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Investor's Business Daily

October 26, 2000

Are Efforts To End 'Tax Competition'
The First Steps Of Global Tax Cartel?

By Eileen M. Ciesla
Investor's Daily

           Tax gatherers are going global - and ganging together to stop that scourge of the earth: "harmful tax competition."

     That's the charge against the U.S. Virgin Islands and 40 other so-called tax havens.

     The charge was made in June by the Organization for Economic Cooperation and Development, a Paris-based gang of 29 high-tax, mostly European countries, plus the U.S. and Japan.

     The OECD is threatening sanctions if tax havens - politely termed "offshore financial centers" - don't meet its  demands. To wit: agree to more fiscal transparency and stop preferential tax treatment by June 2001.

     Some members of Congress are alarmed. If the OECD can force 41 countries to play by its rules, the U.S. could feel pressured to do so also."The (OECD) effort is designed to create a tax cartel," Rep. Dick Armey, R-Texas,  warned in a letter last month to Treasury Secretary Lawrence Summers. "If the OECD succeeds, our nation will face the risk of higher taxes and a weakened economy, while developing nations will be hamstrung in their attempts  to promote economic growth."

     Six OFCs have already knuckled under to the OECD: Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and San Marino. The rest are still holding out.

     The OECD says the initiative has been misrepresented.

     "The project is not about trying to harmonize taxes, it is not about trying to minimize or set minimum tax rates,  and it's not about trying to tell any country about the kind of tax structure they should have," said Jeffrey Owens, an OECD spokesman. "It's to provide a level playing field to avoid the tax distortion of financial decisions, particularly in the financial service sector."

     It's true that tax havens rob Europe of vital revenue, but fighting crime is the OECD's main concern, Owens says.

     To make the OECD's list, an OFC must meet one of three criteria. It lacks transparency. It doesn't have an open exchange of financial information with other nations. Or it "ring-fences." That is, it provides a different set of tax incentives for domestic and foreign firms.

     The OECD says ending these practices is the only way to crack down on "tax avoidance." The solution is to strip away the privacy that OFCs afford and end other incentives to avoid taxes.

     "That's the only way you're going to counter illegal tax crimes and other abuses of the tax system. We need  more effective cooperation," Owens said.The plan has the support of the Clinton administration. "A lot of very  pernicious activity seeks the shadows of nontransparency," said a U.S. Treasury official, who asked not to be named. "We want sunshine to be a disinfectant."

     Drug traffickers, arms dealers and terrorists often use OFCs to launder money. "In some cases there is overlap between the failure to comply (with OECD demands) and money laundering," the official said.

     While the two sides argue, some investors are hedging their bets."Some multinationals are getting antsy," said  Bruce Zagaris, partner with the D.C. law firm Berliner, Corcoran and Rowe. "They're afraid of criticism that not  only are they doing business in tax havens, but in tax havens that are on the blacklist. And that could cause their  publicly traded stock to go down."

     Target nations complain that nailing down what makes a tax practice harmful isn't easy.

     "What about capital gains earned by foreigners on U.S. stock?" said a Cayman Islands attorney, who asked not to be named. "An American pays withholding tax on that gain, a foreigner does not. That is ring-fencing by the  OECD definition. Is that under attack next?"

     Others say the OECD blurs the line between avoiding taxes and laundering money.

     "They are the exact opposite," said Dan Mitchell, economist with the Heritage Foundation. "Money laundering is taking money from the underground economy and bringing it above ground. Tax avoidance is taking legally made  money and hiding it from the government."

     Robert Bauman, former Maryland congressman and author of the "Offshore Money Manual," believes the  blurring is intentional.

     "They're trying to tar countries with no money laundering problems, but no taxes either. It's been a political factor throughout," Bauman said. "Many of the OFCs are major financial competitors to New York and London.  The Cayman Islands is the fifth largest in amount of money held by banks and trust companies. Obviously, if you can shut them down, they'll have to go somewhere."

     Working alongside the OECD is the Financial Action Task Force (FATF), an international watchdog group  formed by major industrial nations in 1989 to fight money laundering. In June, the FATF named 15 countries it says  are hot spots for money laundering. Eleven of the 13 are also on the OECD's list.The FATF left off its list the biggest money laundry in the world: the U.S.The Financial Crimes Enforcement Network of the Internal Revenue Service says half of the $ 600 billion laundered each year is laundered in the U.S.

     Congress recently killed a bill to fight money laundering. The International Counter-Money Laundering Act,  sponsored by Rep. Jim Leach, R-Iowa, would have given officials the right to ask banks to release customer information based on "reasonable grounds."

     The bill, it was argued, compromised financial privacy rights. Some fear OECD pressure might help push  through future bills curbing privacy rights or raising taxes.

     "Once we embrace this process of subjugating a country's sovereignty in terms of tax policy, are we really going to back out when the gun is aimed at us?" Mitchell said. "Many of the high-tax nations in Europe view the U.S. as a tax haven and would like to force us to raise our tax rates. And they will use our participation in the attack on tax  havens as a precedent."

 

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