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Towards world tax co-operation
by Jeffrey Owens, Financial, Fiscal and Enterprise Affairs Directorate (DAF)
OECD is not against all tax competition. Our member countries are prepared to engage in fair competition for financial service activities which are transparent and open. Tax competition can have positive effects. For example, the implementation in one country of a long needed tax reform may encourage other countries to undertake similar tax reforms in order not to lose their relative international competitiveness.
The aim of the OECDs work is not to restrain competition, but rather to restrain harmful tax practices that erode the tax bases of other countries; that direct mobile investment from one location to another; that distort trade and investment patterns; that increase the administrative costs and compliance burdens; and that undermine the fairness and neutrality of tax systems.
What does the OECD mean by harmful tax competition?
We define harmful tax practices by any of three operative criteria: lack of effective exchange of information, lack of transparency, and attracting business with no substantial domestic activities (e.g. ring-fencing) where coupled with low or zero tax rates. By discouraging these practices, the Report will serve to strengthen and to improve tax policies internationally. These efforts will improve overall economic well-being for all taxpayers.
What is the size of the tax haven problem?
The problem is big and getting bigger. It is hard to estimate with any degree of accuracy because we are speaking of unreported income. But we do know, for example, that over 1 trillion dollars (US) is invested in offshore funds, and that the number of funds has increased by more than 1400% over the last 15 years.
Q:What does the tax haven list mean? Is it a blacklist?
The tax haven list is a list of jurisdictions that meet the criteria for being tax havens. We want to give the listed jurisdictions an opportunity to understand clearly what would be required for them to make a commitment to eliminate harmful tax practices. For instance, the commitment does NOT mean getting rid of a zero-tax system. It does mean greater transparency and effective exchange of information practices. To give tax havens the time they need, no action is intended with regard to jurisdictions on the June list. Instead, OECD will establish a second list the List of Unco-operative Tax Havens in the next year. Jurisdictions named on this second list will be targeted for co-ordinated defensive measures.
Some other jurisdictions claim that they have co-operated with OECD and yet they are still listed. How do you explain this lack of consistency?
Many jurisdictions have co-operated with OECD, in terms of providing information, meeting with the Forum, and working to understand our project. For this very reason we have given the additional year for listed jurisdictions to decide whether to commit to eliminate harmful tax practices, before we move forward on co-ordinated defensive measures.
What are these international standards that you are asking countries to meet?
The international standard is to allow information to be effectively exchanged on geographically mobile income so that the home country can fairly and effectively audit the foreign activities of its residents. The international standard means, for example: (1) The beneficial ownership of shares and trusts must be kept on records that can be accessed by governmental authorities. (2) There are audited or filed financial accounts. (3) There is an efficient administrative process to all the tax authorities of another state to obtain information needed to enforce its own revenue laws with regard to geographically mobile income. These are some examples of the international standards of transparency and disclosure that tax havens are being asked to meet. And let me emphasise that it is going to be the same standards for all member countries and non-member countries.
What is going to happen to the economies of listed jurisdictions?
We believe there will be an initial adverse impact on some although not all of these economies, as reputable companies relocate their activities. In the longer term some of these jurisdictions may be able to regain this business as they comply with the new international standards. Of course we are attentive to the potential impact on their economies, which is why we have initiated a dialogue with our Development Assistance Committee. We are also participating in other conferences and meetings, such as with the World Bank and Commonwealth, to consider the development agenda of small states.
What do you say about the accusation that the OECDs campaign against unfair harmful tax practices is led by countries that refuse to lower their tax rates?
Countries are free to have whatever kind of tax structure they think is required for their own economic situation, including not having an income tax. There are no minimum rates or other restrictions on any general tax measures. In fact, the project is meant to encourage open and transparent government. Governments must be able to choose the level and structure of taxes best suited to their social, economic and political situations. Part of that freedom comes from being able to choose tax rates and systems. What we do try to prevent are measures that facilitate non-reporting of income and income shifting unrelated to economic activity, but all countries should recognise that their choice to go against the international standard on transparency and exchange of information can have a negative impact on the sovereign right of other countries to have the taxation system they choose. And as a consequence other countries may choose to adopt defensive measures that could have a reciprocal negative effect on tax havens.
For decades, rich countries and international organisations have encouraged many of the listed tax havens to diversify to become economically independent. Many have responded to this encouragement by developing viable international financial service sectors. Is it not unfair that the OECD now plans to destroy these economies with draconian sanctions? What do you expect tax havens to do if they stop being financial centres and can no longer sell bananas?
We are not asking tax havens to stop being financial centres, but we are asking them to comply with international standards of disclosure, transparency and non-discrimination. We are asking that these jurisdictions stop holding themselves out as places where taxpayers can escape tax legally due. The very fact that some notable financial centres have made advance commitments is evidence of this objective.
Isnt OECD bullying small island states, without giving any thought to the developmental and economic needs?
Lets be clear. For decades some of these states have been eroding the tax base of not just OECD countries but those of developing countries as well (as confirmed in a recent report by Oxfam). They have been assisting dishonest taxpayers to avoid paying their fair share of taxes in their countries of residence. And who has borne the burden of these activities? Honest taxpayers.
Were the listed jurisdictions consulted?
We have aimed to be fully transparent to the jurisdictions, advising them of the status of our work and also obtaining their input on numerous occasions. Each reviewed jurisdiction had an assigned OECD contact country and there were frequent bilateral discussions. Jurisdictions were given the opportunity to review and comment on reports, which describe these regimes, and the majority agreed to these texts. They were also invited to attend consultations with the full Forum on Harmful Tax Practices. So, there were many opportunities to participate in the process, and the majority of jurisdictions took advantage of these opportunities.
What is the relationship between the work undertaken by the OECD Forum, FATF and the Financial Stability Forum? Do you in any way co-ordinate your work?
The OECDs work is specifically related to taxation, and it is the only one of the present international initiatives focused on taxation. The work of the FATF is focused on anti-money laundering, and the FSF is concerned with the consequences of offshore centres for the stability of international financial markets. However, there is some common ground in that all three projects deal with the need for transparent, well-regulated, non-discriminatory regimes in offshore centres. All three seem to be moving in the direction of distinguishing between co-operative and uncooperative jurisdictions. We believe the OECD process is perhaps the most evolved in terms of avoiding name and shame and seeking a co-operative solution to these problems, as evidenced particularly by the existence of advance commitments.
Are sanctions envisaged? Does the OECD have authority to apply sanctions?
The OECD does envision co-ordinated defensive measures, but it is the member countries, not the OECD, which will apply those measures. All OECD does is provide a framework in which co-operation can take place. The counter measures envisaged are only for uncooperative jurisdictions that choose not to work to meet international standards. OECDs role is to help think through the most effective measures, issues that would arise in implementation, and so forth.
The Report to Ministers is gentle on OECD member countries, indicating only that regimes are potentially harmful, and at the same time the Report is harsh and condemnatory on tax havens. How do you justify this difference?
The Report is condemnatory neither for tax havens nor for OECD countries. The Report identifies 47 regimes of OECD countries that are potentially harmful. Our member countries are committed to eliminating the harmful features of any regimes found to be actually harmful by April 2003. The Report, then, is balanced, and might even be said to subject OECD countries to a higher standard and subjects them to a shorter deadline.