January 19, 2001

OECD Nations Want Caribbean Tax Havens to Tell All

By Daniel J. Mitchell,
a senior fellow at the Heritage Foundation and chairman
of the Center for Freedom and Prosperity.

     Two weeks ago the Organization for Economic Cooperation and Development held a conference in Barbados hoping to convince "harmful tax regimes" from the Caribbean region to rewrite their tax and privacy laws according to OECD specifications. These countries have been branded "tax havens" because they offer both low taxes and financial privacy -- thus luring capital from higher tax jurisdictions and making life harder for the OECD's tax collectors.

     Representing the Center for Freedom and Prosperity, a non-profit group founded to defend tax competition, financial privacy and fiscal sovereignty, CFP President Andrew Quinlan and I were invited to the Barbados meeting as private-sector advisers to the Antigua delegation.

     But on the first day of the conference, we were denied entry, initially on the grounds that our badges were not ready and later because the staff allegedly had run out of plastic badge-covers. It took an intervention from the Antigua delegates to secure our credentials in time for the afternoon session. Later that day our Caribbean friends informed us that the OECD was extremely agitated with our presence, despite the fact that many delegations -- and even the OECD -- had private-sector consultants. Under pressure, we agreed to withdraw from the conference.

     While conference organizers were able to force us from the meeting, that was their only victory. The OECD was hoping to get the tax havens to acquiesce to a "Collective Memorandum of Understanding," which would have obliged low-tax countries to eliminate tax and privacy laws that attract foreign investment. To be fair, the OECD is not necessarily seeking to force low-tax countries to raise tax rates or to introduce new taxes. Instead, the goal is to compel these nations to allow foreign tax collectors access to financial accounts so OECD nations can impose taxes on income earned in other countries. The OECD claims this is necessary to stop tax evasion, but they conveniently overlook the fact that withholding taxes on capital income at the source would guarantee that all income is taxed while still allowing for competition, privacy and sovereignty.

     This attack on fiscal sovereignty could cause casualties in America's backyard. Sixteen of the targeted jurisdictions are Caribbean islands, including the Cayman Islands, Barbados, Aruba, Grenada, Antigua and The Bahamas. A concerted attack on the financial services sector of these countries could have a devastating impact on their economies. This, in turn, could cause emigration and political instability in the region. Not surprisingly, the tax-competitive nations of the Caribbean are quite unhappy with the OECD's arm-twisting. Many leaders from the region view the organization as a rich nation's club arrogantly rewriting the rules of international competition to protect the interests of politicians from high-tax nations. During the brief time we spent at the meeting, we heard a number of low-tax countries berate the OECD for a wide range of misdeeds including colonialism, protectionism, bullying, hypocrisy and arrogance. Owen Arthur, the prime minister of Barbados, did a marvelous job defending his nation's sovereign right to set tax and privacy laws, as did other government officials from the region.

     When the dust settled, the OECD had failed to convince a single "tax haven" country to sign the Memorandum. Indeed, the high-tax nations were actually forced to retreat. Battered by criticism, the OECD agreed to the creation of a task force that would grant low-tax nations a seat at the table as the negotiation process continues. Yet this victory, engineered by Mr. Arthur, should not engender overconfidence.

     The OECD is likely to ignore any task-force recommendations that would hinder its initiative. Moreover, it has not withdrawn its threat of penalizing tax-competitive nations by way of financial protectionism, and it is still demanding that targeted nations agree to the Memorandum of Understanding by July 2001.

     It is also likely that the OECD will begin to use more extreme rhetoric as its bureaucrats desperately seek to keep the initiative from unraveling. It already is trying to smear low-tax countries as havens for dirty money -- even though an overwhelming share of proceeds from criminal activities is acquired and laundered in OECD nations. Indeed, a 1998 U.N. report on the subject noted that criminals often avoid so-called tax havens since they act as a "red flag" for investigators.

     Ironically, many of the "tax havens" have stricter money-laundering laws than OECD nations. American regulators, for instance, were forced in 1999 to withdraw their plans to codify stringent "know-your-customer" rules, after hundreds of thousands of U.S. citizens objected to the government forcing financial institutions to spy on them. Yet such rules are now commonplace in the Caribbean.

     At the very least, the U.S. should not participate in this misguided effort.

     Its tax burden is relatively low compared to Europe, it imposes very low taxes on foreign investors, and generally it does not require its financial institutions to share financial data with foreign tax collectors. This makes the U.S. a tax haven and has helped it attract savings, investment and entrepreneurial talent from around the world.

     In other words, the OECD attack on so-called tax havens could turn into an attack on U.S. tax laws. Indeed, we already may be seeing this. The Clinton administration, as part of its last-minute rush of new regulations, earlier this week proposed that U.S. banks be required to report deposit interest earned by foreigners to their respective governments. This would be bad news for the U.S. economy, which greatly benefits from the inflow of foreign capital.

     The U.S. should also defend the sovereign right of other nations -- particularly our Caribbean neighbors -- to adopt market-friendly tax systems. Low-tax nations in the Caribbean are role models. They demonstrate that pro-business policies can spur economic development. The U.S. should also bear in mind that if the Caribbean economies are crippled by the OECD initiative, there will be political consequences that are likely to be destabilizing for the region. Fortunately, the new Bush administration will have an opportunity to scuttle this misguided initiative, a step that will be good for the U.S. and good for its neighbors in the Caribbean.

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