April 24, 2001
OECD 'Harmful' Tax Competition Move May
Violate WTO Obligations, Expert Says
by Cordia Scott
Mark A.A. Warner, former legal counsel in the OECD through December 2000, said on 23 April that several of the OECD's 11 proposed sanctions against so-called tax
havens could get OECD countries into trouble with international trade law if they carry them out.
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Opinions vary widely as to whether the Organization for Economic Cooperation and Developments' crusade to eradicate tax competition is a good idea or not. While some believe tax
competition is harmful and that it brings economic distortions, others believe it is a positive force that drives tax rates downward and makes governments more efficient. Opinions also vary as to what should be done
about it. The OECD, whose 30 member countries compose the world's wealthiest and most economically developed nations, believes it is unfair and is committed to stamping it out. It published a report in June 2000, in
which it branded 35 low-tax jurisdictions as uncooperative tax havens. It has given them until 31 July 2001 to cooperate with its campaign and end their offensive tax practices or face the threat of economic
annihilation by means of certain "countermeasures" or economic sanctions imposed by the heavy-hitting OECD member countries. (For the full text of this report, see 2000 WTD 124-11 (Document link: Database
'Worldwide Tax Daily', View '(Number'), or Doc 2000-17602 (31 original pages).)
All opinions aside, Mark A.A. Warner, who worked as a legal counsel in the OECD up through December 2000, told a luncheon audience on 23 April that several of the OECD's 11
proposed sanctions could get OECD countries into trouble with international trade law if they carry them out. Warner currently works as an international antitrust and trade counsel in the New York and Washington
offices of Hughes Hubbard & Reed LLP. The luncheon was sponsored by the Heritage Foundation, a conservative public policy institute that is supporting efforts by the Center for Freedom and Prosperity to persuade
the U.S. Bush administration to withdraw U.S. support for the OECD initiative.
Warner argued that many of the powerful OECD member countries also belong to the World Trade Organization and have agreed to abide by WTO international trade rules -- specifically,
the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade In Services (GATS). Both GATT and GATS have certain prohibitions on discriminatory measures. Prohibitions take two forms, Warner
explained later in a telephone interview: national treatment -- where WTO members are to treat foreign products, services, and service providers no less favorably than domestic products, services, and service
providers -- and "most favored nation" (MFN), where WTO members are to treat foreign products, services, and service providers from another WTO member no less favorably than another WTO member. A footnote
in the GATS agreement provides a "carve out" or exception for measures that are inconsistent with national treatment, he said, and noted that there is no similar MFN carve out.
Several of the 11 proposed economic sanctions contained in the OECD's June 2000 report, "Towards Global Tax Cooperation," may violate the GATT or GATS nondiscrimination
prohibitions because they wouldn't apply to OECD member countries (although they would apply to their overseas territories and possessions), Warner said. OECD members Luxembourg and Switzerland, for example, who
have excluded themselves from the process, aren't listed on the OECD blacklist, despite strong evidence that they should be. Neither are other OECD member countries that have preferential tax arrangements that were
listed in the first OECD 1998 report, "Harmful Tax Competition: An Emerging Global Issue." "In everything they're proposing to do, the discrimination remains," he said. He also pointed out that
the OECD even admitted in its 1998 report that it had no empirical evidence the blacklisted countries' practices had harmed its member countries in any way.
The OECD's proposed "transactional charges and levies on certain transactions," depending on how they are designed and implemented, appear to be the worst violation of
both the GATT and GATS rules, according to Warner. "For the other proposed counter measures, a GATS attack seems more likely, given the focus on globally-mobile assets and the nature of trade with the
blacklisted countries," he said. He noted that other possible sanctions that might violate the GATS would relate to the treatment of withholding taxes, deductions, and credits. The GATS general exception for
"fraudulent and deceptive practices" would unlikely save those countermeasures because the OECD campaign has focused on low taxes from the beginning and not just on transparency and information sharing as
part of the OECD's work to stem money laundering, bribery, and corruption, he said. Warner also noted that the countermeasures would also have to be judged against the language in the Chapeau of GATS Article XIV,
which states that they are required not to be applied in a manner that would constitute arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on
"If the measures were implemented in a nondiscriminatory basis to all countries, then they might be OK," Warner said. "But if that were the case, what is the need
for the blacklist? And, therefore, a [WTO] panel may look closely to see whether the measures are truly intended to be, or are, implemented in a nondiscriminatory fashion." The United States, in Warner's
opinion, is probably safe from a "GATS attack" because of its scheduled commitments and MFN derogations. Other prominent OECD member countries that didn't list tax-related MFN exclusions at the time of the
"Uruguay Round" of GATT aren't in as lucky of a position, he said.
He also pointed out that OECD member countries cannot rely on existing measures or tax treaties to protect them from a GATS attack. The measures and treaties raise the stakes by
potentially calling into question the viability of their very existence. "The OECD has a habit of not looking at possible trade law consequences of its actions until after the fact, as demonstrated by the
failure of the proposed multilateral agreement on investment a few years ago and its work on export credits discussed in recent WTO panel decisions relating to airplane financing by Canada and Brazil," he said.
Countries should be freely permitted to use lower taxes to attract capital to build a financial services industry, Warner said. "If the OECD is serious about this initiative,
[it] should work with all affected countries in a global tax forum to reach common definitions of appropriate tax base and rates and rules regarding information sharing and privacy rather than impos[e] them in a
unilateral and discriminatory fashion." (For prior coverage, see Tax Notes Int'l, 23 Apr., p. 2018, or 2001 WTD 74-1 (Document link: Database 'Worldwide Tax Daily', View '(Number'), or Doc 2001-10900 (10
Geographic Identifier: United States; Organization for Economic Cooperation and Development
Document Number: Doc 2001-11681 (5 original pages)
Index Terms: international organizations, tax harmonization, international taxation, tax competition, tax havens, Organization for Economic Cooperation and Development, offshore jurisdictions, low tax
Cross Reference: For the full text of 1998 OECD report, see 2000 WTD 124-11
(Document link: Database 'Worldwide Tax Daily', View '(Number'), or Doc 2000-17602 (31 original pages); For prior coverage, see Tax Notes Int'l, 23 Apr, p. 2018, or 2001 WTD 74-1 (Document link:
Database 'Worldwide Tax Daily', View '(Number'), or Doc 2001-10900 (10 original pages).
Subject Area: Tax havens, Multijurisdictional taxation, Tax policy issues, Harmonization of taxes