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BW Businessworld

A Haven, But Not For Taxes

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The peak of summer brings rains to India, but for the rich countries of the north it means balmy days under a gentle sun. For their people it is time to expose themselves on a beach in Mexico or Morocco; for their leaders it means meetings in beautiful surroundings. By their standards, the leaders of Group of 8 chose well; Lough Erne made an attractive frame for their collective pictures. Their communiqué, however, will not be regarded equally favourably. For one thing, it was replete with advice to everyone else, and left themselves completely out. For another, it was advice that is unlikely to be followed. It told companies to find out who owns them, to pay taxes conscientiously and tell tax collectors what taxes they have paid elsewhere in the world. They seem to have got their law wrong here. Companies are owned by their shareholders, whom they send copious correspondence. In that sense they know who their owners are, and the information is always available to tax collectors. The leaders’ problem arises because many of the shareholders are themselves companies, which are often registered in countries termed tax havens.

In other words, the information that the leaders’ governments would like to lay their hands on is with other governments; all that the leaders have to do is meet their leaders in equally beautiful resorts, and persuade them over champagne to hand over the information. But let alone champagne, not even vodka is likely to do the trick, for those countries are in the business of attracting companies, and confidentiality is part of their charm. Their business prospers because of advanced countries’ high tax rates. Their leaders are unlikely to hold equally ostentatious meetings in Bahamas or Virgin Islands; but if they did, their communiqués would advise advanced countries to reduce their tax levels to reasonable levels. Faced with gaping fiscal deficits, the latter would consider the advice unreasonable, but it is reasonable for countries to differ on what is reasonable. The only solution is international harmonisation of tax rates; cross-national preaching is no substitute.
 
Some of their advice would have made better sense if some context had been provided for it. The leaders instructed companies to mine legally, pay taxes to the relevant governments, disclose such information freely, and not to mine in conflict zones. This advice may be directed at Reddy Brothers, who carted away iron ore from Karnataka, then ridden with conflict between Yediyurappa and the top brass of the BJP; but that is unlikely. It is possible that the chaos in central Africa or Afghanistan has led some adventurers to make side payments to informal armies and take away gold or diamonds; but if so, it is the disorder that created the business opportunity, not the other way round. So the leaders’ logic could be improved.
 
But their advice to developing countries to roll back protection, dismantle bureaucracy at their borders and allow quicker and easier movement of goods is relevant and appropriate. Although the European Union is hardly a model for the rest of the world just now, a Bengali Union between Bangladesh and surrounding India would do both a world of good. It would legitimise movement of goods which occurs illegally just now, and create industry and employment that would give many Bangladeshis work where they are instead of having to dodge border security forces and pay intermediaries who facilitate communication between the forces and their victims. This is elementary economics well within the understanding of our Prime Minister. But after Mamata Banerjee’s vociferous tactics stopped his proposed river sharing agreement with Bangladesh, he has been frozen into inaction on the eastern front. It may happen or not happen, but one possible consequence of his stepping down would be that it may bring in a more active and courageous prime minister. But his successor may well be one whose extremism brings the country to the edge of the cliff. Reason does not have much space in the political market. 

The author is Consultant Editor of Businessworld.

ashok(dot)desai(at)gmail(dot)com

(This story was published in BW | Businessworld Issue Dated 29-07-2013)