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June 7, 2004
OECD Targets Additional Financial Centers in
Expanded Tax Haven Crackdown
by Cordia Scott
The OECD concluded its latest global forum on harmful tax competition on 4 June in Berlin, identifying 11 additional financial centers it intends to target and vowing to push forward with
its drive to achieve a level playing field despite the apparent unwillingness of some OECD countries to support the campaign.
The OECD concluded its latest global forum on harmful tax competition on 4 June in
Berlin, listing 11 additional financial centers it intends to target and vowing to push forward with its drive to achieve a level playing field despite the apparent unwillingness of some OECD countries to support
the campaign.
Buried in a footnote of the new report, "A Process for Achieving a Global Playing Field," issued at the close of the Berlin forum, the OECD identified 16 financial centers it
"will take steps to engage" in the process. Besides the five jurisdictions remaining from the original tax haven blacklist -- Andorra, Liberia, Liechtenstein, the Marshall Islands, and Monaco -- the
expanded list now includes Barbados, Brunei, Costa Rica, Dubai, Guatemala, Hong Kong, Macao, Malaysia (Labuan), the Philippines, Singapore, and Uruguay.
A question that remains is how the OECD can achieve a
level playing field when several of its own member states -- Switzerland, Luxembourg, Austria, Belgium, and perhaps even the United States -- say they won't relax their financial privacy laws to exchange
confidential information on nonresident investors that the OECD and the European Union are both seeking. According to the European Union's newly negotiated savings tax directive, Switzerland and Luxembourg don't
have to exchange information, but can apply a withholding tax -- first at 15 percent, then at 35 percent -- on the interest paid to residents of EU countries.
There was little to no public acknowledgement of
that issue at the Berlin meeting, according to participants, even though it goes to the heart of the agenda. Besides German Finance Minister Hans Eichel's brief mention of it in his opening address, the subject
wasn't discussed.
The OECD concluded its latest global forum on harmful tax competition on 4 June in Berlin, listing 11 additional financial centers it intends to target and vowing to push forward with its
drive to achieve a "level playing field" despite the unwillingness of some OECD countries to support the campaign.
Buried in footnote 7 of the new report, "A Process for Achieving a Global
Playing Field," issued at the close of the Berlin forum, the OECD identified 16 financial centers it "will take steps to engage" in the process. Besides the five jurisdictions remaining from the
original tax haven blacklist -- Andorra, Liberia, Liechtenstein, the Marshall Islands, and Monaco -- the list now includes Barbados, Brunei, Costa Rica, Dubai, Guatemala, Hong Kong, Macao, Malaysia (Labuan), the
Philippines, Singapore, and Uruguay.
"I'm sure the OECD would say `No, no, that's not really a blacklist,' but of course, if it walks like a duck and quacks like a duck, then most generally it's a
duck," Daniel Mitchell, an economist with the Heritage Foundation and an outspoken OECD critic, said on the final day of the meeting. "These new countries are being 'invited' to participate in the OECD's
global forum, but that's kind of like inviting a turkey to Thanksgiving dinner."
William McCloskey, chair of the OECD's Committee on Fiscal Affairs, sees things differently. "The Global Forum would
be very unhappy if our work resulted in tax cheats shifting their activities into . . . financial centers not committed to the high standards we are seeking," he said in a prepared statement. "The Global
Forum is looking to involv[e] these and other competing financial centers, including OECD countries that have to date not participated in the Global Forum, in our dialogue, so that they can be part of the process by
which we achieve our goal of fair tax competition." McCloskey also pointed to how Hong Kong has already announced it will be seeking tax treaties with OECD countries.
When asked whether the tax havens
now participating in the forum were pleased that other significant financial centers would be targeted, Carlisle Rogers, an Anguillan official who attended the meeting, said, "No, I can never be happy with any
black[list] system by the OECD, but if there is to be a level playing field, then obviously these countries have to be brought into the process." The Berlin meeting never focused on how the newly listed
financial centers will be brought into the fold, he said. "That's a question that is still hanging there, because besides actually writing to them, there is no indication of how the OECD will actually bring
them into the process."
Savings Tax Directive
Another question still hanging in the air is how the OECD can realistically achieve a level playing field when several of its own members --
Switzerland, Luxembourg, Austria, Belgium, and perhaps even the United States -- say they won't relax their financial privacy laws to exchange confidential information on nonresident investors that the OECD and the
European Union are both seeking. According to the newly negotiated savings tax directive agreement, Switzerland and Luxembourg don't have to exchange information, but can apply a withholding tax -- first at 15
percent, then at 35 percent -- on the interest paid to residents of EU countries. (For prior coverage, see Tax Notes Int'l, 7 June 2004, p. 1001, 2004 WTD 107-1 (Document link: Database 'Worldwide Tax Daily', View
'(Number'), or Doc 2004-11649 [PDF].)
There was little, if any, public acknowledgement of that issue at the meeting, according to participants, even though it goes to the heart of the agenda. Besides German
Finance Minister Hans Eichel's brief mention of it in his opening address, the subject wasn't discussed.
