DESPITE US OBJECTIONS, OECD'S TAX HAVEN DRIVE ROLLS ON

International Money Marketing, 3 October 2001

In the past couple of years, offshore financial centres have had to come to terms with the looming presence of the OECD casting a critical eye over their tax arrangements, to the alarm of financial institutions, clients and their advisers.

So the gradual realisation in recent months that what seemed an unstoppable drive toward tax harmonisation has been, at least temporarily, derailed by political opposition from the OECD's largest and most influential member has been a cause for restrained celebration among those jurisdictions that feel the organisation has arbitrarily branded them as "tax havens".

The saga began with the publication in 1998 of a report by the OECD entitled Harmful Tax Competition: An Emerging Global Issue, which set up a forum on harmful tax practices, established guidelines for dealing with "harmful preferential regimes" in member countries, and adopted a series of recommendations for combating harmful tax practices.

Two years later, in June 2000, the OECD released a progress report, Towards Global Tax Co-operation, which designated 35 offshore financial centres as tax havens. Before the release of the report, six jurisdictions - Bermuda, Cyprus, Malta, the Cayman Islands, Mauritius and San Marino - were removed from the list after undertaking to implement whatever reforms were considered necessary to meet the OECD's requirements. Critics criticised the six jurisdictions that agreed such "advance commitments" as having signed a blank sheet of paper by agreeing to implement whatever changes were deemed fit by the OECD, and accused the countries in question of panicking.

The countries designated as tax havens by the OECD condemned the organisation for trying to impose a "one size fits all" straitjacket on their tax regimes without any sort of consultation.

The OECD initiative must be viewed against the backdrop of a series of efforts by both governments and international organisations to tackle the intertwined issues of tax evasion and tax avoidance, and laundering of the proceeds of crime.

In 1998 the UK government commissioned a report from former Treasury official Andrew Edwards, who undertook a comprehensive overview of the tax systems and anti-money laundering regimes of the UK's dependent territories, the Channel Islands and the Isle of Man.

Although the Edwards report was largely favourable, it found the islands' legislation wanting in a number of areas and noted the need for all three jurisdictions to establish an impartial financial ombudsman.

In addition, the UK Foreign and Commonwealth office commissioned a report from audit and consulting firm KPMG on the UK's dependent territories in the Caribbean and Bermuda. Although the report's conclusion that the territories were heavily dependent on financial services broke little new ground, it warned that the island jurisdictions could become the "weak links" in the global financial services industry.

The report, released in October 2000, concluded: "The territories are at risk from attempted fraud, and failure to tighten regulation could affect the stability of and confidence in financial markets." A subsequent government White Paper also emphasised "the importance of the Overseas Territories meeting accepted international standards".

Some of the jurisdictions targeted by the OECD have been vocal in their indignation about the initiative, which they see as rich countries trying to impose their rules on poorer countries. In response, they have established the International Tax & Investment Organisation (ITIO) - based in Barbados and including 10 Caribbean jurisdictions, the Cook Islands, Malaysia and Vanuatu - in an effort to establish a united front against what is perceived as OECD bullying.

Says ITIO spokesman Ben Coleman: "It is 30 of the world's richest and largest countries telling the smaller ones what to do. It's hard to differentiate between 19th century protectionist trade policy and this 21st century gunboat diplomacy."

Chief among the ITIO's concerns is that the OECD is guilty of inconsistent, even hypocritical, behaviour because not all member countries follow the rules they are seeking to impose on others.

Says Coleman: "Barbados currently has more than adequate anti money- laundering legislation in place, yet the OECD is threatening to penalise them because they refuse to sign up to the commitment. Belgium's tax laws are structured in such a way that it could be considered a tax haven, as could the City of London."

This view is rejected by OECD spokesman Nick Bray. "The OECD is committed to doing something about its own tax practices, and has made a commitment to address it by April 2003," he says.

"Switzerland and Luxembourg have abstained from the commitment, so if they do not address it they will be subject to the same defensive measures as those imposed on tax havens."

Offshore centres have also found some powerful allies. The Centre for Freedom & Prosperity (CFP), a pressure group based in the US state of Virginia and funded by "individual and institutional donations from around the world", is credited with having played a leading role in persuading the Bush administration to back away from the OECD's harmful tax initiative.

Launched in October 2000, the centre aims to promote tax competition, financial privacy, and fiscal sovereignty by aggressively lobbying the US government, and by dispatching chief spokesman Andrew Quinlan to the farthest reaches of the globe to spread its philosophy that tax competition can be beneficial.

The partial endorsement of this by US Treasury Secretary Paul O'Neill obliged the OECD to back away from its plan to announce an updated list of tax havens at the end of July and to launch sanctions against jurisdictions that failed to fall into line. A new deadline has been set for November 30.

At the same time, talks between the US and its OECD partners reached an agreement that the harmful tax initiative would focus on transparency and exchange of information, and would relax the drive against "ring-

fencing", which allows international businesses to benefit from more favourable fiscal conditions than local ones.

However, Bray is adamant that the initiative has not been blocked by US opposition and instead is simply changing gear. "The OECD is still committed to moving ahead," he says. "It takes time and there will be delays, but our long-term objectives and commitments remain unchanged."

An additional obstacle, says Bray, has been Spain's objections to Gibraltar representing itself when, according to strict practice, it should be represented bythe UK. After Spain realised that Gibraltar was dealing directly with the OECD, it held up further progress on the OECD's work regarding tax havens.

Bray describes this contretemps as "an unfortunate diplomatic incident". He adds that organisations such as the CFP do little to help either the OECD or the cause of the offshore centres: "It consistently misrepresents us in a manner that is both untruthful and deliberately flawed."

Despite the efforts of the ITIO and other opponents of the OECD initiative, more countries are signing up to "advance commitments", most recently Aruba in August and Bahrain in September. With the ring- fencing argument with the US now defused, the organisation's long-term goal - to have all centres in full compliance or subject to "defensive measures" by April 2003 - may yet be achieved.

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