STRENGTH IN NUMBERS - THE INTERNATIONAL TAX AND INVESTMENT ORGANIZATION IS HERE AND IT MEANS BUSINESS

OFC Publications (Canada), 17 May 2001

By Ken Hunter

Feeling shut out of the international decision-making process, a number of countries targeted by the Organization for Economic Cooperation and Development's "harmful tax competition" initiative have formed a new multilateral body in an attempt to present a united front.

By pooling resources, exchanging information and sharing expertise between its members, the International Tax and Investment Organization aims to strengthen international cooperation between small and developing economies in tax and investment matters. The organization sprang from the ashes of a joint Commonwealth/OECD working group established at meetings in Barbados in January.

Countries on the ITIO's organizing committee include: Antigua and Barbuda, Barbados, the British Virgin Islands, the Cook Islands, Dominica, Malaysia and Vanuatu. The Pacific Forum has formal observer status, and supportive organizations include the Commonwealth Secretariat and the Caribbean Community Secretariat.

Barbados, which hosts the ITIO's Secretariat in its Ministry of Industry and International Business, is serving as chair of the organization. Lynette Eastmond, the ministry's director of international business, says the ITIO will try to establish standards that meet the requirement of small and developing countries, while taking into account the concerns of the international community and countries that have double taxation arrangements with small, developing states.

"SDEs understand their obligation to the international community. They however believe it to be unfair that a regime should be put in place that specifically targets the smallest and most vulnerable jurisdictions in the world and will eventually target all developing countries that provide incentives in the area of services."

Sabaruddin Ismail, director of the Labuan Offshore Financial Services Authority, is a representative of the ITIO's regional office for Asia. Although Ismail says each SDE has its own niche and may require different economic approaches and solutions, he agrees with Eastmond that it is unfair to target SDEs.

"As a sovereign government, Malaysia in particular, as well as other small developing economies have the legal and social responsibility to determine its own taxation regime," Ismail says. "However, it must observe the legal procedures and in accordance with the national policies, priorities and objectives.

"Accordingly, a country should not be obliged to adopt a taxation regime which is detrimental to its domestic economy. This is much needed to enhance efficiency in the country. Perhaps, the OECD must review the 'harmful tax competition' initiative, as it is not done in line with international laws."

Many of the SDEs involved in the joint working group feel the OECD Secretariat was not very cooperative, Eastmond says. For example, the SDEs asked the Secretariat 17 questions seeking clarification on the OECD principles of transparency, non-discrimination and exchange of information. The OECD gave some verbal answers but has not given the detailed answers in writing.

Eastmond says the OECD's refusal to answer put a damper on the SDEs' participation in what was hoped would be a dialogue that would create a shared perspective on the OECD principles.

"The work of the joint OECD/Commonwealth Secretariat working group on tax cooperation has not come to an end therefore," Eastmond says. "We hope that when and if the answers do come that they will be comprehensive."

The OECD's delay in answering the questions also prompted Robert Mathavious, director of financial services with the BVI Government, to write a letter to the editor of the Financial Times in early May. The letter also clarified the British Caribbean overseas territories' position on the "harmful tax competition" initiative.

"The territories are not preparing a joint statement but, through the International Tax and Investment Organization, a group of small and developing economies are considering the most appropriate way of responding to the OECD's open-ended demands," the letter reads. "These SDEs are still waiting for the promised answers to 17 fundamental questions they asked the OECD on February 28. It is inequitable to expect them to make commitments without this information. In particular, the SDEs want reassurance that OECD countries will themselves observe the standards they demand of others."

In June 2000, the Paris-based OECD published a blacklist of 35 jurisdictions it said were engaged in "harmful tax competition." The OECD gave the jurisdictions until July 31, 2001 to start reforming their tax regimes or face sanctions.

Critics of the OECD have likened the "harmful tax competition" initiative to big countries pushing around small ones. An ITIO spokesperson calls the OECD a "technocratic organization" and says the ITIO will provide its members with a valuable tool with which to make themselves heard.

"It's very important for these countries that they actually get together in this way. And there's no doubt that the OECD has not really, despite the joint working group, done anything to encourage this sort of multilateral discussion between the small countries."

A spokesperson for the OECD would not comment.

The SDE's cause got a major boost in May when United States Treasury Secretary Paul O'Neill announced the US had withdrawn its support for the OECD's "harmful tax competition" initiative. O'Neill said the initiative in its current form is too broad and not in line with the George W. Bush administration's tax and economic priorities.

"Although the OECD has accomplished many great things over the years," O'Neill said in a statement, "I share many of the serious concerns that have been expressed recently about the direction of the OECD initiative. I am troubled by the underlying premise that low tax rates are somehow suspect and by the notion that any country, or group of countries, should interfere in any other country's decision about how to structure its own tax system. I also am concerned about the potentially unfair treatment of some non-OECD countries."

Eastmond says the ITIO was encouraged by O'Neill's statement.

"We believe that all countries, OECD and non-OECD alike, should play by the same rules, and that standards should be developed in a truly inclusive international forum that involves everyone," she says. "We hope and expect that the refocusing of the OECD process will lead to the involvement by right of ITIO members and other small and developing economies as equal participants in setting any new international taxation standards."

Although the ITIO was established to help its members deal with the "harmful tax competition" initiative, the organization does not want to be considered a one-trick pony. Eastmond is quick to point that the ITIO will also address other global initiatives affecting international tax and investment policies that need to be addressed from a global perspective.

For example, the OECD is already extending its work to e-commerce, in order to eliminate competition from SDEs worldwide it considers harmful. The OECD's 1998 Report on Harmful Tax Competition says the OECD also intends to look at harmful competition in manufacturing. This will cover investment incentives, which are important for the economic development of many countries seeking foreign investment.

"One of the major initiatives which the SDEs are concerned about is the Multilateral Agreement on Investment," Eastmond explains. "In fact, the OECD in its 'harmful tax competition' initiative has required some countries to provide access to all aspects of their markets to foreign investors. This is something that is not required at the (World Trade Organization) level. SDEs also recognize that the electronic commerce rules may be shaped in such a way to curb the benefits which small states could experience."

"The ITIO is not just about the OECD's harmful tax competition initiative," agrees the ITIO spokesperson. "It's dealing with that because that's the challenge facing everyone now. But the OECD is planning to look at controlling e-commerce laws in the small countries. They're planning to turn their attention to investment incentives and manufacturing incentives. And that could bring in countries like India and South Africa.

"The ITIO is going to look at the impact on the development of countries of these OECD initiatives, so it's bigger than just the tax thing."

Eastmond says the ITIO will draw the attention of all members to these and other issues, so the organization can formulate a comprehensive response and lobby like-minded organizations or groups to support the ITIO's position.

And how will the ITIO make its position known? The organization plans to coordinate activities, disseminate information, do research, provide analysis and advice and facilitate technical assistance.

For example, the ITIO will offer members administrative support and help establish links with interested and potentially supportive international bodies. A Web site and e-mail newsletters are also in the works to provide information on tax and investment matters, the ITIO's stance on international standards on privacy and confidentiality and e-commerce initiatives.

In addition, the organization will try to give its members technical assistance, such as training and short-term secondments between jurisdictions.

"For the members, so far, it has proved very valuable," says the ITIO spokesperson. "It has proved valuable in terms of learning about what each other is doing and it has proved valuable in terms of giving them all some support and encouragement and sharing resources which they can draw on."

"Jurisdictions are very enthusiastic because they have already seen the benefit of meeting and sharing information," agrees Eastmond. "More and more countries, we believe, will come to recognize the importance of this organization."

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