Rogers said that even though the issue wasn't raised, "it is obvious that that . . . will prevent
reaching an actual level playing field. And the OECD functions as if that is something that should not even be brought to the table. . . . The others, including where I come from, seem to be browbeaten, seem to have
taken a somewhat weaker stance than you would think we should in fact take, and unfortunately, I can't [comment] on what [Anguilla's] policy should in fact be."
Eichel said in his opening statement that
the European Commission would accept the withholding tax compromise only for a limited time and that Switzerland and other countries ultimately would still be expected to dismantle their banking secrecy laws.
"[N]o country has been given a commitment, either by a member state or by the European Commission, that bank secrecy rules will be able to prevent the exchange of information in tax matters for an unlimited
period," Eichel said.
"If [the withholding tax rates are] applied effectively, this would make [Switzerland and Luxembourg] less attractive financial centers to tax cheats," McCloskey said.
"But as Eichel said, all of this is only for a transitional period. EU countries will continue to press for exchange of information from Switzerland and Luxembourg."
There also is still the question
of whether the United States supports or complies with the EU savings tax directive. "At some of the unofficial side meetings, some of the OECD people were claiming the U.S. was in favor of the savings tax
directive," Mitchell said. "So I was able to get confirmation from the White House that nothing has changed. Now, interestingly enough, neither [U.S. International Tax Counsel] Barbara Angus nor any of the
other U.S. people here [at the Berlin forum] ever made that claim themselves, at least in public, so it's an open question."
Level Playing Field Defined
A global level playing field is
"fundamentally about fairness," according to the forum's definition of the term that is published in its new report. "In the context of exchange of information, achieving a level playing field means
the convergence of existing practices to the same high standards for effective exchange of information on both criminal and civil taxation matters within an acceptable timeline for implementation with the aim of
achieving equity and fair competition."
It fundamentally should be about fairness, inclusiveness, mutual benefits through bilateral implementation, "a consistent and rigorous approach to any failure
to implement," and review and verification mechanisms, the report said. Participating countries are particularly worried about being disadvantaged by those jurisdictions that refuse to cooperate with the OECD,
according to the report. "[T]he latter [should] not [be] permitted to profit from the promotion of their position of being outside the process," the report said. An "acceptable timeline" is also
key, because "the process for implementation of those standards should not be open-ended."
In its preliminary report to the global forum in April, the Sub- Group on Level Playing Field Issues
stressed that "uniform consequences" should be applied to any jurisdiction that fails to implement the OECD's standards of transparency and effective exchange of information. The new OECD report does not
describe what those uniform consequences should be, however, or how they should be achieved, although annexes in the preliminary report state that OECD member countries are under no obligation to impose uniform
consequences. After critics highlighted that seeming discrepancy, the final report said the global forum believed "it was premature at this stage to discuss such measures."
That is the correct
approach, according to McCloskey. "We did not spend too much time on this issue since we are working on the assumption that all financial centers will make their best efforts to implement the standards. If this
assumption proves incorrect, then we will revisit the use of defensive measures by individual countries to protect their tax bases."
"The only strong points came from Panama and St. Vincent and the
Grenadines, [which] said the issue of coordinating uniform consequences for the nonparticipating partners and the participating partners who don't meet the OECD on its deadline . . . should be deferred into the
future," Rogers said. "And that was a very valid point, because there is still a possibility that the OECD can still take action against those of us who are actually a part of the process. And Panama
wanted that taken off of the table."
Compliance in 2006?
According to the report, "all countries should reflect these principles in their bilateral arrangements and should strive to
achieve effective exchange of information and transparency by 2006." However, the report goes on to acknowledge that "practical considerations" may render a strict application of the deadline
unworkable in some cases.
The report also pushed back the next meeting of the forum by one year to the autumn of 2005. More time is needed to gather and study the transparency and information exchange
practices currently applied by all OECD countries, non-OECD-participating partners, and all other significant financial centers, Rogers said. "It will take time to make contact with the new countries on the
blacklist and see what their views are," he said.
McCloskey agreed that the 2006 deadline must be fluid because "much of this work will be implemented in the context of bilateral tax information
exchange agreements." Canada, for instance, has not even started the negotiation process, "so flexibility is required." [At press time, the OECD report, "A Process for Achieving a Global Level
Playing Field," can be found at http://www.oecd.org.]
_____________________________________________________________________
Tax Analysts Information
Geographic Identifier: Organization for Economic Cooperation and
Development; Multinational; Hong Kong; Macau; Malaysia; Singapore;
Andorra; Barbados; Brunei; Costa Rica; Guatemala; Liberia; Liechtenstein;
Marshall Islands; Monaco
Language: English
Subject Area: Tax havens
Tax policy issues
Harmonization of taxes
Web Information: As of 4 June 2004, the OECD report, A Process for
Achieving a Global Level Playing Field, could be be found at
http://www.oecd.org
Institutional Author: Tax Analysts
Author: Scott, Cordia
Document Number: Doc 2004-11848
Tax Analysts Reference: 2004 WTD 109-1
Cross Reference: For prior coverage, see Tax Notes Int'l, 7 June 2004, p.
1001, 2004 WTD 107-1 (Document link: Database 'Worldwide Tax Daily', View
'(Number'), or Doc 2004-11649 [PDF].
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