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Tax Notes International
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Code Section: Section 999 -- International Boycotts

Author: Goulder, Robert

Institutional Author:  Tax Analysts

Citations: (December 2, 2000)

Tax Analysts Reference: 2000 WTD 234-2

Web Page: http://www.freedomandprosperity.org

_______________________________________________________________

New Coalition Strikes Back at OECD Tax Haven Campaign

     Just when it appeared that the OECD was well on its way toward stamping out what it describes as harmful tax competition, a small voice has developed in opposition to their plan in the form of the newly established Center for Freedom and Prosperity.

====== SUMMARY ======

     Just when it appeared that the Organization for Economic Cooperation and Development was well on its way toward stamping out what it describes as harmful tax competition, a small voice has developed in opposition to its plan. The disturbance arises in the form of the newly established Center for Freedom and Prosperity (CFP), a Washington-based nonprofit organization devoted to lobbying U.S. lawmakers in favor of market liberalization. (For prior coverage, see 2000 WTD 226-18, or Doc 2000-30114 (1 original page).) The question now being asked in Washington, Paris, and many other political and financial centers around the world is whether that voice will gather volume and momentum and develop into a substantial force that threatens to drown out and derail the OECD's war against tax havens.

     According to CFP cofounder and president Andrew F. Quinlan, an experienced Capitol Hill insider, the group's highest priority is to conduct an immediate and direct challenge to the OECD's global initiative to force low-tax jurisdictions to abandon their current fiscal policies. The battle will be fought through the CFP's affiliated body, the Coalition for Tax Competition, which Quinlan also coordinates. Joining Quinlan in his effort is economist Daniel J. Mitchell, cofounder of the CFP and chairman of its board of directors. Mitchell, who is also the McKenna Senior Fellow at the Heritage Foundation, has become well-known for his criticism of the OECD's stance against tax competition at the international level. Another Board member is Veronique de Rugy, a French citizen and postdoctoral research fellow at George Mason University in Fairfax, Virginia. De Rugy formerly worked for the European branch of the Institute for Humane Studies and will use the contacts she made there to coordinate the Center's activities in Europe.

     But is this a case of David versus Goliath? The CFP's opposition in the tax policy debate consists of nothing less than the combined forces of the OECD, representing the 29 most economically developed nations of the industrialized world, together with the G-7 finance ministers, the Financial Action Task Force (FATF) -- the world's leading multinational organization in the fight against bank privacy -- the Financial Stability Forum, and the European Union.

     During a November 30 interview with Tax Analysts, Mitchell and Quinlan acknowledged that they face powerful adversaries, but remained confident that they would ultimately prevail. Mitchell said that the CFP has been enthusiastically received. "Thus far, we have experienced a very positive reaction from governments, as well as financial service providers, multinational enterprises, and taxpayers. That is important, because just four or five months ago, these groups were becoming a little demoralized about what was happening with respect to tax competition; it seemed the whole industrialized world had ganged up on them. . . . We may not be an army that equals the size of the OECD, but we are a vehicle through which this battle can be fought," he said.

     So what is to be done? Mitchell and Quinlan believe that one of the critical moments in the tax policy debate will occur July 1, 2001, the OECD's deadline for seeking cooperation from the 35 tax havens blacklisted in their June 2000 report, "Toward Global Tax Cooperation." According to the OECD report, jurisdictions that do not agree to cooperate by July 1, 2001, risk being subjected to defensive countermeasures.

     The salient point, Quinlan noted, was that the OECD is not a government; it lacks the ability to promulgate or enforce such sanctions. As OECD officials have admitted in the past, it is up to the organization's 29 member states to implement the appropriate responses. And that is where he believes the OECD is most vulnerable. He foresees that July 1, 2001, will arrive with many of the blacklisted jurisdictions having refused to cooperate. Once that occurs, other member states will look to the United States to strike the first blow against the tax havens by attempting to implement defensive countermeasures -- what Mitchell refers to as "financial protectionism." But Quinlan, calling on years of Capitol Hill experience, suggested that the OECD would discover that getting such controversial measures passed into law is much easier said than done. "It only takes defeat in one house of Congress to kill a bill," he said.

