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CFP Strategic Memorandum, February 2, 2004

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Center for Freedom and Prosperity Strategic Memorandum

Date:      Monday, February 2, 2004

To:        Supporters of Tax Competition

From:    Dan Mitchell, Heritage Foundation Senior Fellow

Re:        London Meeting of OECD Sub-Group
___________________________________________________________________

Beginning February 3, representatives of high-tax governments and low-tax jurisdictions will meet in London as part of the Organization for Economic Cooperation and Development's (OECD) "level playing field" sub-group. This meeting is a continuation of the Ottawa conference, and is part of the OECD's ongoing (and almost entirely futile) effort to convince low-tax jurisdictions that they should agree to serve as fiscal colonies for high-tax nations.

The fundamental issue is whether low-tax jurisdictions should agree to emasculate their privacy laws and surrender their fiscal sovereignty so that high-tax nations can more easily enforce their bad tax laws including taxation of income earned outside their borders. Using the threat of protectionism, the OECD convinced many so-called tax havens to sign "commitment letters" indicating that they would take the aforementioned steps, but the low-tax jurisdictions simultaneously stated that the letters were not binding unless all OECD nations agreed to abide by the same misguided rules. This "level playing field" requirement has created a stalemate since a number of nations including OECD members such as the United States, the United Kingdom, Luxembourg, and Switzerland are "tax havens" according to the OECD's own definition.

The OECD hoped this problem would be solved by the adoption of the European Union Savings Tax Directive. At one point, this tax harmonization scheme would have required all EU nations along with six non-EU nations including Switzerland and the United States to automatically collect and share information about nonresident investors. Had that proposal been implemented, low-tax jurisdictions would have faced tremendous pressure to comply with OECD demands (even though the level-playing-field requirement still would not be satisfied because certain tax havens in Asia and elsewhere would have been exempt).

The EU directive became a moot issue, though, when the Brussels-based bureaucracy was forced to eviscerate the proposal (see CF&P Foundation Prosperitas, Vol. III, Issue IV,
1 for a complete analysis). Several OECD nations have been excused from any requirement to share information, meaning that the so-called level playing field does not exist and low-tax jurisdictions are not obliged to act as deputy tax collectors for high-tax nations.

So what, then, is the purpose of the London sub-group meeting? There is no good answer to this question, but the best guess is that the OECD does not want to officially admit that its project has failed. It is also likely that the Paris-based bureaucrats hope that endless nagging might convince low-tax jurisdictions to acquiesce. But this hardly seems to be likely, particularly since leaders of low-tax jurisdictions contrary to conventional wisdom among OECD officials are not unsophisticated people that can be easily hoodwinked.

Supporters of tax competition, including delegates to the sub-group meeting, should remember these key points:

  1. Stalemate is victory The liberalizing impact of tax competition grows stronger with each passing day. More and more nations are lowering tax rates and reforming their tax codes. As this process continues, the pressure to attack low-tax jurisdictions will abate. Eventually, the number of nations interested in tax harmonization will begin to shrink and the process will collapse.2 While it may be a nuisance to attend meetings with OECD officials and bureaucrats from high-tax nations, this is a relatively low-cost way of placating opponents of tax competition assuming, of course, that low-tax jurisdictions to not make any foolish concessions. But since the level playing field clearly does not exist, this is not a realistic threat.
     
  2. The European Union savings tax directive is a diminishing threat The European Union savings tax directive is the biggest danger to tax competition, but that danger is increasingly remote for the reason stated above. Moreover, this watered-down version of the directive may never be implemented. According to the Article 17(3) of the directive, EU members must unanimously agree before July 1, 2004 that the conditions of the directive have been met in order for it to be implemented.3 This might not happen, especially since a number of non-EU jurisdictions, have refused to join the cartel. Moreover, the directive would be very vulnerable to a legal challenge if it did get implemented. A recent article in Butterworths Journal of International Banking and Financial Law explained that the directive violates the treaty guaranteeing the free movement of capital.4
     
  3. Don't let the OECD win procedural victories The bureaucrats in Paris have prepared "Draft Terms of Reference" and this document represents a potential pitfall for low-tax jurisdictions.5 While this document carries no official weight, it is a clever attempt by the OECD to drive the conversation in the wrong direction. The very first term, "Defining the global level playing field concept," is not unreasonable, but this should be augmented by additional terms such as: a) Considering the type of level playing field that will enhance global economic growth; b) Considering the process that will enable lower-income jurisdictions to close the gap with upper-income nations; and c) Considering the process that creates incentives for developing nations to adopt market-oriented policies. These added terms would help focus the debate on economic growth something the OECD conveniently forgets to discuss even though it is part of their mission. But the main problem with the "Draft Terms of Reference" is found in Term 8 ("Identifying the role of uniform consequences for failure to implement transparency and effective exchange of information") and Term 9 ("Considering ways to publicly recognise fulfilment of the transparency and effective exchange of information standards"). Both of those Terms presuppose that information exchange is necessary and desirable. This is a disingenuous attempt to compromise the integrity of the entire meeting. At the very least, both of these Terms should be preceded by the clause, "To the extent necessary,". This clause does not bias the discussion in any direction and the inclusion of this clause at the beginning of Terms 8 and 9 would indicate that the OECD believes that the discussion about level playing fields should take place on a level playing field.

       Less than four years ago, it appeared tax competition, fiscal sovereignty, and financial privacy were heading for extinction. But advocates of tax harmonization have been stymied, and there is every reason to believe that these opponents of economic liberalization will remain frustrated so long as low-tax jurisdictions forcefully defend themselves.

Endnotes

1 October 2003, CF&P Foundation Prosperitas, Vol. III, Issue IV, by Dan Mitchell, The Level Playing Field: Misguided and Non-Existent, http://www.freedomandprosperity.org/Papers/lpf/lpf.shtml.

2 For more information on this development, read the Tax Competition chapter in the Heritage Foundation's Index of Economic Freedom 2004, available at http://www.heritage.org/research/features/index/ChapterPDFs/chapter2.HTML.

3 Article 17(3) reads, "The Council shall decide, by unanimity, at least six months before 1 January 2005, whether the condition set out in paragraph 2 will be met, having regard to the dates of entry into force of the relevant measures in the third countries and dependent or associated territories concerned. If the Council does not decide that the condition will be met, it shall, acting unanimously on a proposal by the Commission, adopt a new date for the purposes of paragraph 2." The full text of the directive can be found at: http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=E N&numdoc=32003L0048&model=guichett.

4 Marc Dassesse, "Does the EU Directive on 'taxation of savings' violate the freedom of movement of capital," Butterworths Journal of International Banking and Financial Law JIBFL (2004) Vol.19 No.1 Pages 12-17.

5 The full text of the document is available at http://www.freedomandprosperity.org/memos/m02-02-04/oecd-draftterms.pdf.

 

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P.O. Box 10882
Alexandria, Virginia 22310-9998
202-285-0244
cfp@freedomandprosperity.org
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