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Bureau of National Affairs

No. 17
Thursday January 25, 2001
Page G-7
ISSN 1523-567X
Tax, Budget & Accounting

International Taxes
OECD Official Hoping for Progress
At London Meeting on Tax Havens

     LONDON--The Organization for Economic Development hopes to make strides toward combating transactions it identifies as harmful tax practices in 33 countries and territories during London discussions held by a joint working group Jan. 26-28, OECD Deputy Secretary General Seiichi Kondo said Jan. 24.

     The working group, which will be co-chaired by Australia and Barbados, was formed after a Jan. 8-9 meeting in Barbados when representatives of tax-haven target countries failed to win agreement on mechanisms to promote "transparency, non-discrimination and effective exchange of information," according to a joint statement issued in Barbados (8 DTR G-2, 1/11/01).

     The working group plans to issue a report on its progress at a Feb. 15 meeting in Tokyo between the OECD and the Pacific Islands Forum. 

     Kondo told BNA the group's task will be "to find a mutually acceptable political process by which these principles can be turned into commitments" and "to examine how to continue the dialogue begun in Barbados."

     He said that as traditional borders vanish in the global economy, the OECD is seeking "to create a framework that will allow economic and political freedom to flourish in a climate of fairness. The stakes are high, and so are the temptations to resort to dirty practices," he said. "Bribery and corruption, price-fixing cartels, large scale tax evasion, and other abuses of free markets are all part of the dark side of globalization."

     OECD Effort Questioned

     However, Andrew Quinlan of the Center for Freedom and Prosperity criticized the effort as "misguided" and said in London that the OECD has misrepresented the agreement in Barbados (see related report in this section ). Quinlan said the target nations had agreed only "to give low-tax countries greater input in the process, and allow them to withdraw from the [memorandum of understanding], put an end to the threat of sanctions, and suspend the July deadline" for countries on the list to sign letters of commitment in principle to the OECD effort.

     The Barbados meeting gathered more than 160 participants from 40 countries and territories. These included 12 OECD countries, among them Great Britain, Canada, and Australia, and 18 of the jurisdictions on the OECD's list of tax havens. The meeting was hosted by Prime Minister Owen Arthur of Barbados with Commonwealth Secretary-General Don McKinnon and Kondo as co-chairs.

     Kondo said the outcome of the Barbados meeting was "positive on both sides" because a majority of offshore jurisdictions agreed for the first time that the broad principles of transparency, nondiscrimination, and effective exchange of information should guide government tax systems. It proved, he said, that "more tax jurisdictions are recognizing that the OECD effort makes sense," while also giving offshore jurisdictions a chance to vent "their frustrations with the OECD in a frank and forceful manner. But it also enabled the OECD countries to explain why they were pursuing their objectives," he said. 

     Kondo added that for the first time the underlying objectives of the OECD's effort were backed in Barbados by the World Bank and International Monetary Fund.

     Sanctions for Noncompliance

     To avoid sanctions, countries and territories on the tax jurisdiction list would have until July 31 to agree in principle to conditions outlined by the OECD in its Memorandum of Understanding on Harmful Tax Practices, he said. By the end of 2001, they would need to have drawn up detailed plans for financial transparency, effective exchange of information for all tax matters, and the elimination of tax structures that attract businesses without substantial business activity. By the end of 2005, they would need to be in full compliance.

     Signatories also would need to ensure that their tax authorities have access to information on beneficial owners of companies, partnerships, and other entities, and that their financial accounts are in keeping with generally accepted accounting standards. By the end of 2003, parties would have in place a legal mechanism that allows tax authorities to furnish OECD countries with information needed to investigate and prosecute tax cheats. 

     Sanctions would include an end to deductions, exemptions, credits, and penalties for not reporting transactions. They would be justified, Kondo said, because tax evasion undermines the ability of democratically elected governments to raise money through taxation, thereby "shifting financing burdens unfairly on to the shoulders of honest taxpayers."

     OECD Critical of Own Members

     To be fair to the low-tax countries, Kondo also criticized a number of its own member states for practices that "have the effect of creating distortions in the international balance of tax collection, including the use of headquarters regimes, and tax breaks applied to leasing, fund management, shipping, and investment." 

     Within its own membership, he said, the OECD is encouraging governments to lower tax burdens and eliminate discriminatory tax regimes by 2003. "We recognize that low taxes, combined with discipline in public sector spending, will help to spur private initiative," said Kondo. "The same measure applies equally to OECD and non-OECD countries," he said.

     If the OECD's initiative is successful, he said, it should actually help governments around the world to reduce tax rates. "There is only one standard being applied for all countries, whether they are members of the OECD or not."

     Kondo insisted the OECD is not asking offshore jurisdictions with zero income tax rates to impose higher taxes, "or trying to put them out of business. The Cayman Islands," he noted, one of the jurisdictions that agreed to cooperate with the OECD, "is retaining zero income tax." 

     In seeking cooperation, he said, the OECD is simply asking jurisdictions on the list to stop marketing financial services that throw a cloak of secrecy over tax evaders, allowing them to escape the scrutiny of the tax authorities in their own countries. 

     Effective cooperation between countries may require greater access to information, he said, but insisted this would not compromise confidentiality between financial institutions and legitimate customers. "It does not mean unfettered access," he said. 

     Many smaller tax haven countries are known to be resisting the OECD effort because it threatens to undermine their financial services sectors. But Kondo said the OECD accepts a role for offshore financial centers, provided they are well-regulated. He cited Bermuda, which is cooperating with the OECD, as a jurisdiction that "has a flourishing offshore insurance sector. By joining the OECD's drive against harmful tax practices," he said, "Bermuda's authorities are affirming their position as responsible members of the world financial community." 

     By Patrick Tracey

     Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.


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