     With the July 1, 2001, deadline less than seven months away, Mitchell, Quinlan, and company understand that they must move swiftly to realize their goals. If the future unfolds as their coalition intends, the tax havens will ignore the OECD's demands and face few -- if any -- meaningful sanctions as a consequence of their defiance. Therefore, the coalition argues, the impetus for cooperation with the OECD is overrated. That is the argument the CFP will put forward December 5-7 during the 24th Annual Conference on Caribbean and Latin American Economies in Miami, Florida, where various finance ministers and tax officials from several of the affected jurisdictions will be in attendance.

     Unperturbed by the "David versus Goliath" analogy, Quinlan promised, "We will work very hard between now and July 1 to let these low-tax jurisdictions know that there is a winnable battle here and that they do not have to buckle under to pressure from the OECD. Last but not least, we should remember that David did defeat Goliath." Perhaps the chances of David's tax counterpart are not so bad.

====== FULL TEXT ======

     Just when it appeared the Organization for Economic Cooperation and Development was well on its way toward stamping out what it describes as harmful tax competition, a small voice has developed in opposition to its plan. The disturbance arises in the form of the newly established Center for Freedom and Prosperity (CFP), a Washington-based nonprofit organization devoted to lobbying U.S. lawmakers in favor of market liberalization. (For prior coverage, see 2000 WTD 226-18, or Doc 2000-30114 (1 original page).) The question now being asked in Washington, Paris, and many other political and financial centers around the world is whether that voice will gather volume and momentum and develop into a substantial force that threatens to drown out and derail the OECD's war against tax havens.

     According to CFP cofounder and president Andrew F. Quinlan, an experienced Capitol Hill insider, the group's highest priority is to conduct an immediate and direct challenge to the OECD's global initiative to force low-tax jurisdictions to abandon their current fiscal policies. The battle will be fought through the CFP's affiliated body, the Coalition for Tax Competition, which Quinlan also coordinates. Joining Quinlan in his effort is economist Daniel J. Mitchell, cofounder of the CFP and chairman of its board of directors. Mitchell, who is also the McKenna Senior Fellow at the Heritage Foundation, has become well-known for his criticism of the OECD's stance against tax competition at the international level. Another Board member is Veronique de Rugy, a French citizen and postdoctoral research fellow at George Mason University in Fairfax, Virginia. De Rugy formerly worked for the European branch of the Institute for Humane Studies and will use the contacts she made there to coordinate the Center's activities in Europe.

     But is this a case of David versus Goliath? The CFP's opposition in the tax policy debate consists of nothing less than the combined forces of the OECD, representing the 29 most economically developed nations of the industrialized world, together with the G-7 finance ministers, the Financial Action Task Force (FATF) -- the world's leading multinational organization in the fight against bank privacy -- the Financial Stability Forum, and the European Union. Concurrent with the OECD's efforts, the European Commission and the Primarolo Group have been conducting their own separate assault on preferential tax regimes within the 15-nation EU bloc, advocating compliance with the so-called EU Code of Conduct. (For prior coverage, see 2000 WTD 231-3, Doc 2000-30876 (5 original pages).

     During a November 30 interview with Tax Analysts, Mitchell and Quinlan acknowledged that they face powerful adversaries but remained confident that they would ultimately prevail. Mitchell said that the CFP has been enthusiastically received. "Thus far we have experienced a very positive reaction from governments, as well as financial service providers, multinational enterprises, and taxpayers. That is important, because just four or five months ago, these groups were becoming a little demoralized about what was happening with respect to tax competition; it seemed the whole industrialized world had ganged up on them. . . . We may not be an army that equals the size of the OECD, but we are a vehicle through which this battle can be fought," he said.

Philosophical Opposition

     As those who follow international taxation are well aware, the OECD effectively declared war against the tax havens of the world in April 1998 with the release of its landmark report, "Harmful Tax Competition: An Emerging Global Issue." The report decried what it termed "harmful tax practices" on various macroeconomic policy grounds and called upon tax haven jurisdictions to dismantle their low-tax regimes and bank secrecy laws in the name of curbing cross- border tax evasion. In view of the interests that the OECD represents, the international tax community had good reason to take the campaign very seriously. The stakes are huge, both economically and politically.

