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The Bureau of National Affairs

No. 76
Friday April 19, 2002 Page G-6
ISSN 1523-567X
Tax, Budget & Accounting

Tax Havens
Model Information Exchange Agreement
Presented for OECD Tax Havens Initiative

 PARIS--Adding substance to its ongoing battle against tax havens, the Organization for Economic Cooperation and Development April 18 unveiled a model agreement for information exchange that will provide a framework for most future interactions between authorities in offshore financial centers and their counterparts in the world's industrialized countries.

The Model Agreement on Exchange of Information in Tax Matters was presented simultaneously with publication of the OECD's much-anticipated list of noncooperative tax havens, which specifically targets seven offshore financial centers that have refused to meet transparency and information exchange standards demanded by the world's industrialized nations (75 DTR GG-1, 4/18/02; 75 DTR J-1, 4/18/02).

The seven jurisdictions that have refused to abide by the OECD's demands for greater transparency and better information exchange and now face the possibility of collective sanctions in 2003 are: Andorra, Liberia, Liechtenstein, the Marshall Islands, Monaco, Nauru, and Vanuatu.

Thirty-one other jurisdictions once targeted by the OECD have agreed to cooperate with the harmful tax competition program, launched in 1998, committing specifically to conduct effective exchange of information on a host of tax and financial matters.

This list includes six jurisdictions--Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino--that agreed to meet OECD demands for greater transparency, nondiscrimination policies, and effective information exchange before the May 2000 publication of the suspected tax havens list, and 25 others that agreed by April 18: Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Belize, the British Virgin Islands, the Cook Islands, Dominica, Gibraltar, Grenada, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles, Niue, Panama, Samoa, the Seychelles, St. Christopher and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos, and the U.S. Virgin Islands.

How Does Model Agreement Work?

The model agreement--developed by a working group of OECD member states and 11 cooperative offshore financial centers--details how information exchange processes between officials in OECD countries and those in the 31 cooperative jurisdictions should be carried out.

The OECD said the agreement "is intended to establish the standard of what constitutes effective exchange of information," but noted that no country could "prescribe a specific format for how this standard should be achieved."

The model agreement thus contains two models for information exchange: a bilateral treaty for state-to-state relations between OECD members and cooperative jurisdictions, and a multilateral treaty that could integrate any number of bilateral information exchange agreements between offshore jurisdictions and OECD member states.

While the model agreement is not a legally binding instrument, its prelude noted that it has been drawn up in accord with commitments made by all jurisdictions wishing to cooperate with the OECD. The text may thus be modified, but not in any way that would dilute a jurisdiction's initial commitment to cooperate with the OECD tax havens program.

Obligations for Contracting Parties

The model agreement's first article commits countries to "provide assistance, through exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Contracting Parties concerning taxes covered by this Agreement."

This includes information "relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters."

Members of the working party from OECD and nonmember countries alike agreed that the multilateral version of the model agreement for information exchange cover:

  • taxes on income or profits;
     
  •  taxes on capital;
     
  •  taxes on net wealth; and
     
  •  estate, inheritance, or gift taxes.

The bilateral version of the model agreement does not specify the type of taxes over which information is to be exchanged, leaving this crucial information to be supplied by contracting parties.

The model agreement also sets the conditions covering requests for information, the scope of cooperation during visits from foreign tax authorities, and the limited possibility to decline requests for information.

The agreement sets out the competent authorities of the participating countries as the entities to handle requests and grants of tax information.

Under the model document, the information "shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the country being asked for information if that is where the conduct occurred."

The country being asked for the information would be required to use all relevant measures to provide it to the requesting country, according to the agreement.

In addition, if specifically requested by the competent authority of the applicant country, the other nation would be required to provide depositions of witnesses and authenticated copies of original records.

Each party to the agreement must ensure its competent authority has the ability to obtain and provide:

  • identity of the person under investigation;
     
  • statement of the information sought and the form in which the applicant party wishes to receive the information;
     
  • tax purpose for which the information is being sought;
     
  • rounds for believing the information is within the jurisdiction of the country being asked for the records;
     
  • name and address of anyone believed to be in possession of the requested information; and
     
  • statements on conformity to the law and affirming the requesting country has used all means available in its own territory to obtain the information.

