In May 1996, Ministers of the member states of the Organisation for Economic Co-operation & Development called upon the organisation to “develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases.” The years since that call was made have been a testing time for many of the Caribbean nations and the offshore world.
The unofficial agenda of the OECD was never in doubt. Many of its European members, and to a lesser extent the US, were being hampered in the collection of taxes from their own nationals by the ease with which the offshore community accepted foreign capital and then shielded its holders. The OECD talked of a “race to the bottom”, in which the tax bases of its member states would be eroded and evaporated by the flight of capital offshore.
The OECD seized the moral high ground, claiming that only drug dealers and tax evaders need fear a realignment of the global taxation system. Similar logic drove other international bodies to join the hunt. A sub-committee of the OECD empanelled a Financial Action Task Force on Money Laundering. The Financial Stability Forum, a G-7 body, added its weight, demanding that many of world's leading offshore financial centres improve supervision and co-operate with other regulators to avoid being frozen out of the international financial system.
The European Union and Britain, by way of a KPMG enquiry into the regulatory systems of six Caribbean jurisdictions, added their weight. The weapons these august bodies brought to the battle were administrative: reports, lists and the threat of economic sanctions of the kind used against rogue nations. The goal was to bring the often tiny economies of the offshore world to heel.
Second agenda accusations
At first, Caribbean leaders cried foul, claiming that the OECD was pursuing a second agenda. “The language was muscular,” said Arthur Owen, Prime Minister of Barbados. “I confess to having added my share of caustic commentary on the issue, as would the leader of any state whose economic livelihood appears to be threatened by the unilateral action of a powerful organisation in which it has no voice or vote.”
Eighteen months ago, the Cayman Islands and five other jurisdictions gave in to OECD pressure and agreed to do whatever was necessary to assuage the onslaught. The decision gave the general populations of the jurisdictions pause. Had Cayman and the others acted from strength or weakness?
The Bermuda Finance Minister was apparently so ashamed of the terms to which he had agreed that he refused to reveal their nature to the people who would have to live with them. Given that the OECD's first priority is transparency, many observers scoffed at the notion of secret agreements binding uninformed citizens. The OECD refused point-blank to answer questions on the subject or to defend its own lack of transparency. The agreement remains sealed two years later, although sources suggest that it relates to the dismantling of regulations protecting Bermudian ownership of local businesses.
For a while, it began to look as if the words ‘offshore' and ‘banking secrecy' would be consigned to history, quaint terms from the late 20th century, a time before the globalisation of the world economy was completed, when countries and territories still had the sovereign right to set their own national agendas.
In January of this year, the OECD met with representatives of the small and developing economies (SDEs) and others from the Commonwealth, Caricom and Pacific Islands Forum in attendance.
An understanding by all parties that they would work together did not move the debate much further forward. In March, a paper was submitted by the SDEs to the OECD, at a meeting in Paris of the OECD-Commonwealth Joint Working Group on Harmful Tax Competition. The letter listed 17 questions, turning the spotlight back onto member states of the OECD. Were they all ready to implement their own standards? Who would monitor this process? Would the OECD care to define its terms (specifically ‘criminal tax matter' and ‘civil tax matter')?
Also at that meeting, eight of the SDEs formed their own organisation, the International Tax and Investment Organisation (ITIO), as a forum for SDEs to seek international co-operation in areas where the OECD is discussing rules. “(The SDEs) understand that they need to meet high international standards,” said an ITIO spokesman. “And they want to do that. But they want to be properly involved in the setting of those standards. And that isn't what's happening at the moment.”
On May 10, with the twice-deferred OECD deadline of July 31 for the publication of its final list of harmful tax jurisdictions and the imposition of sanctions against them fast approaching, US Treasury spokesman Paul O'Neill dropped a bombshell: the US would not support the OECD sanctions. In explaining the US decision, O'Neill said that Washington was troubled by the underlying premise that low tax rates are somehow suspect and by the notion that any country, or group of countries, should interfere in another's decision about how to structure its own tax system.
