Remember Enron, the US energy company that went bust in 2001 amidst massive fraud by its directors? The biggest financial scandal of the 21st century revealed that the company had 881 offshore subsidiaries. 692 of them were registered in the Cayman Islands, 119 in Turks and Caicos, 8 in Bermuda and 43 in?Mauritius. In the business world, Enron was the watershed. Before Enron was a time where corporate corruption was unthinkable and, after Enron, came an era where a sceptical press launched itself into tracing fraud by multinational companies. Already, the food giant Parmalat has fallen into the net of investigators. This year, the director of another firm, Worldcom, is in court in America, for having ?cooked the books?.

These cases are believed to be the tip of the iceberg. Since then the Organisation of Economic Cooperation and Development (OECD), the United Nations and the G8 have all decided to chase tax evaders, wherever they are. They are demanding more openness from those countries where they believe money is being hidden. But the problem is not so simple.

Much of the money ?laundered? offshore is done ?legally?. A complex system allows companies and rich individuals to hide away their earnings. One of these techniques is transfer pricing. What this entails is that a company can set up a branch in a country which offers nil or low taxation on profits.

Mauritius, for example, offers free repatriation of profits. The offshore firm is then sold the products at a very low price, which are then resold at an inflated price to the different subsidiaries of the company worldwide. All the profits then appear to be made in these low tax countries. In the 80s, despite limited investment in plant machinery or research and development, multinationals in Ireland appeared to be incredibly profitable. It was as if the workers here were the most efficient on the planet.

<B>Inflating earnings</B>

Transfer pricing, if it has to be conducted in far and distant countries, does not necessarily require a final assembly plant. Sophisticated means are always at hand for the rich. Companies may sell their logo to their offshore holdings, ?rent? it back, and deduct the ?rent? as expenses. They can also move money to the subsidiary, borrow it back and subtract the interests. Basically, it works by inflating the earnings of these subsidiaries, which play the vital role of retaining the profits. If all these transactions are legal, then what is the fuss about?

The problem is that offshore companies contribute little to the world economy and little to these countries where they supposedly reside. Despite all this money floating around in the more than 20 000 offshore firms in Mauritius, what is the explanation behind their coexistence with poverty, inequality and an unemployment rate of almost 10%? Why are people finding it difficult to make ends meet every month?

The problem is further compounded by the double taxation agreements that we have entered into with a number of countries. Companies avoid paying the same tax twice in signatory countries. But loopholes in the system have allowed some to make their way freely through the fiscal net of both countries.

In recent years, probes by the Income Tax Department of India, a partner of Mauritius in a double taxation scheme, revealed that loopholes in the agreement allowed companies to avoid tax in both countries. The Indian press now commonly refers to Mauritius as a tax haven. Despite a population almost a thousand times smaller than India, and an economy trailing by a factor of 100, Mauritius is the biggest source of Foreign Direct Investment (FDI) in the sub-continent. In 2002-2003, a third of India?s FDI came from Mauritius, amounting to $534 million. Like the Irish in the 80s, we must be working miracles.

But there is no magic involved in offshore transactions. Maximising profits requires the craft of accountants, consultants and a compliant, if not hypocritical, international monetary system. A report by the OECD in 2000 produced a black list of uncooperative countries serving as tax havens. Quite amazingly, Switzerland did not make the grade. Mauritius stayed in the good books of the OECD by agreeing to reveal requested information about its offshore clients.

<B>Redundancy</B>

This sudden interest in tax evaders is nothing but a smokescreen to assuage public opinion. While the OECD can compile ?name-and-shame? lists, the fundamental problem remains the legality of the system on the one hand and the indisputable influence of the rich in the corridors of power. An article carried by the online campaign group ReclaimDemocracy revealed that when U.S Vice-president Dick Cheney was on the board of Halliburton, the company increased its offshore subsidiaries from 9 to at least 44. Little wonder that this ?legal? tax evasion continues unabated. It is estimated that 150 000 offshore companies are set up every year.

To complicate matters, what would be the cost of reforms to the tax havens, mostly small developing nations? Mauritius, for one would be hit by the abolishment of the system. There would be numerous job losses in the banks and other support systems, as these companies pulled out. Many consultants might find themselves redundant without the tax evaders.

But it is morally questionable whether billions of dollars can be siphoned off to the bank accounts of the rich while 240 million people in Africa live on less than $1 a day. The amount of money legally ?laundered? could finance global education and primary health care for all. It shows the powerlessness of many people in the face of blatant tax evasion by corporations.

Until global taxation policies are reformed, the poor will remain spectators to the financial contortions of the rich, who want the cake and even the crumbs...

<B>Diren valayden

Outlook Correspondent in Dublin</B>