DECISION TIME FOR PACIFIC 'TAX HAVENS' AS OECD DEADLINE LOOMS

Pacific Islands News, 8 February 2002

Time is running out for six Pacific nations listed by the OECD as tax havens. Samoa, Vanuatu, Cook Islands, Marshall Islands, Nauru and Niue have been given until 28 February to agree to the requirements of the OECD's "harmful tax practices" initiative or face the consequences.

Until now they have stood out against OECD demands. The harmful tax practices initiative has been the main topic of discussion at a meeting in Vanuatu of The International Tax and Investment Organisation - a group bringing together tax havens in the Pacific, Caribbean and Asia.

"With the 28 February deadline being so close, there was a very lively discussion on this issue," said Emma Ferguson, economic advisor to the Pacific Islands Forum Secretariat. "The meeting was attended by a number of Caribbean nations, as well as the Cook Islands and Vanuatu from the Pacific. There was a huge exchange of information about the discussions people have had with the OECD and they're thinking about whether or not to commit to the initiative.

"Clearly, this decision...needs to made on the basis of very detailed country information. I think this meeting gave people a great basis to go back home and talk to their governments in some details about what the best decision for their nations will be, considering the huge economic impact a decision either way could have on small nations such as Pacific island countries."

There have been deep concerns over the OECD's attempt to stamp out what it calls "harmful tax practices" in countries around the world. Chief among them is the perception that the powerful OECD member countries are asking countries to commit to standards they themselves are not willing to follow.

"The Pacific Islands strongly believe in a level playing field and at the moment this initiative doesn't give a level playing field. OECD member states are not being asked to commit to the same sort of standards that non-member states are being asked to implement. This is a huge problem for the Pacific states and all countries on the list," Ferguson said.

On the surface the demands seem to be fair. Countries are being asked to implement changes to their offshore financial sectors that will change the way information is exchanged between countries on taxation issues. It will also change the level of transparency in offshore sectors. This, according to the OECD, is vital in tackling the problem of money laundering that they say is rife in listed countries. But Ferguson said there is more to it.

"When you start to look at the practical implementation issues and the way that the OECD is asking countries to go ahead and make these changes, there are real economic difficulties that will raise their heads in these countries. The whole financial sector will face a great deal of difficulty in continuing to do business."

If that does happen, then Pacific island economies will suffer dramatically.

"When you look at the size of the offshore sectors in Pacific countries, they can be as much as 7 or 10 percent of the Gross Domestic Product. So even if you lose a even a proportion of that, that is a large proportion of the country's economy. There's no industry that can develop to fill the space. The financial services sector is one of the very few growth areas that some of these countries have and they will rely on it for economic development in future years."

It's a tough decision, and countries that decide not to comply must be prepared for tough consequences.

"Standing up to 30 OECD members, who are very large and very economically and politically powerful, is always a tough decision for countries to make. So far, the six listed Pacific nations have determined not to commit to this initiative, although they could decide to move either way in the coming weeks.

"If they decide not to commit, the OECD has threatened to impose defensive measures on a bilateral basis against these countries. However, these defensive measures will now not come into place until April 2003, so that leaves a window where countries that don't commit will hopefully continue negotiations with the OECD to reach some sort of equitable solution that treats the listed countries in a similar fashion to the OECD countries themselves."

Some countries are, though, folding to OECD demands. Niue Premier Sani Lakatani said this week that he plans to dissolve the island's entire offshore financial sector, which could cost the country, which at the moment has virtually no economic base, around US$700,000 a year.

Nauru has attempted to create tighter offshore banking legislation, but was told by the OECD's Financial Action Task Force after a meeting in Hong Kong last week that the new laws did not go far enough and that Nauru would remain on the OECD blacklist.

Marshall Islands Finance Minister Mike Konelios wrote earlier this month to Noriaki Mizuno, head of the Asia Pacific Review Group, highlighting the measures RMI has taken to prevent money laundering from penetrating the financial system.

According to a release from RMI Banking Commissioner Alfred Alfred Jr., Minister Konelios emphasised that Marshall Islands remains "committed to the international initiatives aimed at suppressing money laundering".

He also said that the RMI is confident that "its anti-money laundering regime is now in alignment with international standards". The Marshall Islands, he said, has formulated anti-money laundering regulations, revised its plan for combating money laundering, established a suspicious activity reporting system and approved six international conventions against terrorism...

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