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Bureau of National Affairs

No. 19
Monday January 29, 2001
Page G-4
ISSN 1523-567X
Tax, Budget & Accounting

International Taxes
Harmful Tax Competition Furor
Raises Specter of Global Tax Forum

     LONDON--Offshore tax havens targeted by the Organization for Economic Cooperation and Development for harmful tax competition were not likely to cave in to demands for greater transparency at a meeting with OECD representatives Jan. 27-28 unless the same rules applied equally to onshore countries, representatives of some countries and territories facing punitive measures from the OECD said Jan. 26.

     One source, speaking on condition that he not be named, told BNA that the offshore tax centers were "seriously considering a call for a global forum on taxes in June" to hash out their differences. 

     The representatives were gathered at a meeting of low-tax advocates sponsored by the Center for Freedom and the Press and the European Policy Forum one day before a joint working group of countries from the British Commonwealth and the OECD were scheduled to meet for two days of discussion on harmful tax competition.

     The working group, drawn from ministers and senior finance and tax officials from 13 countries or associated territories, was established following talks between OECD and the countries in Barbados earlier this month on the OECD's initiative on harmful tax practices and that organization's memorandum of understanding, which threatens punitive measures against 35 offshore financial centers whose tax systems included elements defined by the OECD as harmful. The sanctions would have the effect of unplugging the offshore tax centers from the global financial grid.

     Negotiations Promote Better Understanding

     Richard Hay, an international tax partner in the London office of Stikeman Elliot, which represents the government of the Bahamas, complained that the debate over changing standards was "conducted at the outset by lobbing bombs over the fence," particularly between the OECD's Committee on Fiscal Affairs and the accused tax havens. However, he said that face-to-face dialogue has "softened negotiating positions and promoted better understanding of legitimate national interests."

     He said that tax neutrality, the chief lure of the offshore world, would survive in most offshore centers despite the changes under way, and he predicted that greater transparency would greatly reduce the number of tax evaders parking funds in offshore havens. This, in turn, would send "a significant proportion" of illicit financial activity to the onshore international financial centers where, Hay said, "much of it is already conducted." 

     Hay cautioned that the OECD would be judged by the fairness of its demands. "At a minimum," he said, "this means that there must be a level playing field for all parties. Offshore centers need to know that the same rules will be applicable to all. It is not sufficient to say that most members of the club--that is, the OECD--adhere to the rules demanded. This is particularly so where the dissenting voices emanate from those jurisdictions that compete most effectively with the offshore world." 

     He added that the offshore havens were likely to insist that they be permitted to continue to "transact business in a tax-neutral fashion." In return, he predicted, the offshore jurisdictions would agree to match the regulatory rigors of the onshore international financial centers.

     Hay said he expected a resolution that takes "reasonable account" of the interests of all parties and leaves room for the offshore financial centers to continue to attract demand for their services. Noting that the offshore centers tend to offer "a level of sophistication in particular areas which exceeds that available in the major onshore money centers," he said demand would continue to grow as the expansion of the world economy creates greater wealth. 

     The offshore centers that "respond deftly to the pending changes are likely to find themselves occupying an increasingly successful role at the crossroads of the global economy," he said.

     Resistance to OECD Demands

     Others at the meeting were less sanguine about the prospects for compromise. Jorge Loaiza, an attorney representing the Panamanian government for Arias, Fabrega & Fabrega, expressed uncertainty about the outcome of the talks.

     "We believe we're doing our job by enforcing our laws on money laundering right now," he said. He insisted upon his country's "constitutional right of association" as a sovereign nation and said judicial means already exist "to obtain evidence and to order the seizure of assets if the country of origin has a valid claim." Asked if Panama felt bullied by the OECD, he said, "That's what we perceive."

     Andrew Quinlan, president of the Center for Freedom and Prosperity, a nonprofit anti-tax advocacy group, told BNA that offshore financial centers would "wind up selling sand" if threatened sanctions are enforced and small nations are, in effect, confined to miniscule domestic demand for financial services. 

     He told several representatives of the targeted countries that his group, along with the Heritage Foundation, a Washington, D.C., conservative think tank, have been "fighting hand-to-hand combat against the OECD since last October" with the aim of killing the OECD effort by June. Given the low-tax leanings of the newly-elected U.S. president, he said, "We now think it's a winnable battle."

     Jennifer Dilbert, Cayman Islands government representative in the United Kingdom, said the Cayman Islands had already signed an advanced commitment in principle to the memorandum of understanding because there were "various attachments that gave us some protection," chiefly the right to retain a zero income-tax rate.

     Ben Coleman, a senior associate with APCO UK, which represents the Virgin Island territories, applauded the efforts of the CFP in general but said he found "some of the things they're talking about quite worrying," such as threats the group has made to lobby Congress to cut funds to the OECD if it levels sanctions against uncooperative offshore centers. 

     Observers said tax havens might also seek refuge in the arms of the World Trade Organization, based on denial of market access in violation of the General Agreement on Trade in Services. Another possible avenue could be the argument that sanctions amount to an infringement of article 8(2) of the International Monetary Fund Agreement, which restricts the ability of IMF members to impose restrictions on international fund transfers. 

     By Patrick Tracey

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

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