Poor Paul Erdman and Christopher Reich. Having constructed elaborate plot lines involving secret Swiss bank accounts, they might just be the most tragic victims once these banks change their way of business. For the other victims, let’s not shed a tear.
Because, on the whole, it’s good news that stashing money away in secretive tax havens is becoming more difficult. The Wall Street Journal reported late last month that Swiss banks such as UBS are cracking down on clients whom they suspect of “dodging home-country taxes”. What’s particularly good here is that this haven, concerned about protecting its reputation, appears to have taken it upon itself to transition to a more transparent order. After Switzerland, others may follow suit.
No doubt, political force has played a role over time: Starting with US law enforcement in February 2009, countries have been pressuring banks in Switzerland or Liechtenstein to identify criminal clients. The Group of Twenty last year made tax transparency key to transforming global finance.
But politicians didn’t overreach then, relying more on diplomacy (including the threat of action) to persuade UBS and others that the old order—where two havens compete to offer the least taxation—won’t work. As this idea—tax competition in the extreme can be harmful—gains ground, the havens themselves are figuring out the rest.
It could have been much worse. In India last year, an entire election campaign veered off course to obsess over this issue, prompting concerns that the government may enact retroactive laws—make past actions suddenly illegal, allowing bureaucrats to chase old cases. Even now, there are suggestions about a joint parliamentary committee to probe tax havens, given their relevance to the Indian Premier League saga.
But, as we wrote in these columns last year, legislation isn’t the way out. Changes in laws could give bureaucrats too much power to chase even correct tax assessments, or exercise massive discretion in deciding what is proper tax saving and what is outright evasion. Most of all, legislation should not void India’s own attempts at diplomacy and enforcement. Forinstance, the government has to be mindful if its own domestic laws affect foreign tax treaties.
After all, it’s now that India is getting around to ensuring exchange of information with tax havens, as well as classifying tax jurisdictions as cooperative or non-cooperative, as recent reports suggest. The Europeans themselves have used such blacklisting to great effect. As the Swiss will tell you, these measures can be quite potent.
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