Shivakantjha.org - Triplet 11 - Switzerland: A tax haven sui generis
Switzerland: A tax haven sui generis
By Shiva Kant Jha
April 3, 2009
THE policy of confidentiality in Switzerland is the product of its policy of neutrality it maintained in course of history reaffirmed by the Treaty of Versailles and the Declaration of London in 1920. The practice of banking secrecy grew to the present form on account of factors, inter alia, the following :
(i) The geo-political reasons which led Switzerland to maintain neutrality were responsible for generating faith of people that their wealth under the Swiss system was safe. To say the obvious, the most important factor ensuring safety is secrecy.
(ii) During the inter world War period it was essential to ensure secrecy in matters of transaction in bank accounts as there was an evident risk of confiscation of the accounts of the Jews by the Nazi.
But whenever any government produced proof of corruption on the part of the investors the Swiss authorities co-operated to promote the cause of justice. But things should be different if at any subsequent point of time it is shown to the competent authorities that any specific amount of wealth in the Swiss banks represented the proceeds of crimes. The story of Bofors illustrates the high water mark of the judicial process is Switzerland. The Bofors investigation stood frustrated mainly because of the lack of political will of our country, and remissness on the part of our agencies.
But other tax havens have a different track-record. They were established with an obvious purpose to provide vaults for the wealth of the rich, and shelters for the crooks. The Caribbean tax havens evidence a specialty of the Caribbean economy low tax and confidentiality. Known as financial centres they help commission of financial crimes. On account of displeasure of the United States and the actions of the Paris-Financial Action Task Force some drastic actions were taken. To illustrate with reference to the Bahamas: in February 2001 the Bahamian government cancelled licenses of many offshore banks. It band more than 1,00,000 International Business Companies registered in the Bahamas but with anonymous ownership. Naura, (population 12,100), a tiny dot above Australia is doted with four hundred offshore banks whose ways invited serious displeasure of the Financial Action Task Force on Money Laundering. A common device is to set up holding companies in the tax haves. In this game players come from different parts of the world. It is said that some Saudi Arabian prince hold in netherlands Antilles and many others " hold billions of dollars worth U.S. real State through Antilies holding companies" India too has produced may bad patriots. We have heard a lot about Saint Kitts. We could have known much about the ignoble adventures of our bad patriots in may such destinations if our Government would have been patriotic enough to consider the interest of the nation supreme. Liechtenstein was held guilty of money laundering and also in concealing millions of dollars for the drug cartel based in Cali, Colm.,
In its eagerness to make Mauritius a most inviting tax haven the operative system has been made opaque. It is in the public domain that several government agencies sought information from the Mauritian Authorities about the entities operating through mauritius but they didn't get good response. One thing more as a matter of policy these mauritian authorities didn't investigate the affairs of such entities, they had, in fact, hardly anything to supply. In the letter of assurance dated May 24, 2000 sent by the Minister of Finance of mauritius to the Secretary-General of the OECD submitted apropos the runs as under:
"OECD's Report, "Harmful Tax Competition : an emerging Global Issue" (the "OECD Report") said that the Government of Mauritius would elimination of harmful tax by administrative and legislative actions, and would ensure effective exchange of information in tax matters, transparency, and the elimination of any aspects of the regimes for financial and other services that attracted business with no substantial domestic activities in a phased manner by the end of the year 2005. Mauritius assure that it would refrain from introducing any new regime that would constitute a harmful tax practice under the OECD Report."
But in effect the assurance given was just an exercise in appeasement. The USA and the European countries are bothered about other tax havens. So far our country is concerned, it has allowed the tax haven routes to be misused for reasons well known. Vested interests in our country seem to be interested in an opaque system, Precisely this fact can explain India's seeming silence on subjecting the tax havens and offshore financial centres to discipline and sunshine.
The tax havens justify what they do on the ground of their sovereign rights to manage their economic affairs within their domestic jurisdictions. This should be clear from what happened at the Malta Conference of the Finance Ministers held in September 2000. The 2001 Britannica Book of the year mentions;
"At September 19-21 Commonwealth meeting of Finance Ministers in Malta, many small vented anger at attempts by the Organisation for. Economic co-operating and Development to impose economic sanctions by July 2001 on 20 Commonwealth countries operating offshore financial centers they complied with OECD tax rules. Those countries insisted that as sovereign states they reserved the right to impose their own tax regimes. The ministers also renewed attempts to speed debt repayment, a matter that, owing to Commonwealth pressure led by successive British governments, had begun to pay off, only 10 countries still qualified for relied, however."
The present-day global economic crisis has made the world leaders to reflect over the tax havens and offshore financial centres. People think that something effective would be done in the London Economic Summit of April 2, 2009 to subject the transactions through such countries to a searchlight. Let us see what turns out. It is unfortunate that questions pertaining to Switzerland has got caught up in the whirls of European politics. Germany and France want a tough action against tax havens. They have good reasons to harbour grouse against Switzerland for historical and political reasons. It is difficult to predict the course of events going to take place. A prudent course is required to be adopted, otherwise the political fall out may not be good for the world.
