THE OECD HARMFUL TAX PRACTICES DEADLINE FINDS 23 HOLD OUTS AND 10 COMMITMENTS

International Enforcement Law Reporter, 29 March 2002 (April 2002 edition)

By Bruce Zagaris

EXTRACT: From a perspective of international enforcement, several complex trends are occurring. The first is that powerful countries through an international organizations (the OECD networking with international financial institutions) are trying to formulate a new international tax enforcement regime through soft law and many small jurisdictions are either resisting or trying to revise the same. Another important development is the dynamic whereby small jurisdictions are trying to devise mechanisms whereby they can effectively participate in the shaping and implementing of rules, thereby challenging the ability of the OECD to develop participatory democracy in its processes. In this regard, they have tried to network and develop common approaches. In fact, some of them formed their an organization, the International Tax and Investment Organization (ITIO), and continue to try to develop means to collectively deal with the more powerful countries and international organizations.

FULL PIECE: On February 28, 2002, the final deadline set by the Organization of Economic Cooperation and Development (OECD) for jurisdictions to make commitments to comply with the harmful tax practices policies arrived. 10 jurisdictions committed; 23 remained hold outs; and 2 were removed from the list. n1 n1 For background see Cordia Scott, As OECD Tax Haven Deadline Passes, 23 Countries Hold Out, Worldwide Tax Daily, 2002 WTD 41-1, Feb. 28, 2002 (Tax Analysis); Lawrence J. Speer, Four More Jurisdictions to Comply with OECD's Tax Havens Initiative, Daily Rep. for Exec., Feb. 28, 2002, at G-10.

Despite the passage of the strict deadline, Nicholas Bray, OECD spokesman, reported the OECD had a number of additional proposed commitments it was examining. They would be announced once the OECD has accepted them, perhaps in the days or weeks to come. The OECD had extended the first deadline to November 30, 2001 after vociferous private and public diplomatic protests from the targeted jurisdictions and again until February 28, 2002, after the OECD experienced internal disputes between Spain and the United Kingdom over the status of Gibraltar.

Immediately before the February 28 deadline, the OECD received four new commitments from Guernsey, Jersey, Grenada, and St. Vincent and the Grenadines. Approximately one week before the deadline the Government of Antigua and Barbuda made a commitment, opening the way for Grenada and St. Vincent and the Grenadines, who, like Antigua and Barbuda, are also members of the Organization of East Caribbean States (OECD).

Earlier the OECD withdrew Barbados and Tonga from the list after it re-evaluated them, thereby leaving 23 targeted jurisdictions without commitments and subject to countermeasures by OECD members. n2

n2 Speer, id.

When the OECD first announced its initiative in May 1998 and prior to publishing its tax haven blacklist in June 2000, six jurisdictions made a commitment: Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino. Additional commitments came only after the OECD, in response to the vociferous protests by the targeted jurisdictions and the withdrawal of support by the Bush Administration soon after it came into office, revised its requirements, whereby it kept two requirements: exchange of information; and enhanced transparency. It dropped as requirements the abolition of ring-fencing (or discriminatory application of incentives) and no or low taxation/absence of substantial activities.

In their commitments Guernsey and Jersey proposed to improve their exchange of information, which they claim already meets the OECD requirements in criminal matters, including the possibility of exchanging it in civil tax matters through bilateral agreements. Guernsey and Jersey committed to better transparency in the way of collecting better information on beneficial ownership for legal entities, including managers of collective investment funds and trustees and beneficiaries of entities operating in the two jurisdictions, including resident and nonresident enterprises, including those incorporated outside but carrying out activities in the respective jurisdictions. They committed to ensuring that their regulatory authorities have access to bank information relevant to tax matters and requiring accounts be kept and audits conducted in accordance with internationally accepted procedures. They promised to participate in self-assessment programs the OECD will operate as part of its implementation program.

The OECD has removed Guernsey and Jersey from the list of noncooperative jurisdictions and will permit them to participate in an OECD-sponsored Global Forum on Taxation.

The letters from Grenada and St. Vincent and the Grenadines were less detailed, referencing the commitment "to the principles of effective exchange of information in tax matters and Transparency" and pledging to implement measures to ensure compliance. Grenada observed it will have significant costs in implementing the commitments buy expressed the hope that the OECD and other international organizations would help in furnishing technical and financial assistance. n3 In the 1980s, Grenada abolished income tax and has weak tax administration, which is the case in most OECD countries. The OECD will likely be willing to help, especially since such assistance will provide intelligence on potential problems on compliance and, if done properly, may serve as an incentive for the hold outs.

n3 Id.

It became clear that the decision of the last five or so jurisdictions to commit depended on: (1) their ability to participate in the Global Forum which will decide policy and implementation, including the tax exchange agreement model provisions; (2) their ability to withdraw if all OECD member countries, especially Switzerland and Luxembourg, do not comply with the standards themselves by 2005. n4

n4 Scott, supra (quoting Sir Ronald Sanders, the Antigua and Barbuda High Commissioner in London).

At present, the scorecard of 16 jurisdictions that have committed to the OECD are: Antigua and Barbuda, Aruba, Bahrain, Bermuda, the Cayman Islands, Cyprus, Grenada, Guernsey, the Isle of Man, Jersey, Malta, Mauritius, the Netherlands Antilles, San Marino, the Seychelles, and St. Vincent and the Grenadines. The 23 countries that have yet to commit are: Andorra, Anguilla, the Bahamas, Belize, the British Virgin Islands, the Cook Islands, Dominica, Gibraltar, Liberia, Liechtenstein, the Maldives, the Marshall Islands, Monaco, Montserrat, Nauru, Niue, Panama, Samoa, St. Lucia, St. Christopher and Nevis, the Turks and Caicos Islands, the U.S. Virgin Islands, and Vanuatu. Representatives from Vanuatu, Niue, and Nauru publicly have rejected the initiative because of their belief that OECD countries, such as Luxembourg, Switzerland, Hong Kong, Singapore and the U.S. (referring to such states as Delaware, Montana, and Colorado), would not abide by the same standards. n5

n5 Id.

From a perspective of international enforcement, several complex trends are occurring. The first is that powerful countries through an international organizations (the OECD networking with international financial institutions) are trying to formulate a new international t ax enforcement regime through soft law and many small jurisdictions are either resisting or trying to revise the same. Another important development is the dynamic whereby small jurisdictions are trying to devise mechanisms whereby they can effectively participate in the shaping and implementing of rules, thereby challenging the ability of the OECD to develop participatory democracy in its processes. In this regard, they have tried to network and develop common approaches. In fact, some of them formed their an organization, the International Tax and Investment Organization (ITIO), and continue to try to develop means to collectively deal with the more powerful countries and international organizations.

In the future followers of international regimes will want to monitor the ability of the OECD to effectively implement and enforce the initiative. The outcome may well influence other efforts to formulate regimes, such as the non-cooperative list of the Financial Action Task Force on Anti-Money Laundering (FATF), the blacklist of the report of offshore financial centers of the Financial Stability Forum (an initiative assumed by the International Monetary Fund), and the initiatives of financial counterterrorism enforcement of FATF and the Counterterrorism Committee of the United Nations.

Professionals and businesses participating in international tax and business planning and structuring investments must follow these developments to try to advice clients and plan their normal business affairs. The OECD and other initiative have added an extra layer of complexity to this exercise.

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