Pitches for measures to reverse illicit outflows from developing countries

Calling for greater bilateral and multilateral cooperation to end the era of banking secrecy, Finance Minister Pranab Mukherjee on Monday pitched for strong measures to reverse the ongoing trend of illicit outflows from developing countries and exploitation of natural resources through ‘abusive' transfer pricing schemes.

Inaugurating a two-day international seminar here on taxation laws jointly organised by the Finance Ministry and the Organisation for Economic Co-operation and Development (OECD), Mr. Mukherjee said this abusive transfer pricing mechanism was robbing developing countries of their scarce resources that were required for funding developmental programmes.

Mr. Mukherjee lamented that despite the global efforts and statements issued by G-20 leaders at the London summit in April, 2009, the global banking system had still remained opaque in various non-tax and low tax jurisdictions. He pointed out that while the ‘Global Plan for Recovery and Reform' statement of G 20 leaders gave a call to take action against non-cooperative jurisdictions, including tax havens, “the spirit of this statement has not been respected.”

“We cannot say with certainty that the bank secrecy is over in all cases. While the countries have accepted to end bank secrecy in general, some countries have agreed to do so only from prospective date and are not willing to exchange past banking information. This puts a question mark on the efficacy of present legal provisions for exchange of banking information. There is an urgent need to revisit existing legal framework developed by OECD in this regard,” Mr. Mukherjee said.

Highlighting these issues at the seminar assumed significance as the OECD is a 34-member ‘rich club' grouping of developed and developing countries, which has been playing a major role in bringing about reforms in the international taxation system, especially after the global financial crisis impacted all economies around the world in varying degrees.

On the issue of transfer pricing Mr. Mukherjee pointed out that while the abusive practice had been robbing developing countries of their scarce resources, the rising number of disputes in international taxation matters was an area of concern. Owing to linkages with the global economy, such tax disputes were not just bilateral in nature, but had assumed a multilateral character involving multiple countries. “These challenges of the new global environment will have to be addressed through bilateral and multilateral cooperation,” he said.

Mr. Mukherjee noted that the global economies may also have to think in terms of a multilateral tax convention to address the issue as experience clearly shows that non-resolution of disputes result in unending litigation.

Listing the steps that India has taken so far, Mr. Mukherjee said the process of renegotiation of tax pacts with 65 countries had been initiated to broaden the scope of provisions governing the exchange of banking information and information without domestic interest. Till date, a total of 14 tax exchange information agreements (TIEAs) had been completed and talks concluded on double taxation avoidance agreements (DTAAs) with 36 countries in 2010-11.

The Finance Minister noted that since tax competition driven by the presence of tax havens had created an unhealthy situation and aiding individuals in parking undisclosed income abroad, the emphasis of cooperation to track such outflows had to be on professional and skill upgradation in tax administration and in industry.

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