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Bureau of National Affairs

No. 20
Tuesday January 30, 2001
Page G-1
ISSN 1523-567X
Tax, Budget & Accounting

International Taxes
Global Tax Forum Proposed
By Offshore Tax Jurisdictions

     LONDON--A global forum on taxes will be held this year if the Organization for Economic Cooperation and Development accedes to a demand made Jan. 28 by offshore financial centers following three days of talks with the OECD that failed to reach agreement on ways to achieve global cooperation on cross-border tax matters.

     Barbados Prime Minister Owen Arthur, co-chair of a joint working group of OECD countries and offshore financial jurisdictions, mostly from the British Commonwealth, said Jan. 28 that the meeting "ended with an acknowledgement that the further work is needed to achieve a mutually acceptable political process and the creation of a truly inclusive global tax forum."

     Arthur said the chief area of disagreement remains an absence of mutually acceptable definitions of three key principles of transparency, nondiscrimination, and sharing of information put forward by the OECD. The offshore jurisdictions conceded weeks ago in Barbados that agreement should be reached on the three principles, Arthur said, but in London remained unwilling to accept the OECD's definitions of those principles. "We didn't have any input into defining those concepts" from the outset, he said.

     For the time being, an OECD Memorandum of Understanding unveiled Jan. 8 in Barbados--which threatened punitive measures against 35 nations and territories by July 1 if letters of commitment to the three principles spelled out in the MOU are not signed by then--would remain in force, even though Arthur confirmed that the offshore jurisdictions had proposed a proposal to lift the July deadline. Australian Ambassador to the OECD Tony Hinton said the OECD would consider the proposal.

     OECD spokesman Nick Bray explained that the July deadline "still stands, because the OECD countries have decided that at the ministerial level. Until it's undecided, it stands."

     July 1 Deadline Looms

     One official from a targeted nation said officials from the U.S. Treasury Department already indicated that they would press ahead with a July 1 deadline for offshore financial centers to reach agreement with the OECD or face sanctions that would freeze them out of the global financial markets. 

     Under that worst-case scenario, the offshore financial centers targeted by the Paris-based OECD would be denied access to international banking networks, blocked from investing in onshore securities markets and, in effect, isolated from the clients they depend upon from other tax jurisdictions to support their financial services sector. 

     Arthur told BNA it was "urgent" that the issues outstanding were resolved before the July deadline. "For us, this is a matter of life and death," he said. "Obviously, this is an issue of the most crucial consequences." 

     Arthur, whose country's offshore financial center was one of those identified by the OECD, continued to insist that free market principles fostered competition. "Those who gain market share call it exploiting the competitive advantage; those who lose market share call it harmful," he said.

     Arthur added, however, that "it would have been remarkable" if full agreement had been reached "in one fell swoop" on ways to put into practice the three key principles of transparency, nondiscrimination, and sharing of information.

     'Deficiencies' in Consultations

     An OECD source who asked not to be named said the OECD "is certainly not averse" to a plan for a global forum, "but the OECD has very serious doubts about how effective it would be. One of the major issues is how are they going to have that input. They suggested having this input through this global forum. But the way in which they suggested it was, broadly speaking, too rushed and too vague, and there was a definite fear on the OECD side that this represents a watering down of the standards that the OECD is looking for."

     Arthur said a global forum would give the targeted countries a chance to provide input into how those principles should be defined and to defend their fiscal sovereignty when it comes to the question of investigating illegal tax evasion. He said such input would dispel politically-sensitive doubts at home that the offshore financial centers were fully involved in the process of defining the terms of the principles. 

     As a prelude to a global forum, he said, "there is a proposal now to go forward in the hopes that we can have a second meeting of this working group in early February." The exact timing of the next meeting remains unclear. However, a report on the London meeting was expected to be made at a meeting set for Feb. 15 in Tokyo between the OECD and offshore financial centers in the Pacific Islands Forum. 

     Arthur said that any agreement that is mutually acceptable must be an "all inclusive, genuinely consultative process" and should "not be open-ended but with way stations in the decisionmaking process leading to a conclusion of the process."

     Hinton said the working group meetings in Barbados and London were originally intended as forums to sort out differences but acknowledged that there was "some misinterpretation" from both sides about the exact aims of the discussions. "The process has been criticized as non-inclusive, which led to enhanced dialogue in Barbados and London addressing deficiencies of the consultations. That has been an important part of the last three days." 

     Hinton said a response to the proposal for a global forum would be premature until all 35 of the targeted offshore financial as well as the OECD member nations have a chance "to consult their constituencies." He noted that the working group in London was "restricted" to Antigua and Barbuda, Australia, Barbados, the British Virgin Islands, the Cook Islands, France, Ireland, Japan, Malaysia, Malta, the Netherlands, Vanuatu, and the United Kingdom. "The very nature of restricted attendance or participation rules out communiques," he said. He added that the proposal for a global forum is "an ambitious one that will take creativity" to accomplish.

     Process Seen as Unfair

     Arthur suggested that the threat of sanctions while negotiations proceed was inherently unfair. "We obviously started out with a latitude that the OECD does not have," he said. "I don't think you can impress upon us domestic taxation across borders." 

     Arthur did not rule out resorting to challenges before the World Trade Organization, based on denial of market access in violation of the General Agreement on Trade in Services, or before the International Monetary Fund, which restricts the ability of IMF members to impose restrictions on international fund transfers. "After we've exhausted all the possibilities for constructive engagement, then, yes, we may explore other modalities," he said. 

     Arthur observed that Barbados is known to have in place higher standards for transparency than many OECD countries and is being targeted by the OECD only for discriminatory tax practices because nonresidents are offered special tax breaks that are not offered to Barbadian residents. He insisted there was "no degree of roguery" permitted in the island nation, once a British colony.

     While not speaking for other countries, he said Barbados was "a microcosm of the world." A Commonwealth spokesman characterized the issue of money laundering as "a red herring. This is not about money laundering," he said. "It's about the competition for global capital."

     Andrew Quinlan, president of the Center for Freedom and Prosperity, a nonprofit anti-tax group formed last October largely in response to the OECD initiative, said his group planned to return to Washington, D.C., to lobby the Bush administration on behalf of the targeted tax jurisdictions. However, the OECD spokesman said "historical experience shows that transparency and exchange of information have been favored through various administrations. "It would be kind of surprising if the U.S. administration came forward and opposed this now," said Bray. 

     Quinlan said CFP's position is that income can be invested offshore with no conditions once it has been taxed in the home country. Bray, however, observed that "this strikes at the heart of how taxes are collected." 

     A Heritage Foundation economist with the CFP declared victory after the three-day meeting. "They didn't give in," Dan Mitchell said, noting that none of the 35 nations and territories had signed advanced letters of commitment to the MOU in London. "Any time they fight to a draw, we win."

     By Patrick Tracey

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

 

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