     But not everyone agrees that the OECD initiative reflects sound tax policy. Mitchell has argued repeatedly that the project is misguided, insisting that tax competition should be encouraged, not persecuted. (For prior coverage, see 2000 WTD 200-15, or Doc 2000- 26564 (23 original pages).) From his perspective, tax competition is a positive force that directs tax rates downward, helping taxpayers and forcing governments to become more efficient. By contrast, he contends, the OECD war against low-tax jurisdictions is akin to the European Union's tax harmonization movement. He predicts that both efforts would inevitably result in a convergence toward higher taxes. He also takes a dim view of the manner in which the OECD has gone about its business, suggesting that they "act as if they are upholding international standards, when in fact, they are unilaterally dismantling centuries of economic practice and international law."

     Mitchell believes that the OECD should never have strayed from its otherwise useful work in the international tax arena, such as developing transfer pricing guidelines or model income tax treaties. On that point, he is not alone. Following the release of the OECD's 1998 report on tax competition, Richard Hammer, a prominent member of the OECD's Business and Industry Advisory Council (BIAC), was highly critical of the new endeavor and suggested that the report would never have been issued had the BIAC been involved in the formative consultations. (For prior coverage, see 1999 WTD 131-2, or Doc 1999- 23454 (3 original pages).

     When asked to explain why the OECD chose to pursue that route, Mitchell said:

         I think the OECD got involved in this area for typical empire-building reasons. For a couple of years, their budget was trending downward, and they were not happy about that. This whole project has allowed them to ask [their member states] for dramatic increases in funding. But, having said that, I don't think the OECD bureaucracy is necessarily driving this process, as much as the treasury departments of France and Germany and unfortunately, to some degree, the United States. . . . The U.S. participation is the most puzzling feature of this debate, particularly since our low-tax structure attracts so much investment from offshore. This is doubly tragic, since I am sure the OECD project would not have gone as far as it has without the current U.S. administration somehow blessing it along the way, as can be seen in the public statements by [U.S. Treasury Secretary Lawrence] Summers and [Acting Assistant Secretary for Tax Policy Jonathan] Talisman. I also understand that Japan has become very involved in the OECD project because they want to suppress the rise of Hong Kong and Singapore as dominant economic powers.

     Mitchell considers the debate to involve much larger issues than just international taxation, and he is careful to clarify that he does not condone or defend illegal tax evasion, arguing that low tax rates and withholding are the preferable ways to ensure compliance. As he sees it, the OECD effort represents a worldwide attack on taxpayer privacy rights and an attempt to derogate the national sovereignty of lesser-developed regions. Mitchell warns that once those freedoms are compromised, they will be permanently lost. He also believes the OECD suffers from a fundamental internal contradiction -- they openly embrace globalization with respect to trade issues, but quietly reject globalization in the area of tax competition. He said:

         This is fiscal protectionism -- a knee-jerk reaction against globalization. Politicians feel they are being hemmed in by competitive pressure, in terms of their ability to set their own fiscal policy. In other words, politicians are like businessmen seeking protection from foreign competition. If a Mexican manufacturer wants to export widgets into the United States, that hems in the U.S. widget producers. But that's good economics; it rewards competition and benefits consumers. We understand that competition works for pet stores, bankers, and carmakers, so why isn't that same policy good for taxation? Everyone else in the private sector is expected to deal with the rigors of globalization, why not politicians and tax collectors?

Just the Tip of the Iceberg

     Two years after its initial pronouncement against tax competition, the OECD released a follow-up report in June 2000, during its annual ministerial meeting in Paris. The document, "Toward Global Tax Cooperation," blacklisted 35 low-tax jurisdictions because they did not agree to cooperate with the OECD's crusade to eradicate harmful tax competition. The report also pointed out approximately 50 potentially harmful tax practices existing within OECD member states that it may eventually require to be removed.

