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The Bureau of National Affairs

No. 125
Friday June 29, 2001
Page GG-1
ISSN 1523-567X
Lead Tax Report

International Taxes:
United States Wins Compromise Tempering
OECD Tax Havens Initiative

PARIS--The United States and its trade partners in the Organization for Economic Cooperation and Development have reached a compromise that will limit an ongoing crackdown on offshore tax havens to greater information exchange between tax authorities in targeted jurisdictions and law enforcement officials in the world's industrialized countries, sources told BNA June 28.

The compromise, negotiated between officials from the 30 OECD member countries during the June 26-27 meeting of the OECD's Fiscal Affairs Committee, would eliminate the tax competition emphasis of the ongoing initiative and only allow sanctions against offshore financial centers that refused to meet case-specific information-sharing requests from OECD.

The OECD, a think tank and negotiating forum for 30 of the world's richest nations, launched its harmful tax competition initiative in 1998. It later published an initial list of suspected tax havens in June 2000, and gave the 35 jurisdictions initially listed a July 31, 2001, deadline to express a formal commitment to cooperate by 2005.

July Deadline Extended to November

The compromise agreement--which was approved June 28 by the OECD Council, the Paris-based organization's highest decision-making body, and is slated to be published in coming days--extends this commitment deadline to Nov. 30, and also will grant cooperative offshore financial centers longer delays for designing and then implementing their compliance plans, sources said.

The extension of the July 31 deadline is attributed to political uncertainty generated by the Bush administration's unwillingness to follow the Clinton administration's policy lead on this issue.

U.S. officials, including members of Congress and the Bush administration, regularly suggested in recent months that the OECD initiative is the first step in a plan to "harmonize" tax rates or tax systems worldwide.

Top OECD officials and ministers from leading G-7 countries publicly disagreed with this assertion, while observers said that the Bush administration has been misled by business representatives and lobbyists from offshore financial havens being targeted by the OECD initiative.

Administration Delay Mirrored

"The whole process was essentially shut down for four months, while the new U.S. administration tried to decide what its policy was, so it now seems reasonable that we extend the deadline by the same amount of time," a source told BNA.

The extension will allow countries to analyze the new outlines of the revised OECD program.

In its initial form, the OECD initiative identified tax havens as jurisdictions whose tax regimes failed to meet minimum criteria in three areas: transparency, information exchange, and discriminatory tax regimes. Jurisdictions refusing to share banking and other financial information with OECD governments while actively seeking to attract mobile financial activities for tax evasion purposes were scheduled to be identified as non-cooperative tax havens, and could have faced a host of punitive diplomatic, economic and financial sanctions.

Sources told BNA that the compromise reached June 26-27 eliminates discriminatory tax regimes--different, and usually preferential, tax treatment offered to foreign firms versus domestic firms--from the tax haven criteria meriting coordinated sanctions.

The OECD initiative will still see the existence of discriminatory regimes--also known as ring-fencing--in offshore financial centers as a potential indicator of tax haven status, but will no longer demand that jurisdictions do away with the practice under threat of concerted action from the 30-member OECD.

O'Neill Objections Inspire Change

This change is directly attributed to public positions taken by U.S. Treasury Secretary Paul O'Neill, who came out strongly in favor of the information-sharing aspects of the OECD initiative but rejected the idea that the world's industrialized countries demand changes to any specific aspect of offshore financial centers' tax regime.

Six jurisdictions--Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino--agreed to the OECD's initial demands for greater transparency, nondiscrimination and effective information exchange before the initial list was published in 2000, while three others--the Isle of Man, the Netherlands Antilles, and the Seychelles--have since reached bilateral agreements to do so.

These nine jurisdictions have been allowed wide leeway to work with the OECD on the scope of their cooperation, including the ongoing drafting of the information exchange instrument, while the remaining 32 jurisdictions have yet to reach agreement to cooperate with the OECD on the harmful tax competition initiative.

The nine cooperative jurisdictions will be allowed to opt out of their prior commitment to eliminate discriminatory regimes, sources said. The jurisdictions will also benefit from other changes reached in the compromise plan, including an extension of the period for implementing detailed plans for achieving compliance with the OECD initiative from six months to one year.

The OECD also agreed to hold off any coordinated defensive measures against non-cooperative tax havens until April 2003, the date set for the final elimination of harmful tax practices within the 30 member countries of the OECD.

Opponents Find Fault With New Plan

Meanwhile in Washington, D.C., representatives of advocacy groups opposed to the tax havens initiative June 28 applauded the concessions made by OECD but said the new agreement is "still dangerously flawed."

Andrew Quinlan, president of the Center for Freedom and Prosperity, called OECD's retreat from its original tax harmonization agenda "the good news."

"The bad news is that the OECD is still demanding that other countries have an obligation to help enforce the oppressive tax laws of OECD member nations," he said, adding that the center will increase its public education campaign to oppose OECD's "fiscal imperialism."

"Tax competition, financial privacy and fiscal sovereignty should be celebrated, not persecuted," he said.

Dan Mitchell, senior fellow at the Heritage Foundation, said, "The president's economic team thwarted the worst aspects of the OECD's anti-tax competition campaign, but the agreement still contains dangerous elements. Information exchange for tax purposes, even when limited to specific cases, is inconsistent with sound tax policy, respect for privacy, and international comity."

By Lawrence J. Speer

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

 

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