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The Wall Street Journal Europe

November 22, 2002

A Global Journal Report:

Tax Havens Revolt:
U.K.'s Caribbean Colonies Ignore Government
Order To Disclose Account Data

By Paul Hofheinz in Brussels and Glenn Simpson in Washington

The U.K. is facing a rebellion from its remaining Caribbean colonies over European Union efforts to crack down on tax avoidance.

Ministers from the Cayman Islands and other overseas territories will hold an emergency meeting this weekend in George Town, Grand Cayman, to respond to a British government demand that they agree to disclose the identities and account details of Europeans who hold savings accounts in Caribbean tax havens.

According to the laws that govern the five territories, which include the British Virgin Islands, Turks and Caicos, Montserrat and Anguilla, the U.K. can simply force them to accept the plan. But the five have already ignored a British ultimatum that they submit plans for adopting the measure before Nov. 15. Now, U.K. diplomats are stepping up the pressure, hoping to secure the colonies' outright acceptance of the plan before the end of the year, in time to announce it to their EU allies at a year-end summit.

The colonies say they are being treated unfairly, and note that Europeans routinely stash money they want to hide from their local tax authorities in other countries, such as Switzerland and Luxembourg. But EU diplomats say the argument is disingenuous. The U.K. wants the Caymans and other colonies to comply so it can put pressure on the big tax havens in the heart of Europe to go along as well.

"We believe it is morally and legally wrong for the U.K. to be in direct competition with its territories and then give us ultimatums," says McKeeva Bush, the Cayman Islands political leader. "We are prepared to go to the European Court of Justice, the World Court, and the United Nations if necessary," he added.

The dispute began nearly two years ago when the 15 countries that make up the EU agreed to get tough on internal tax evaders. Led by British Chancellor of the Exchequer Gordon Brown, EU governments agreed to require banks in all EU countries to supply tax authorities in other EU countries with the account numbers, account balances and interest paid on savings accounts held by all EU citizens. The measure was meant to help EU governments crack down on tax evaders, but it promptly ran into trouble. Belgium, Luxembourg and Austria refused to go along unless the EU could get a similar agreement from other countries, including the U.S., Switzerland and a dozen globally recognized tax havens, including the five British colonies.

Since that time, the EU has negotiated with all of those countries, but progress has been slow. Switzerland, in particular, has dug in its heels, refusing to agree to hand over bank details of EU citizens to EU tax authorities, but offering to levy a withholding tax, which would have allowed Switzerland to comply without revealing the names and details of Swiss bank account holders. But EU officials rejected the Swiss offer as "clearly inadequate." The Belgian government then suggested that EU ministers cancel the whole program.

The U.K. has put pressure on the colonies. At a meeting of EU finance ministers last month, Mr. Brown told ministers he would have an agreement from the five territories by the end of the year. "Countries right across the world face problems caused by a minority of their residents who seek to evade the taxes they owe by hiding their money in other jurisdictions," Mr. Brown told his colleagues, according to notes from the meeting. That "makes it harder for governments to fund the schools, hospitals and public services that their citizens expect," he added.

The U.K. colonies, however, have been willing to go along only partially. All five have agreed to share information in criminal cases involving tax fraud, but they refuse to force banks to hand over the account details of all EU citizens, even if those citizens aren't the subject of a tax-fraud investigation.

The U.K., meanwhile, is stepping up the pressure. In an Oct. 31 letter to all five "dependent territories," British diplomats demanded that the colonies agree to provide full details by Nov. 15, but the deadline passed without that commitment. In the letter, the U.K. government said it is anxious to obtain the consent "to ensure that the Chancellor of the Exchequer can confirm in early December that all relevant UK Overseas Territories will commit to the EU Tax Package by the end of the year."

Cayman Islanders say the policy will harm their economy, and they won't go along unless the EU can get other tax havens to commit. "The interests of the U.K.'s Eurobond market are of importance to the United Kingdom but no more so than our financial-services industry is to us," says Mr. Bush, the Cayman Islands leader. "We have fully considered our options and those of the EU and are confident our position is correct."

EU diplomats say that the U.K. has the power to force its way in this dispute. According to the laws governing the five territories, the U.K. can invoke its so-called orders-in-council, which give it the power to demand that legislation be enacted.
Mike Sesit in London contributed to this article.

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