Nothing had changed when O'Neill made his statement, except the occupant of the Oval Office and, as a consequence, the US taste for the OECD initiative. Commentators had been pointing out for some time that once the offshore communities had been forced to meet European taxation requirements and the OECD had tasted blood, the next target – the country with the next lowest tax rate, would be the US itself.
George W Bush's first major act as President had been to engineer an enormous tax rebate to underline his party's belief in low rates of personal and corporate taxation. If he did not disassociate the US from the OECD initiative when its sights were aimed at small nations, how would he head off the inevitable OECD demands that the US raise its tax rates to European levels without facing charges of hypocrisy?
President Bush had been appraised of the situation in a letter from the SDEs and in any number of meetings with Caribbean leaders. His decision to withdraw US support destabilised the OECD initiative, despite American pronouncements that they would continue to encourage the SDEs to open their financial systems to greater scrutiny.
“Given the lack of agreement within the OECD, the July deadline is unlikely to be met,” said Sir Ronald Sanders, Antigua's High Commissioner to London and his country's lead negotiator with the OECD. The ITIO, which had by then grown to 11 SDEs, nevertheless warned against considering the OECD initiative dead.
It was certainly wounded. The US refusal to impose sanctions meant that their imposition was unlikely. The Commission had not answered the ITIO's 17 questions (it still has not). Absent a reply, the SDEs indicated that they would not come to the table on any of the OECD's demands.
Unable to respond to the 17 questions without revealing the moral bankruptcy of its argument, the OECD said nothing as the July 31 deadline loomed. On July 18, O'Neill went before the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs to announce a new world order. The OECD was to get its own house in order before it could enforce its rules on anyone else, O'Neill said. The OECD was being “counter-productive” and the US was not alone among OECD members in its views, he added.
By now, the SDEs had retaken the moral high ground. Owen Arthur, Prime Minister of Barbados, said: “The power to tax is a sovereign right that cannot be compromised and certainly cannot be yielded to institutions which have no standing in law to determine the tax policies of other countries.” (The Commonwealth Ministers Meeting in Malta in mid-September opened with that statement. The Secretariat spoke of a “virtuous cycle” of job and wealth creation by the 29 of its members who are offshore financial centres.)
The July 31 deadline duly passed without the publication of an OECD hit list. The SDEs raised the volume on their demands to be included in the Global Tax Forum, a body of 55 nations attempting to decide the key issues, from which the SDEs are excluded.
Ralph T O'Neal, Chief Minister and Finance Minister of the British Virgin Islands, warned the OECD that unless the SDEs were invited to participate, the OECD would face “the very real danger that the objectivity, quality and viability of the group's deliberations will be called into question and its output meet resistance rather than acceptance.”
Meanwhile, Cheryl-Ann Lister, the head of the Bermuda Monetary Authority, said that Bermuda would not install rules not already in force throughout the OECD. “While it often seems that Bermuda's response has to be entirely driven by the various international pressures confronting us, the reality is that we continue to set our own agenda,” she asserted.
Little has happened publicly since the July deadline passed. The ITIO has grown to 12: Anguilla, Bahamas, Barbados, Belize, British Virgin Islands, the Cayman Islands, Cook Islands, Malaysia, St Kitts & Nevis, St Lucia, Turks & Caicos Islands and Vanuatu. The Secretariats of the Commonwealth, Caricom and the Pacific Islands Forum have been granted observer status.
The OECD list of harmful tax jurisdictions remains in play, although it is down now to 30 countries. On the list are Andorra, Anguilla, Antigua and Barbuda, the Bahamas, Bahrain, Barbados, Belize, the British Virgin Islands, Guernsey, the Cook Islands, Dominica, Gibraltar, Grenada, Jersey, Liberia, Liechtenstein, the Maldives, the Marshall Islands, Monaco, Montserrat, Nauru, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Western Samoa, the Turks and Caicos Islands, the American Virgin Islands, and Vanuatu.
