The Organisation for Economic Co-operation and Development (OECD) today named seven so-called tax havens which continue to resist its attempts to browbeat them into abandoning their right to compete with the tax regimes of the large and rich countries which make up its membership. The seven are Andorra, Liechtenstein, Liberia, Monaco, the Marshall Islands, Nauru and Vanuatu. Two other countries expected to be on the list – Panama and Samoa – reached last minute agreements with the OECD. Simultaneously, the OECD has published a model agreement for exchanging tax information.
“The real success of the project so far is that we have received commitments from 31 jurisdictions to the OECD’s principles of transparency and effective exchange of information,” says Gabriel Makhlouf, chairman of the OECD Committee on Fiscal Affairs. “The list identifies those tax havens that have not as yet committed to those principles. OECD member countries will use the list as a basis for the framework of co-ordinated defensive measures now being developed.”
In fact, the Pharisaical nature of this punitive expedition is starkly evident. The two richest members of the OECD rich country club – Luxembourg and Switzerland – have yet to commit themselves to the principles of transparency and effective exchange of information. Yet the blacklisted countries, which are not members of the OECD, could face “defensive measures”: a euphemism for financial sanctions.
The OECD launched its initiative to address so-called “harmful” tax practices in 1998. Needless to say, the key criterion in identifying harmful tax practices is the lack of “effective exchange of information,” by which the OECD means being its members being able to tax the assets and income of their citizens without having to compete to attract them with a more accommodating fiscal regime. (One of the many oddities of political life is that it is the only sphere of human endeavour in which competition is found to be harmful, especially to the ability of governments to soak their populations.) A report published in April 1998 set out criteria for identifying tax havens. Subsequent “consultations” bullied a number of countries into co-operating with the OECD in the initiative.
Progress reports published in 2000 and 2001 explained how other jurisdictions could follow their helpful example, and identified a number of countries the OECD deemed to be tax havens. Further “discussions” raised the number of co-operators to the present 31. “The success of this co-operation can already be seen in the models for exchange of information developed jointly by a number of the jurisdictions and the OECD, ” continues Makhlouf. “We are very pleased with the contributions made to this process by Aruba, Bermuda, Bahrain, the Cayman Islands, Cyprus, the Isle of Man, Malta, Mauritius, the Netherlands Antilles, San Marino and the Seychelles.We look forward to working with all committed jurisdictions on other related issues.”
The OECD has played a brilliant game of divide-and-rule. Those it has bullied into submission are now concerned that profitable business will decamp to those jurisdictions strong enough to resist the OECD, so they are now on the same side as their captors. “We know that they all have concerns about establishing a level playing field,” says Makhlouf. “We understand those concerns. Financial services are extremely mobile and it is in no one’s interest that harmful activities move to jurisdictions that do not meet acceptable standards of transparency and effective exchange of information. We have gone a long way towards achieving a level playing field as a result of having a very large number of on and offshore financial centres commit to the same principles. And our aim is that the framework of co-ordinated defensive measures applying to uncooperative financial centres prevents them from gaining an economic advantage.”
The “defensive measures” are scheduled to come into effect within OECD member-countries in April 2003 – so Luxembourg and Switzerland can look forward to something nasty in the post from Paris around that time. Non-members have until 2005 to mend their ways or face sanctions. “We are disappointed that some jurisdictions have chosen not to make commitments and we will want to maintain contact with them in order to encourage them to do so as soon as possible,” says Maklouf. “We will of course monitor carefully the emergence of any new tax havens.” In December last year European Union member-states agreed to swap tax information rather than accept a pan-European withholding tax, but Switzerland remains outside the Union and Luxembourg will not co-operate until the Swiss do.
The OECD rejects the notion that its campaign is no more than an attempt to protect the tax revenues of its members, which will rob smaller countries of sovereignty as well as their financial services industries. “The ultimate success of this project will benefit all countries: OECD members and non-OECD economies; developing countries and those with economies in transition,” claims Makhlouf. “The implementation of the commitments to transparency and effective exchange of information will help to protect tax bases and as a result help developing countries meet the call made in Monterrey for them to mobilise their own domestic resources for development.” Indeed, one of the many unfortunate consequences of September 11 is to make the OECD campaign seem much more high-minded than it is. “We also believe that by promoting transparency and greater co-operation between our economies, our work will contribute to efforts to counter money laundering, the financing of terrorism and strengthen the international financial system,” says Makhlouf.
The model agreement for effective exchange of information in tax matters – developed by the OECD’s Global Forum Working Group on Effective Exchange of Information, chaired by Malta and Holland but whose members include Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, the Isle of Man, Mauritius, the Netherlands Antilles, the Seychelles and San Marino – is available on the OECD website. It contains two models for bilateral agreements.
Dutch junior Finance Minister, Wouter Bos, regards the model agreement as an important step. “The Netherlands has always been of the opinion that transparency and exchange of information are the key-elements in neutralising harmful tax practices and both should therefore be high on the international tax agenda,” he says. “In that light, I am very pleased with the release of the model agreement. The fact that eleven non-member financial centres have had the courage to actively contribute to this achievement is very encouraging. I would like to express my gratitude to all of them, but in particular to Malta, which as co-chair has been instrumental in reaching success. I expect this agreement to become the international standard for exchange of information in tax matters.”
Maltese Minister, John Dalli, adds: “Indeed it is crucial that the agreement will become the international standard. The exchange agreement recognises in its introduction that ‘it is important that financial centres throughout the world meet the standards of tax information exchange set out in this document.’ It encourages as many economies as possible to co-operate in this important endeavour and notes that it is not in the interest of participating economies that ‘the implementation of the standard contained in this agreement should lead to the migration of business to economies that do not co-operate in the exchange of information.’ The OECD members and committed jurisdictions will engage in an ongoing dialogue to work towards the achievement of that aim.”
Donald J. Johnston, Secretary General of the OECD, welcomed in particular the “constructive” participation of the browbeaten non-members. “I have always said that it is important for the OECD to establish new ways of carrying out its work and to look beyond its own membership for input,” he says. “For these reasons, the OECD established a number of Global Forums in 2000 that would provide a framework for our discussions with Non-OECD economies in certain key areas. I am very pleased to see that this framework has not only proved to be successful as a vehicle for dialogue but has also been able to produce concrete results that members and non-members alike can use to improve co-operation in tax matters. I congratulate all of the participants in this work for the excellent work product that they have produced and in particular the participants from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, the Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino. I am confident that our collaboration on other related issues will be equally successful as we move forward in our work with all of the jurisdictions that have committed to improve the transparency of their tax and regulatory systems and establish effective exchange of information.”