The most significant outcome of the recently concluded G20 summit is perhaps its resolve to crack down on tax havens – unprecedented as it is, its implications are not entirely clear.
In the communiqué of April 2, the G20 promises to “take action against non-cooperative jurisdictions, including tax havens” and declares that it stands “ready to deploy sanctions to protect our public finances and financial systems”, since the “era of banking secrecy is over”. The sudden concern is not surprising – for example, recent reports have suggested a clear link between tax havens and the financial crisis, and France for example is reported to have seen money worth several times its GDP disappear to these financial institutions. French President Nicolas Sarkozy reportedly threatened to walk out of the Summit unless strong action was promised against tax havens. The OECD has been for a few years publishing a list of “non-cooperative jurisdictions”, and the worst offenders have been Costa Rica, Malaysia, the Philippines and Uruguay in terms of sharing information.
Following the pledge at the G20 summit, all nations, including the four mentioned above, have been taken off the ‘non-cooperative’ list. This now entails a commitment for several nations to share information that was hitherto undisclosed, bringing with it the distinct possibility that these States will no longer attract the sums of money that they have been. While India is not directly affected by this decision, since it is not a tax haven, it is important to note that India’s biggest source of FDI is Mauritius, a tax haven. Mauritius accounted for two-fifths of India’s FDI in 2007, with investment of $11 billion.
What counts in Mauritius’ favour is that its recent OECD-compliance record has been improving, and it is now classified in the ‘least-risky’ category. Furthermore, given that this move applies equally to competing tax havens as well, it is possible that Mauritius’ investments do not dip as drastically as one might expect. This, of course, remains to be seen.
The communiqué released by the summit is available here. This report carries an excellent analysis of the summit in general, and HT examines the implications of the summit for India. Other comments on the summit and tax havens are available here and here.