     Mitchell argues that the OECD's blacklist merely represents the tip of the iceberg and masks the group's unspoken long-term objectives. He noted that none of the 35 blacklisted jurisdictions represents a major source of international power -- politically, economically, or militarily. Therefore, he suggests, they were easy targets to help establish the foundation for what will become a much larger campaign. Mitchell said:

       There is a nice baseball analogy here. The OECD attack on these blacklisted countries is just first base. Their next step will be aimed at low-tax jurisdictions with a little more clout, perhaps Singapore, Hong Kong, Luxembourg, and Switzerland. They represent second base. Once they are finished getting them, they will move onto third base, which might be the U.K. or the Netherlands. And the OECD's ultimate objective, or home plate, is the United States. We [the United States] are a tax haven. We have no effective information exchange with any country besides Canada; we don't tax capital gains and interest income for foreigners who invest here; we have ring fencing and no or low levels of taxation on inward investment. We have everything the OECD says they don't like about the Cayman Islands . . .  and the Europeans are not pleased that they have so much capital outflow to the U.S.

A Strategic Vision

     So what is to be done? Mitchell and Quinlan believe that one of the critical moments in the debate will occur July 1, 2001, the OECD's deadline for seeking cooperation from low-tax jurisdictions on the group's blacklist. According to the OECD's 2000 report, jurisdictions that do not agree to cooperate with the OECD by that date risk being subjected to defensive countermeasures. The term "defensive countermeasures" has never been defined, but is generally regarded to include measures similar to those imposed against nations on the U.S. Treasury Department's international boycott list. The boycott list, applied through section 999(b)(3) of the U.S. Internal Revenue Code, discourages U.S. taxpayers from engaging in commercial activity with parties in the targeted countries by imposing stiff economic sanctions relating to such transactions.

     The nations on the boycott list have historically been associated with state-sponsored terrorism. (For prior coverage, see 2000 WTD 200-29, or Doc 2000-25915 (1 original page).) Viewed in that manner, the OECD's proposed defensive countermeasures could be interpreted as grouping tax havens alongside terrorists. Reasonable minds may differ, of course, as to whether such treatment reflects sound tax policy. Mitchell was not shy about expressing his views on the matter, saying, "I would respect the OECD more if they were honest about what they are doing. These countermeasures are not defensive; they are offensive, because the OECD is trying to bully someone else into changing their laws so it's easier for them to collect taxes. . . . Those measures are defensive only in the same sense that Hitler 'defensively' invaded Poland."

     The salient point, Quinlan noted, was that the OECD is not a government; it lacks the ability to promulgate or enforce such sanctions. As OECD officials have admitted in the past, it is up to the organization's 29 member states to implement the appropriate responses, and that is where Quinlan believes the OECD's campaign is most vulnerable. He foresees that July 1, 2001, will arrive with many of the blacklisted jurisdictions having refused to cooperate with the OECD. Once that occurs, other member states will look to the United States to strike the first blow against the tax havens by attempting to implement defensive countermeasures -- what Mitchell refers to as "financial protectionism." But Quinlan, calling on years of Capitol Hill experience, suggested that the OECD would discover that getting such controversial measures passed into law is much easier said than done. "It only takes defeat in one house of Congress to kill a bill," he said.

     Mitchell agreed that the United States would likely be the first test case for sanctions against uncooperative tax havens. "The United States is the 800-pound gorilla of the world economy," he said, doubting that other leading OECD member states would separately enact countermeasures once the same measures had been defeated in the U.S. Congress. His reasoning is that the governments of France and Germany are sufficiently astute to realize that taxpayers would simply move their activity to the United States if they adopted sanctions. "They [France and Germany] would just lose out on a lot of business, and I doubt they would let that happen. . . . Is Britain going to impose these countermeasures if the U.S. won't? I don't think so," Quinlan said.

Flexing Political Muscle

     A good example of the rocky political landscape that might await any proposed countermeasures can be seen in the failure of another recent U.S. legislative proposal, the International Counter-Money- Laundering and Foreign Anti-Corruption Act of 2000 (H.R. 3886). The administration of U.S. President Bill Clinton strongly endorsed the proposal to dismantle certain bank secrecy laws in the name of curbing money laundering. Even the ideologically diverse House Banking Committee overwhelmingly approved the bill, 31-1. But just when the bill's supporters thought there would be smooth sailing, a political logjam developed. Because a key group of lawmakers opposed the bill, its forward momentum stopped. The bill did not come up for a vote before the full House of Representatives, and the Senate Banking, Housing, and Urban Affairs Committee has declined to hold hearings on it. In short, the bill is dead. (For prior coverage, see 2000 WTD 186-1, or Doc 2000-24646 (4 original pages).) The same legislation was highly praised by the FATF, whose secretariat is affiliated with OECD headquarters in Paris.

