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Bureau of National Affairs, 11-15-01

No. 219
Thursday November 15, 2001 Page G-3 
ISSN 1523-567X
Tax, Budget & Accounting

International Taxes
OECD Extends Harmful Tax Deadline;
Britain Takes Responsibility for Gibraltar

LONDON--The Organization for Economic Cooperation and Development Nov. 14 extended until Feb. 28 the deadline for tax havens to commit to efforts to end so-called harmful tax practices after the British government agreed that it would be responsible for the international tax obligations of Gibraltar.

In a report, The OECD's Project on Harmful Tax Practices: The 2001 Progress Report, the organization also removed the practice of ring fencing as a criterion for harmful tax practices, but left intact an expectation of effective information exchange and transparency, according to Gabs Makhlouf, chairman of the OECD's Committee on Fiscal Affairs.

Makhlouf said the deadline was postponed from Nov. 30 because work was stalled by Spain's veto of the report. However, he declined comment on the Gibraltar issue, saying "it would not be right for me to comment on the bilateral relationship between the United Kingdom and Spain."

Delay Over Gibraltar

The long-awaited progress report was due to be issued July 31 but was delayed after Spain blocked publication over complaints about financial arrangements for Gibraltar. In a footnote to the report, the OECD said that Britain "confirmed" that it would be responsible for the "international obligations" of overseas territories or crown dependencies.

Spanish officials were concerned that unilateral agreements with the OECD would give the territory more international recognition than Spain could tolerate and insisted Britain must negotiate for Gibraltar. Madrid claimed the British territory had no right to negotiate for itself on international issues and that the United Kingdom should represent it.

British officials disagreed, noting that Gibraltar was a fiscally autonomous territory and formed its own tax policies. Until this second progress report was issued, the OECD tax havens initiative was seen by observers as hostage to the wider talks between London and Madrid over the delicate issue of Gibraltar's participation in European Union affairs and the specific arguments about whether Gibraltar should be included in the list of tax havens.

Makhlouf refused to be drawn on questions about Spain's change of heart on Gibraltar. "What I can say is that all the OECD countries endorsed the report that's published today," he said.

He confirmed that Gibraltar is still considered a tax jurisdiction. "Nothing has changed. It hasn't made a commitment yet."

The timing, however, seemed more than coincidental. On Nov. 9, British Prime Minister Tony Blair and his Spanish counterpart, Jose Maria Aznar, announced they were committed to resolving a centuries-old dispute over the sovereignty of Gibraltar.

While the British Foreign Office declined comment on the matter, U.K. Paymaster General Dawn Primarolo said only that she "welcomes the commitments and action that 12 tax havens have now made to end harmful tax practices, and encourages all jurisdictions to eliminate harmful measures that rely on secrecy, lack of transparency and ring-fencing," the latter a term for discriminatory tax regimes offered to foreign investors.

Ongoing Program

The OECD has been trying to put an end to harmful tax competition since 1998, when it issued a report entitled Harmful Tax Competition: An Emerging Global Issue that focused on geographically mobile activities, such as financial and other intangibles.

It developed criteria to identify factors in the financial systems of regimes that would undermine the integrity and fairness of the global tax systems.

A report released in 2000 provided a list of 35 suspected tax havens and 47 preferential regimes and set a deadline for them to commit to make changes to eliminate suspect practices from their systems.

Since then the OECD--a think tank and negotiating forum for 30 of the world's industrialized nations--has received withering criticism over its efforts to blacklist tax havens.

One of the chief concerns from non-OECD members presented last June, which has been echoed by the United States, was the organization's potential involvement in the regulatory framework.

Earlier this year, the United States backed away from the harmful tax project when Treasury Secretary Paul O'Neill's objected to the implication that the OECD members would be telling other countries how to apply their tax systems.

According to Makhlouf, nonmember nations have had input and will continue to have a say in the process of developing the regulatory framework through the OECD's Global Tax Forum. The forum was launched last year as a platform for OECD members to discuss tax matters with nonmember countries, particularly on tax haven issues.

"The OECD seeks to establish a framework within which all countries--large and small, rich and poor, OECD and non-OECD--can work together constructively to eliminate harmful tax practices," he said.

New Terms of Project

The new report narrowed the criteria for determining whether a tax haven is cooperative to transparency and exchange of information. It made clear, however, that OECD countries would welcome the removal of other tax practices in havens to the degree to which they inhibit fair tax competition, and noted that OECD member countries are free to impose unilateral sanctions outside the coordinated framework against any tax havens.

Jurisdictions that committed to earlier OECD criteria for revamping their tax structure may re-evaluate their commitments as they no longer need to meet the substantial activity criteria, the report added.

The report also said that any coordinated defensive measures would not apply to uncooperative tax havens any earlier than it would apply to OECD member countries with harmful preferential regimes.

Lastly, in order to ensure that committed jurisdictions have enough time to develop implementation plans, the time for making such plans was extended from six months after the date of making a commitment to 12 months after that date, the report said.

The OECD also indicated that its members are aware of the administrative concerns expressed by some jurisdictions over meeting these terms and said that member countries, in conjunction with the Internal Monetary Fund and the World Bank, are in the process of setting up a program to offer development assistance to help committed jurisdictions further develop their economies.

'New World' Fit

Makhlouf said that, since the Sept. 11 attacks, a growing number of officials worldwide have been calling for tighter monetary controls at offshore financial centers and improved transparency and exchange of information.

He suggested that such centers would now face greater pressure to demonstrate that they meet international standards for transparency and openness.

"It's a new world," he said. "I think the environment in which the international community finds itself post-Sept. 11 is not about tax and tariffs, but it is about transparency. It is about establishing a regulatory framework for tax which complements and is consistent with everything you've heard either in the press or from leading politicians" in the wake of the terrorist attacks in the United States.

Makhlouf said the OECD hoped that all the jurisdictions would make commitments to revise their tax practices and bring them in line with OECD specifications.

In case any of them do not, or if any OECD member countries do not roll back their harmful regimes, then they would face sanctions, Makhlouf said.

"The OECD is developing a coordinated framework of defensive measures to allow member countries to mitigate the impact on them of any remaining harmful tax practices," he said.

In Washington, D.C., Andrew Quinlan, president of the Center for Freedom and Prosperity, issued a statement Nov. 14 saying the OECD's anti-tax competition scheme remains inconsistent with sound tax policy.

"Once again, the Paris-based bureaucrats have been forced to delay their alleged deadline. Moreover, the OECD has been forced to scale back its demands," Quinlan said. "The OECD's plan was wrong three years ago, the plan was wrong last year, and the plan is wrong today," he said, pledging that the CFP "will work hard over the next several months in Washington to insure that all lawmakers and policymakers are aware of the threat that tax harmonization poses to America's national interests."

Text of the report is available on the OECD's Web site at

By Patrick Tracey and Myrna Zelaya-Quesada

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


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