Assessment of Norfund’s use of tax havens

113

Solidus Investment Fund S.A. Panama Regional Latin America

16 139 0

Horizon Equity Partners Fund III South Africa South Africa -20 049 0

Horizon TechVentures South Africa South Africa 3 425 0

FEDHA Fund Tanzania Tanzania -86 0

* These two funds have a different profile than the others and do not invest directly in developing countries

Of the 35 funds, only six are located in places not regarded as tax havens by the Commission (one each in India and Tanzania, two in Norway and two in South Africa). All the other locations have at least some structures or regulations which suggest that they should be regarded as tax havens, but they do not necessarily function as tax havens for the funds in which Norfund participates. The table also shows that there are a number of examples of funds located in tax havens although they only have one country as their target zone. For example, of the four funds in the Cayman Islands, one is directed at China, one at Thailand and two at Vietnam, while the three funds in Mauritius are focused on Madagascar, Sri Lanka and Costa Rica respectively. Where these choices of location are concerned, the Commission fails to see the relevance of Norfund’s argument that location in a tax haven contributes to avoiding unnecessary tax payments in third countries. In cases where funds invest in only one country, no third country need be involved. One could have established these funds in the country at which they are directed, and only two countries would then have been involved in the activity – Norway and the country where the funds are located. In its argument for using funds, Norfund has maintained that these are often located close to the investment country and that this gives the managers better local knowledge than if the institution had invested directly. This argument does not ring true for all the above-mentioned funds directed at single countries.

114

the benefit of tax treaties which reduce the tax burden on investments in third countries.

The tax planning aspect which the use of tax havens involves runs counter to

Norfund’s goal of paying full tax on its investments in Africa. The Commission also takes the view that the use of tax havens in general conflicts with the overall goals of Norway’s development and assistance policy, including opposition to corruption and economic crime and contribution to economic development.

The Commission has identified the following possible detrimental effects of Norfund’s use of tax havens:

1. Contributes to the loss of tax revenues by developing countries.

2. Contributes to maintaining tax havens by providing them with income and legitimacy which, in turn, contributes to lower growth in poor countries.

3. Contribute to money laundering and tax evasion.

1. Contributes to the loss of tax revenues by developing countries

A goal for Norfund is to contribute to development in the countries where the institution or the funds in which it participates invest capital. This implies that tax revenues should be secured for the host country.

One question is whether Norfund, given its goal, should focus to a greater extent on investing where the highest pre-tax return can be obtained in the developing country, and ignore opportunities for reducing overall tax on these investments through tax treaties and havens, given that reduced tax in such cases could mean a transfer of income from the relevant developing country to the owners of the investment fund – including Norfund.

Placing assets in tax havens can run counter to the goal of contributing to securing tax revenues for the host country. This is because the tax treaties between the host

country and the jurisdictions where the investment funds are registered eliminate or reduce the right of the former to levy tax. This can be illustrated by Mauritius, which has tax treaties with a number of African countries. These reduce the withholding taxes which can be levied by the latter. Such treaties are agreed in part because poor countries lack capital and therefore occupy a weak negotiating position in

circumstances where the tax havens can offer capital.

Tax treaties of the kind mentioned above are not unusual, but the Commission would make it clear that they are formulated on the basis of the domiciliary principle – in other words, the country given the right to tax is the one in which the taxpayer is domiciled. In cases involving legal entities that are merely registered in a jurisdiction and that cannot engage in meaningful activity there (confer GBC1 and GBC2 in Mauritius, see below), no justification exists for such tax treaties on legal, economic and fairness grounds. No justification accordingly exists for giving Mauritius the right to tax GBC1s, as the tax treaties do.

115 Norfund has as one of its goals that tax revenues should accrue to the countries in which it invests. However, the use of a secrecy jurisdiction as an intermediary means, for instance, that some types of capital income are not taxed anywhere. This helps to rob the source country of tax revenues, and the investors rather than the developing country obtain the benefit of the tax saved. The countries which thereby lose tax revenues are those with the greatest need for government income.

2. Contribute to maintaining tax havens by providing them with income and legitimacy

Norfund’s use of tax havens helps to finance the harmful structures in these

jurisdictions through the administration and registration fees it pays. It could also be argued that Norfund, as a public Norwegian fund, contributes to legitimising tax-haven activity if it makes use of their services. Norfund thereby contributes to maintaining the harmful impact of tax havens on developing countries.

This effect would be present even if Norfund did not directly contribute, through its use of tax havens, to tax evasion or money laundering. In chapter 5 and in Appendix 1, the Commission has outlined the way in which tax havens provide a sanctuary where the power elites in developing countries can conceal assets. The fact that such hiding places exist makes it attractive for the power elite to demolish the institutions intended to prevent the plundering of community assets. By legitimising tax havens, such mechanisms will persist and thereby weaken the ability of poor countries to achieve growth.

3. Contribute to money laundering and tax evasion

Given Norfund’s mandate to promote growth and development in the countries in which it invests, investment by the institution in funds must be considered

unacceptable if such activities pose a significant risk of Norfund contributing to the concealment of illegal money flows or to tax evasion. Generally speaking, investment in funds registered in tax havens will present a threat of this kind because the secrecy rules make it impossible for outsiders to know who the owners are and what is taking place. However, most of the investors in the funds in which Norfund has invested are state-owned or international financial institutions and/or local pension funds required to invest in their own country. The danger that these investment funds will be used to channel illegal money flows is therefore limited. Nevertheless, private investors also participate in these projects and may have a different agenda. The Commission has noted that the EDFI, to which Norfund belongs, recommends that its members make an assessment of private co-investors to assure themselves that the funds are not being exploited for money laundering. Norfund has supported this recommendation.

The funds in which Norfund invests are normally likely to represent a very small proportion of financial activity in the relevant tax havens, and the direct investment effect for the tax haven will also be fairly insignificant. On the other hand, the signal conveyed if Norfund ceases to use tax havens could be a strong one.

116