Tax havens have allowed multinational companies, wealthy individuals, corrupt leaders, criminals and even terrorists to keep their income away from the prying eyes of national tax authorities. In the words of one tax expert, the primary reason for maintaining an offshore trust in a tax haven is to avoid tax.

Tax havens are often synonymous with offshore financial centres (OFC) and secrecy jurisdictions. No consensus exists on which functions must be exercised for a state to be characterised as an OFC. The lack of access into tax relevant information and the absence of public registries in tax havens distinguishes them from corresponding regulatory regimes in the rest of the world. Offshore investors are able to use their accounts to evade reporting responsibilities.

The Organization for Economic Cooperation and Development (OECD) identifies tax havens using any of several features, which could be:

* Very low tax levied or
* By virtue of a zero tax regime on capital income,
* A special tax regime for shell companies,
* A lack of transparency concerning ownership and
* No effective exchange of information on tax issues with other countries and jurisdictions.

Mauritius has been viewed as the Switzerland of Africa - a preferred island getaway of tax evaders and avoiders. The provision of nominee shareholders and directors creates problem for developing countries, for example in the case of Zimbabwe’s conflict diamonds, extracted from the heavily militarised Marange fields.

Grandwell Holdings, the private arm of Mbada Investments - a Zimbabwean joint venture with South African company New Reclamation - was registered in Mauritius. Journalist Khadija Sharife, visiting scholar at the Centre for Civil Society quotes Dominic Mubayiwa, the now suspended head of the Zimbabwe Mining Development Corporation, as saying it would have been difficult to do due diligence on Grandwell because it is a paper company registered in Mauritius. Tax havens create laws and systems through ring fencing of certain investments, which potentially impacts on the source countries of some of such investments. This is a fundamental problem with tax havens. The first characteristic, concerning marginal or zero tax on capital income, helps to make tax havens attractive, but is potentially damaging to other countries. The tax haven secrecy rules, broadly speaking, often frustrate systems that depend on transparency to function. They can also obstruct access to justice to victims of corruption or predatory crime in countries other than the tax haven. Those who experience loss and damage, regardless of whether they are public or private institutions, can be disabled from pursuing claims against corrupt or criminal ‘high net worth’ individuals. The consequence is that illegally acquired funds cannot be recovered. Tax havens also accentuate the challenges that already exist in tracking proceeds of economic crime.

Taxation and tax reform are central to nation building for many reasons. To mention a few, governments must be able to ensure sustainable funding for social programmes and for public investments to promote economic growth and development. Because aid generally diminishes over time and is often volatile, domestic resources are necessary to sustain these institutions and programmes. Therefore, taxation is the main nexus that binds state officials with interest groups such as investors and citizens. Tax policy has been central in attracting foreign investment. There is no explanation as to why tax capacities differ across countries at similar levels of per capita income. Because tax is a more objective measure of governance than many prevailing governance indicators, donors and academics might systematically incorporate it into indicators of fragility, resilience and governance more generally. Going offshore certainly complicates the investigator’s job.

The G20 recently decided to endorse the OECD approach of exchanging information about companies and individuals suspected of evading taxes on request, rather than the more stringent automatic exchange of information called for by the Tax Justice Network and others. There is clearly a great need for measures that could help developing countries crack down on corporate tax abuse.

Written by Thobani Matheza, Researcher, Organised Crime and Money Laundering, ISS Cape Town Office