An international initiative aimed at harmonising tax treatment across onshore and offshore locations could blunt the competitive edge of certain captive domiciles. But the US has stopped short of fully supporting the proposals.

Mention the letters OECD to a captive manager in an offshore domicile, and you may notice a little involuntary shudder in reaction. The Paris-based Organisation for Economic Co-operation and Development (OECD) has been waging a campaign to eliminate what it describes as ‘harmful tax practices', aiming to present a level playing field for all nations by the end of 2005. Although most headline news on the initiative has been focused around Caribbean jurisdictions, European offshore domiciles were also labelled as tax havens by the OECD when it issued its list back in June last year.

Of the 35 countries named by the OECD, the European captive domiciles of Gibraltar, Guernsey/Sark/Alderney, the Isle of Man, Jersey and Liechtenstein featured on the list. This is not to say, however, that they are ‘blacklisted' as such. In its report, ‘Towards Global Tax Co-operation', the OECD pointed out: “This listing is intended to reflect the technical conclusions of the (OECD) Committee only and is not intended to be used as the basis for possible co-ordinated defensive measures. Rather ... a further list will be developed in the next twelve months for this purpose.”

Since the original list was issued, several of the European jurisdictions have agreed to co-operate with the OECD. Back in December, the Isle of Man stated its intention to work with the Paris-based organisation. In a statement responding to the Isle of Man's announcement, the OECD commented,

“The OECD welcomes these commitments, which include undertakings in favour of transparency, non-discrimination and effective co-operation.” Any countries making such commitments are destined not to appear on the list of ‘Unco-operative Tax Havens', due to be published this summer. Echoing the Isle of Man's move, the Jersey Financial Services Commission has put forward modernisation plans equalising the taxation treatment between non-resident and resident companies which aims to remove the island from any further list.

Earlier this year, Guernsey's Deputy Laurie Morgan, President of the States of Guernsey Advisory and Finance Committee, was actively involved in the OECD process, attending a multilateral meeting in Paris, which he described as “a useful opportunity to exchange views generally and to discuss how the work of the OECD harmful tax initiative will be taken forward following regional multilaterals and the meeting of the OECD Commonwealth Working Group.” The basic thrust of the OECD proposals – to establish global tax standards – had the support of both Guernsey and Jersey, he said, but added, “These discussions must progress on the basis of mutual respect and understanding as we work towards a partnership between nations and independent jurisdictions with common interests and goals.”

Smaller domiciles as well are taking the OECD bull by the horns. Malta, which has been waiting in the captive industry wings for a number of years, recently hosted a meeting between OECD officials and the Malta Financial Services Centre to clarify its position. Since then, the OECD has removed it from the harmful tax competition list.

What remains unclear through all this is what the penalties will be for those jurisdictions which fail to match up to the standards demanded by the OECD before its deadline of the end of July. Of little doubt is the prospect of blacklisted countries being shunned as prospective trading partners by at least some of the 30 OECD member countries, which include most of the world's strongest trading nations.

Even so, since the OECD started its campaign, the US has subsequently removed its name from the list of member countries which will impose sanctions on the offshore domiciles not adhering to the demands. In a letter dated 7 June this year, US Secretary of the Treasury Paul O'Neill wrote he felt certain facets of the OECD's initiative go too far.

“The OECD initiative implicates low-tax regimes that may be designed to encourage foreign investment but that have nothing to do with evasion of any other country's tax law,” he wrote. “Countries must be free to adopt tax policies that encourage investment and promote economic growth. We should not interfere in any other country's decision about how to structure its own tax system when that system does not serve as an obstacle to enforcing our own tax laws ... I want to refocus the OECD initiative on its core element: the need for countries to be able to obtain specific information from other countries upon request in order to enforce their respective tax laws.”