A corporation cannot be an impervious coverlet of gross abuse
A corporation evolved as an a form of business organization with a high quotient of public interest. It was not conceived as an impervious coverlet (see Gower's Principles of Modern Company Law). Our Supreme Court made a succinct exposition of principles in Life Insurance Corporation of India Vs Escorts Ltd (AIR 1986 SC, 1370) and CIT Vs Sri Meenakshi Mills Ltd (AIR 1967 SC 819). The courts have all along sustained the jurisdiction of the authorities to tear the corporate veil to ensure that no fraud on revenue is committed. In New Horizons Ltd. Vs Union of India (1995) 1 SCC 478) the Supreme Court examined the doctrine of lifting of the veil in all its details, and held that it could be invoked when the corporate personality is found opposed to justice, convenience, or interest of revenue. In Juggi Lal Kamlapar Vs CIT (AIR 1969 SC 932) the Court held that "in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. "In State of UP Vs Renusagar Power Company (1988) 4 SCC 59), the Supreme Court recognized with remarkable assertion the expanding horizon of modern jurisprudence in warranting lifting of corporate veil. It said: Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation.......... The horizon of the doctrine of lifting of corporate veil is expanding." The Court, as the guardian of public policy, would not only frustrate a company's attempts to reap profits from serious crimes but would also not allow it to be used as a facilitator of future criminality. The decision of the Court of Appeal in (R v Registrar General, ex parte Smith (1991) 2 All ER 88) provides guiding principles. It held that Public Policy would enable an authority even to ignore a mandatory legal provision if compliance with that would promote some criminal activity, whether already taken place or apprehended to take place.
Great creative strides in the corporate jurisprudence have occurred in modern times. These developments have been concisely set forth by Rose L J in Re H [(1996)] 2 All ER 391):
"As to the law, the general principle remains that which was enunciated in Salaman V Salomon & Co.........., namely that a company duly formed and registered is a separate legal entity and must be treated like any other independent person with its own rights and liabilities distinct from those of its shareholders. But a succession of case throughout the twentieth century show, a Danckwers L J said in Merchandise Transport Ltd v British Transport Commission, Arnold Transport (Rochester) Ltd V British Transport Commission.
'.......Where the character of a company, or the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance.'
In Adams Vs Cape Industries plc (1991) All ER 929 at 1024) Slade L J, cited this passage and added. 'The correctness of this statement has not been disputed.' The court also assumed to be correct the proposition that-
'the court will lift the corporate vell where a defendant by the device of a corporate structure attempts to evade (i) limitations imposed on his conduct by law........'
The principle warranting the lifting of the corporate veil is an essential principle of civilized jurisprudence. This is evidenced by the fact that this doctrine has recognized by the International Court of justice. In the Barcelona Traction, Light and Power Company Ltd, it (1970/ICJ) noticed "the profound transformation which have taken place in the economic life of nations", and, after discussing the circumstances in which this doctrine is invoked in domestic jurisdictions, stated that the process of lifting the veil "is equally admissible to play a similar role in international law". This approach accords well with the view of Klaus Vogel (Klaus Vogel on Double Taxation Conventions Pg. 125) that in evaluating artificial transactions structured for tax avoidance purposes it is proper to see the operative realities rather than their formal profile to quote:
"….. an artificial transaction created merely for tax avoidance purposes should be judged according to its substance rather than according to its form. According to the view of this commentary, this originally domestic rule applied as a ‘general legal principle recognized by civilized nations' and is also applicable in the relationship between contracting States of a DTC…."
Treaty-shopping the ratio of A Rickshaw Puller Vs A Rickshaw Puller
WHILST arguing before the Hon'ble High Court the case which questioned the misuse of the Indo-Mauritius Double Taxation Avoidance Convention, I told the Court the story of A Rickshaw Puller Vs A Rickshaw Puller. Do not try to find out this case in the books as it is not there. Everyone knows the cases of Shylock Vs. Antonio and Jarndice Vs. Jarndice. These cases are stated for illumination, but never cited as authorities. The Antonio's Case is narrated in Shakeshpeare's A Midsummer Night's Dream to highlight the greed of the hard-hearted shylock, and Jarndice's Case is from Dicknen's Bleak House wherein law's delays ruins the litigants but delights the greedy professionals. These are expanding metaphors expressing more that the legal volumes.
A Rickshaw Puller Vs. A Rickshaw Puller is the figment of my delight. I got the nuggets of its plot in course of my conversation with someone I met in the JJ Colony which is had visited, on the request of the
Hon'ble High Court, along with Mrs. Mittal, (now one of the Hon'ble Judges of the High Court). The story goes thus:
Two rickshaw pullers case from Bihar and settled down in the Colony. They had with them their families. To economize on their resources and to reduce the drudgery of the domestic chores they entered into a gentleman's agreement that whilst junch was in the house of one, the dinner was to be had in the house of the other. They were good friends and assumed good faith. But one of the them turned greedy. He felt that reaping benefits at all costs is the very way of the world. Lucifer's logic sprouts naturally when Mammon casts it spell. The other rickshaw puller found that not only his friends' wives multiplied, even his children grew by leaps and bounds. When questioned he said that his certification was itself a sufficient evidence. When the other contracting party grumbled and protested, he was told to carry out his obligation s he was bound by his words. Change of circumstances did not matter. Having lost everything this way the swindled to go back to his village to become a hapless grain-picker in other's fields. I narrated what happened to this hapless rickshaw puller to my wife though I knew she never had the misfortunes to delve into litigious or forensic matter. "well dear, was it fair and just for the first rickshaw puller to do what he did? She instantly replied; "It was unfair.'
Her verdict led me to initiate that PIL before the Delhi High Court which upheld, by implication to may mind, her verdict with an appreciation in express words for the Petitioner's efforts devoting a paragraph. The litigious odyssey of this Case at the apex Court is too widely known to be set out here. But this story brought to mind what CG Jung had said; "Great innovations never come from above, they invariably come from below…….[From] the mach-derided silent folk of the land those who are less infected with academic prejudice than great celebrities are wont to be."