concern, both in Switzerland and Mauritius. Although the Authority set up in Switzerland to control anti-money laundering still seems to be under-staffed, the necessary steps to guarantee its good functioning are being taken. The Mauritius Economic Crime Office (ECO) is working and already instructing several cases of alleged corruption, both onshore and offshore.

But resistance is encountered for alleged crimes resulting from tax evasion, as defined by the law in many OECD countries. Most IFCs do not view tax evasion as a crime; it is therefore evident that there can be no money laundering resulting from tax evasion under their laws. This is the case for both countries under review, Switzerland and Mauritius. Anti-money laundering laws, both in Switzerland and Mauritius, provide for exchange of information, but this is not applicable to tax evasion. However, it must be pointed out that the endeavour to harmonise EU taxes as well as the new US QI rules have and will further erode the banking secrecy rules.

Finally, in order to be removed from the OECD blacklist and no longer be accused of carrying out harmful tax competition, the 35 countries listed will be forced to levy some taxation on all their corporate vehicles. For those IFCs who engaged primarily into incorporation of IBCs with a zero tax regime, such changes might hit very hard in the attractiveness of their international financial activities. If these IFCs do not have other financial activities or special expertise to propose, it is very likely that their financial services sector will shrink very fast. Indeed, if a major attraction to international clients was to have a zero tax IBC, its taxation would render such vehicles unattractive. Switzerland and Mauritius are not on this blacklist. It must be noted that Mauritius still offers a zero tax IBC.

Conclusion

We anticipate that many IFCs will see their level of financial activities decrease greatly. Indeed, either they will give in to the OECD pressure and allow for some taxation on their corporate vehicles, and therefore lose their attractiveness, either they will not bend to this pressure, but will risk to be effectively locked out of the international financial arena.

On the other hand, IFCs which have more to offer than exclusively tax based attractions, will continue to grow in this field. Such services mainly include private banking; investment funds; holding and investment companies; regional headquarters; international tax planning using double taxation agreements and insurance and reinsurance. This is, in our view, the case off two countries under review, Switzerland and Mauritius.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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