FATF, the anti-money laundering arm of the OECD initiative, has switched its focus almost exclusively onshore. Its latest list still includes St Kitts & St Nevis and St Vincent and The Grenadines, but the balance – Cook Islands, Dominica, Israel, Egypt, Guatemala, Hungary, Indonesia, Lebanon, Myanmar, Nauru, Niue, the Philippines, Russia – shows how much the focus has swung away from the offshore Americas.
Despite the hard political reality that the US is unlikely to declare economic sanctions on Russia any time soon, FATF has issued Russia and Nauru and the Philippines with a warning that they would face ‘countermeasures' if they failed to control their financial systems by September 30. That deadline, too, came and went without action as the world focussed on the events of September 11.
President Bush's intervention came too late to save many of the smaller economies from rethinking the way in which they operate. British Overseas Territories have had to retool their legislative and regulatory regimes or face the introduction of new laws directly from Whitehall. Most, including Cayman, have welcomed the chance to show the world that they meet ‘the highest international standards'. Other offshore jurisdictions have begun the process of change, viewing it as preparation, hoping that, sooner or later, international capital will find a use for their services.
The due diligence pills have not been easy to swallow. The economic powers have insisted on a new paradigm offshore, one in which identities are more difficult to hide and information more easily divulged. Yet, ironically, all the initiatives have failed to dent the international drugs trade, which continues with impunity to find ways of laundering and then burying the proceeds of crime. As long as dollars can be had for a fraction of their value, it seems, individuals and companies will step forward to facilitate the laundering process.
Meanwhile, the offshore world has emerged from the past five years in better shape, in many ways. Those countries that bowed to the demands of the OECD now wear its stamp of approval with honour. Those that have not bowed will not earn the badge. As Cayman copes with the effects of increased demands for its services, this may mean that smaller jurisdictions are better positioned to pick up the next wave of industry that will look to structure in the competitive offshore can provide.
The member states of the OECD and other bodies now face a far greater challenge than the loss of taxes on undeclared income. The advent of e-commerce threatens more directly to unravel their tax bases, as companies trading in cyberspace find national boundaries increasingly irrelevant. A couple of the smaller jurisdictions, notably Anguilla, are exhibiting significant growth and several are looking at e-commerce initiatives, from server farms to improvements in corporate architecture.
The OECD, by focusing on the facilitators of undeclared income rather than those who fail to declare it, set in motion an initiative that once looked as if it might unravel many of the economies of the Caribbean. The US insistence that European governments concentrate on the behaviour of their own citizens has all but scuppered that notion.
The historic failure of continental Europeans to persuade their citizens to enjoy lifetime tax rates of 50% could prompt an observer to ask whether a better initiative might be one aimed at reducing the level of European tax rates, rather than penalising those jurisdictions that have found ways of avoiding the need for punitive levels in the first place.The 17 questions
The following paper was submitted by small and developing economies to the OECD on 28 February 2001, at a meeting in Paris of the OECD-Commonwealth Joint Working Group on Harmful Tax Competition.
At the February meeting, OECD member countries gave brief verbal replies to some of the points raised in the paper. Tony Hinton, co-chair of the meeting and Australia's Ambassador to the OECD, and Gabs Makhlouf, chairman of the OECD Fiscal Affairs Committee, promised a written response that has not yet been forthcoming.
The small and developing economies of the Joint Working Group established at the Barbados high level consultations on the OECD Harmful Tax Competition Initiative reaffirm their belief that the proposal tabled by them at the London meeting of the Group remains the optimal solution. This proposal envisaged a co-ordinated programme of action to develop and implement international standards in the area of cross-border taxation.
The small and developing economies wish to continue their genuine efforts to move the process of constructive dialogue forward.
A number of issues, raised in the 1998 report entitled Harmful Tax Competition – an Emerging Global Issue and the document entitled Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practices (the MOU ), require clarification.