Offshore Centers Score Points

While the OECD countries secured their chief objective in the model agreement--effective information exchange--offshore financial centers cannot be accused of giving up all sovereignty in the affair.

The countries won a strong guarantee of confidentiality for all information exchanged between parties and cost provisions that will force OECD member states to foot the bill for most requests.

The model agreement does not require countries to supply "information which would disclose any trade, business, industrial, commercial or professional secret or trade process."

In addition, countries do not have to provide information they would not be able to obtain in the attempt to administer or enforce their own tax laws.

In keeping with the terms of commitment letters already filed, the model agreement for bilateral information exchange agreements states that the treaties will begin entering into force on Jan. 1, 2004, with respect to criminal tax matters, and by Jan. 1, 2006, with respect to civil tax matters.

Detailed commentary attached to the model agreement illustrates and interprets all of its specific provisions, with the relevance of commentary determined by principles of international law.

Officials from the OECD, member countries, and offshore financial centers all expressed high hopes for the model agreement April 18.

Dutch Finance Minister Wouter Bas said he expects the agreement "to become the international standard for exchange of information in tax matters," adding that it was "very encouraging that 11 nonmember financial centers have had the courage to actively contribute" to the process.

Maltese Minister Jahn Dalli returned the compliment, saying that it was "indeed crucial that the agreement become the international standard," pointing out that no cooperative jurisdiction wanted to lose financial services business to economies that do not cooperate in the exchange of information.

Aruba, Bermuda, Bahrain, the Cayman Islands, Cyprus, the Isle of Man, Malta, Maurituis, the Netherlands Antilles, the Seychelles, and San Marino sat alongside Malta in the working group that drafted the model agreement.

Treasury Approves

In Washington, D.C., Treasury Secretary Paul O'Neill said in an April 18 statement he is "glad to see that our efforts last spring to refocus the OECD project on information exchange and transparency has led to these results." O'Neill applauded the countries that committed to improving their tax information exchange and transparency policies.

"In addition to refocusing the OECD project last summer, I made a commitment to obtain bilateral tax information exchange agreements with the countries on the original OECD list," O'Neill said. "We are making substantial progress. So far, we have signed five TIEAs, and I hope to announce more shortly."

All of the countries with which the United States has recently signed Tax Information Exchange Agreements--the Cayman Islands, Antigua and Barbuda, the Bahamas, the British Virgin Islands, and the Netherlands Antilles--have made commitments to improve their tax information exchange and transparency policies, Treasury noted.

But the OECD's announcement drew criticism in Washington, D.C., from groups opposed to the tax havens initiative.

The tax havens list is a nonevent, according to Andrew Quinlan, president of the Center for Freedom and Prosperity. "Fortunately, the 'commitments' made by low-tax jurisdictions are not binding unless all OECD member nations agree to the same misguided rules. This is why stopping the EU savings tax directive is now a top priority," Quinlan said in an April 18 statement.

Daniel Mitchell, senior fellow at the Heritage Foundation, added, "The OECD was forced to accept commitment letters that are predicated on all OECD member nations agreeing to the same anti-growth tax policies."

Veronique de Rugy, policy analyst at the Cato Institute, agreed, stating, "While the commitment letters are meaningless, they are unfortunate since they lend legitimacy to the imperialist actions of the tax-free bureaucrats in Paris. ... For the jurisdictions that did sign a commitment letter, they must understand that the OECD will not live up to its end of the Faustian bargain."

Further information on the OECD's ongoing tax havens and harmful tax competition initiatives, including copies of the Model Agreement on Exchange of Information in Tax Matters, is available at http://www.oecd.org.

By Lawrence J. Speer and Alison Bennett (Washington, D.C.)

Copyright © 2002 by The Bureau of National Affairs, Inc., Washington D.C.

 

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