US UNDERMINES OECD HARMFUL TAX INITIATIVE

Offshore Red, May 2001 (pub. Campden Publishing Ltd)

April 2001, the failure of the new US Administration to throw its weight behind the OECD's 'harmful tax competition' initiative at last month's meeting of G7 finance ministers in Washington has left the process looking dangerously exposed. Although the matter was raised at the meeting, the official G7 communique made no direct reference to the OECD's work.

The OECD expects the 35 jurisdictions it has identified as 'tax havens' to commit themselves to its principles of increased tra n s p a re n c y, better exchange of information and non-discriminatory taxation before the end of July. Those that do not will face economic sanctions. But the OECD itself does not have jurisdiction to enforce such measures. It can only do so through its members. So far, only three jurisdictions have a g reed to cooperate and a US withdrawal could undermine the whole process.

The Bush administration has not yet added to the statement made after the G7 summit in Palermo in February, when Treasury Secretary Paul O'Neill said: 'I support the priority placed on transparency and cooperation to facilitate effective tax information exchange. At the same time, it is critical to clarify that this project is not about dictating to any country what should be the appropriate level of tax rates.'

The change of government in the US has been accompanied by a gearing up of the efforts to lobby Washington against the OECD. A coalition comprising free marketeers who fear the 'harmful tax competition' initiative will ultimately serve to drive up US taxes and others who fear it will damage many small and developing economies, particularly in the Caribbean, have been waging an increasingly high-profile campaign.

An OECD spokesman said: 'Nothing has changed. There has been a great deal of fuss from the lobbyists in Washington but there is no objective evidence of any change in US policy. G7 finance ministers made some efforts to find out what the US position is, but it was not a matter that the US wanted to address and there was no further clarification.

'We understand that the new US Administration is reviewing all the policies which it inherited from the previous government. Our understanding is that America hasn't made up its mind yet. When it is in a position to clarify its policy, we would welcome it, but in the meantime we have no reason to speculate whether it might have changed its view or not.'

At the same time, the OECD-Commonwealth Working Group is effectively on hold until the OECD countries respond to the 17 questions submitted to it by the non-OECD countries at their Paris meeting on 1 March.

The Working Group was formed to find a politically acceptable process by which jurisdictions could make a commitment to the OECD's principles and to find a more inclusive structure for the O E C D 's proposed global forum on taxation.

But the OECD admitted that it had not yet finalised its written responses. It hoped to be able to do so this month.

A spokesman said: 'We were only given the questions 12 hours before the Paris meeting. We did our best to give verbal clarification at the meeting but also promised a written response. They are serious questions which deserve to be given a serious answer. We are in the process of getting the approval of all OECD members and should be in a position to respond this month.'

The Bahamas has become the first jurisdiction to join the International Tax & Investment Organisation (ITIO), formed in March by the non-OECD members of the Working Group - Antigua, Barbados, BVI, Cook Islands, Dominica, Malaysia and Vanuatu - to take forward and extend its work.

The ITIO is currently preparing a first draft of a tax policy statement that might serve as the basis for a commitment letter for its members to the OECD.

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