     If Quinlan's coalition has its way, any attempt to propose countermeasures against tax havens could meet a fate similar to that suffered by H.R. 3886. "What our coalition has, which no one else can claim, is that we are now set to successfully deal with Congress. We have already met with the key players. All we need now is for more people join with us, so that we speak with a strong unified voice," he said. Evidence of Quinlan's work is reflected in recent comments of U.S. House of Representatives Majority Leader Richard K. Armey (R- Texas), who has gone on record as saying, "By fighting against an international tax cartel and working to preserve financial privacy, the Center for Freedom and Prosperity is protecting taxpayers, both in America and around the world." Armey was the first leading U.S. lawmaker to take a public stand against the OECD's work on tax competition, and he publicly called upon Secretary Summers to withdraw U.S. support for the initiative.

     The point becomes moot if each of the tax havens agrees to cooperate with the OECD. In that event, the battle will have already been played out before July 1, 2001, through diplomatic channels. Some observers feel the process may already be materializing. The chairman of the OECD's Forum on Harmful Tax Competition, Bruno Gibert, announced during an October 18 press conference in Paris that he was very pleased with the progress achieved so far in negotiations with the tax havens. An OECD statement issued at the time of Gibert's press conference stated that 23 of the 35 blacklisted jurisdictions had offered some expression of a cooperative intent. Phil West, then U.S. Treasury Department's International Tax Counsel, who also served as cochair of the OECD Forum, added that he hoped no defensive countermeasures would ever become necessary as a result of successful dialogue with the targeted governments. "Our ultimate goal is to have a list of uncooperative tax havens with no names on it," he said. (For prior coverage, see 2000 WTD 205-1, or Doc 2000-27280 (3 original pages). If it comes to that, the coalition's political prowess may have met its match.

Conclusions

     The Center for Freedom and Prosperity realizes that time is of the essence. With the July 1, 2001, deadline less than seven months away, Mitchell, Quinlan, and company understand that they must move swiftly to realize their goals. If the future unfolds as their coalition intends, the tax havens will ignore the OECD's demands and face few -- if any -- meaningful sanctions as a consequence of their defiance. Therefore, the coalition argues, the impetus for cooperation with the OECD is overrated. That is the argument the CFP will put forward December 5-7, during the 24th Annual Conference on Caribbean and Latin American Economies in Miami, Florida, where finance ministers and tax officials from several of the affected jurisdictions will be in attendance.

     Unperturbed by the "David versus Goliath" analogy, Quinlan promised, "We will work very hard between now and July 1 to let these low-tax jurisdictions know that there is a winnable battle here and that they do not have to buckle under to pressure from the OECD. Last but not least, we should remember that David did defeat Goliath." Perhaps the chances of David's tax counterpart are not so bad.

__________________________________________________________________ __________

Geographic Identifier: Organization for Economic Cooperation and Development; United States; Financial Action Task Force on Money Laundering

Language: English

Document Number: Doc 2000-31203 (9 original pages)

Index Terms: international taxation, tax competition, Organization for Economic Cooperation and Development, tax havens, tax policy

Magazine Citation:

Cross Reference:

For prior coverage, see 2000 WTD 226-18, or Doc 2000-30114 (1 original page);

For prior coverage, see 2000 WTD 231-3, or Doc 2000-30876 (5 original pages);

For prior coverage, see 2000 WTD 200-15, or Doc 2000-26564 (23 original pages);

For prior coverage, see 1999 WTD 131-2, or Doc 1999-23454 (3 original pages);

For prior coverage, see 2000 WTD 200-29, or Doc 2000-25915 (1 original page);

For prior coverage, see 2000 WTD 186-1, or Doc 2000-24646 (4 original pages);

For prior coverage, see 2000 WTD 205-1, or Doc 2000-27280 (3 original pages).

Subject Area: Harmonization of taxes, Tax havens, Tax policy issues

Industry Group: Banking, brokerage services, and related financial services

Web Information: http://www.freedomandprosperity.org

 

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