To enable the group to continue work on the development of a politically acceptable commitment process as set out in the Barbados remit, these small and developing economies must be in a position to understand comprehensively the scope of the commitment sought by the OECD, as articulated in the annexed OECD interpretation of the three broad principles of transparency, non-discrimination and effective exchange of information (the principles), which was also tabled at the London meeting in January.
For this purpose, the small and developing economies would welcome an early and detailed and written response to the following questions:
1 In light of paragraph 6 of the 1998 Report, which states that the report focuses on geographically mobile activities such as financial and other services, and having further reference to paragraphs 10 and 18 of the Report, could the OECD please confirm that the commitments being sought are confined in their scope only to geographically mobile financial and other services?
2 In light of paragraph 12 of the 1998 Report, which states that the treatment of cross-border saving instruments, particularly bank deposits, is not considered at this stage, please confirm the understanding that the affairs of individual physical persons (e.g. interest on bank accounts, portfolio investments and property holding) are not covered by the commitments?
3 Having reference to the Principles mentioned above, please confirm that all of the undertakings sought from the listed economies in relation to transparency, information exchange and non-discrimination are the subject of identical, specifically enumerated commitments given severally by OECD member countries?
4 Please provide specific cross-references in the 1998 Report to the express and detailed provisions of the Principles.
5 Please confirm:(a) that members of the OECD will implement any necessary programmes of reform to will enable them to comply with the standards set out in the MOU;
(b) what steps will be taken to monitor the effective implementation of such commitments by OECD members;
(c) that individual OECD member countries are prepared to apply the same defensive measures to non-complying OECD members as may be applied to any listed countries; and
(d) that failure of OECD members to comply with standards set out in the MOU will be grounds for the committed tax havens to resile from the implementation of the same commitments?
6 Is the OECD able to confirm that the transparency criterion (set out in the principles) relating to governmental access to beneficial ownership and financial information would be satisfied if the government could obtain such access in the event of an investigation being initiated?
7 Is the underlying standard to which reference is made in the area of beneficial ownership information deemed to be satisfied through compliance with the Financial Action Task Force Recommendation 11 and more specifically to the Interpretative Notes to Recommendations 11 and 15-18? If not, to what alternative or additional standards should working group members have reference?
8 To what extent is the transparency criterion relating to access to bank information the same as the standard unanimously agreed among OECD countries as reflected in paragraph 21 of the report entitled Improving Access to Bank Information for Tax Purposes (OECD, Paris, 2000 at p. 14)?
9 Can the OECD confirm that it supports the development of a Global Forum, in which all countries and economies which wish to participate and are committed to international co-operation in cross-border tax issues will be equal partners and that it will be this body through which agreement will be sought on international standards on cross-border taxation (for example, in the definition of ‘civil tax matters' for the purposes of international tax information exchange agreements)?
10 Can the OECD give a definition, as accepted by OECD member countries, of what is covered by the term “criminal tax matter”?
11 Can the OECD give a definition, as accepted by OECD member countries, of what is covered by the term civil tax matter?
12 Would the anticipated commitment to provide exchange of information in criminal tax matters be satisfied through the utilisation of procedures for the provision of mutual assistance in criminal matters? If not, why not?
13 Please confirm that the reference to the absence of impediments to the disclosure of exchanged information contained in the principles is intended to operate only to permit such information to be utilised for matters falling within the scope of an arrangement relating to geographically mobile financial and other services.
14 Which OECD member states have identified and agreed their own harmful tax practices and what are those practices?
15 Which OECD countries have taken specific steps to remove identified harmful tax practices and what are those steps?
16 Could the OECD please outline its proposed programme for involving countries other than ‘tax havens' in the process of entering into and implementing the same commitments as committed ‘tax havens'?
Is it expected that such countries will have implemented these commitments by the end of 2005? If not, when is the expected date and when would they be subject to any defensive measures if they remain uncommitted?
17 What action has been taken by the OECD members to identify and list any measures in their tax regimes which constitute ‘ring fencing' and what steps are being taken to eliminate such measures?