The concept of tax havens is perhaps as old as tax itself. There is no universally accepted definition of ‘tax haven’ — any jurisdiction that safeguards the secrecy of ownership, has minimal regulation, and charges nominal or nil tax could fit the bill. Here’s a quick look at two popular tourist destinations that are commonly perceived as tax havens and which were recently in the news.

Switzerland

With an aggregate effective tax rate ranging from 12 to 24 per cent, this Alpine confederation of cantons might escape the tag of low-tax jurisdiction as several other countries such as the Netherlands, the UK and Spain offer similar regimes. Switzerland is not lightly regulated either, but what endeared it to unscrupulous dodgers worldwide were its banking secrecy laws.

However, the famed Swiss secrecy seems to have taken a beating in recent years. Since 2008, the US has doggedly pursued American citizens suspected of tax evasion. It went after the Swiss advisors and bankers who were seen to enable such evasion. It finally managed to arm-twist Swiss authorities to override their strict secrecy laws. More recently, Switzerland signed a convention sponsored by the Organisation for Economic Co-operation and Development, which will enable freer information exchange on tax cheats and money-launderers, subject to approval by the Swiss parliament.

Indians with Swiss bank accounts appear to have read the signals early and have, over the past few years, emptied their vaults. Liabilities of Swiss banks towards Indians have drastically declined, according to data released by the Swiss National Bank. Only time will reveal the new destinations to which the money may have been moved. Sceptics suspect it may have been remitted to India, disguised as dividends from overseas subsidiaries. Conspiracy theorists go one step ahead and link this to the gradual reduction of tax on overseas dividends from 30 per cent to 15 per cent. The Government, however, maintains that the reduction was intended to encourage foreign exchange inflow.

Mauritius

This picturesque island-country, home to about a million people of Indian origin, continues to provide a ticket-free, backdoor entry to the great Indian FDI circus. Thanks to its tax treaty with India, Mauritius has been used as a conduit jurisdiction enabling tax-free profit repatriation and exits from Indian investments.

The Indian taxman has tried various tricks to close this gate — denying Mauritian residential status to post-box companies, disputing their beneficial ownership of Indian shares, levying a buyback tax to stop dividends masquerading as capital gains. Mauritius, on its part, has steadfastly refused to renegotiate the tax treaty, which has served it well.

Mauritian authorities have, however, conceded a few points. They now grant and renew residency certificates only after rigorous ‘know you customer’ checks to address Indian concerns on round-tripping. Recently, Mauritius also beefed up its Guide to Global Business with more conditions to substantiate whether a company’s control and management is actually located in that country. These include having office premises, holding assets, employing staff and using local service providers. It’s enough if even one of these new parameters is met, which makes it seem like a low threshold. Whether the additional conditions make the Indian taxman happy or not, they would surely boost real-estate demand and employment rate in Mauritius.

Meanwhile, the Indian government has armed itself with the General Anti-Avoidance Rules to unilaterally override a disadvantageous treaty clause. But it will not come into effect until April 1, 2015. Moreover, there are doubts over the tenability of unilateral override under international treaty law.

Sudeep Das, chartered accountant, contributed to this article.

The author is a chartered accountant.

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