19 July 2001

US Treasury Secretary details criticism of OECD tax project; small countries demand inclusion in setting standards


Following trenchant criticism yesterday by US Treasury Secretary O'Neill of the way the OECD has run its so-called "harmful" tax initiative, the International Tax and Investment Organisation (ITIO) has renewed its call for the OECD to involve small and developing economies (SDEs) fully in developing international standards of exchange of information and transparency.

The Paris-based OECD has recently revised its so-called "harmful tax competition initiative" in the light of some OECD countries' strong objections, led by the US.

Giving evidence to a Senate committee yesterday, Mr O'Neill explained the US's grave concerns with the attitude of the Paris bureaucrats in pursuing their tax project, which he suggested involved inequity, a lack of clarity and an attack on sovereignty, and was counterproductive.

Details of Mr O'Neill's statement, with quotations, are in the Notes to Editors below.

Commenting on Mr O'Neill's statement, ITIO spokesperson Ben Coleman said: "We are delighted that the US has helped to introduce a sense of fair play into the OECD's tax project.

"The OECD must now show good faith by inviting all countries with an interest, including small states, to participate in its Global Tax Forum on setting standards for exchange of information. If not, the objectivity, quality and viability of the process will remain compromised."

For further information, please contact Ben Coleman in London on Tel: +44 (0) 20 7526 3603, or Tel: +44 (0) 7958 616 444, or Email: media@itio.org

NOTES TO EDITORS

1. SECRETARY O'NEILL'S STATEMENT TO THE SENATE
Appearing before the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs on 18 July 2001, US Treasury Secretary O'Neill made a statement containing numerous complaints about the way the OECD had run its so-called "harmful" tax initiative. In the paragraphs (i) to (iii) below, we contrast the OECD's original position, Mr O'Neill's comments and the position now.
Mr O'Neill's full statement can be found on the internet at http://www.senate.gov/%7Egov_affairs/071801_psioneil.htm.

(i) Inequitable

OECD officials had proposed imposing sanctions against non-OECD countries at least two years before doing so against similarly-situated OECD countries.
Mr O'Neill deplored this "inequity", saying, "disparity of treatment would not have been fair".
Any sanctions will not now apply to non-OECD countries any earlier than to OECD ones.

(ii) Unclear and an attack on sovereignty

OECD officials had persisted in using "ring fencing" as a criterion for defining a jurisdiction as "uncooperative" (and thus open to sanctions). Small and developing economies (SDEs) have long complained about this as an attack on their sovereign tax systems.

Mr O'Neill called the OECD's approach "problematic", noting that OECD officials had "struggled" to articulate it and adding, "This lack of clarity in definition and uneven application are particularly troubling because the criterion potentially implies fundamental tax and economic policy decisions of the jurisdictions". Mr O'Neill also said he was "troubled by the notion that any country, or group of countries, should interfere in any other country's decisions about how to structure its own tax system."

The ring fencing (or "no substantial activities") criterion has now been dropped. The initiative's exclusive focus is now on effective exchange of information and transparency.

(iii) Counterproductive

OECD officials had refused to listen to requests from SDEs engaged in good-faith discussions to extend the deadline of 31 July.

Mr O'Neill called the OECD's attitude "counterproductive", claiming it would have produced an "inappropriate result". He said, "It would have been counterproductive to so label jurisdictions as uncooperative merely because the OECD and the jurisdictions were unable to conclude their discussions by July 31st".

The deadline has now been extended to 30 November 2001.

2. OTHER US POSITIONS

Mr O'Neill made further statements of interest, as below.

• US supported by other countries

"It is important to note that the United States was not alone within the OECD in advocating these modifications, and that agreement within the OECD would not have been possible without the support of other countries."

• OECD tax officials condemnatory and aggressive

"The two OECD reports [on which the tax project is based] take a notably condemnatory tone with respect to the issues addressed, and the advocacy of internationally coordinated action against targeted countries represents an approach that is more aggressive than is typical for the OECD."

• Spotlight on OECD members

"Tax haven jurisdictions will be able to observe whether OECD member countries with significant financial centers make the changes necessary to meet the standards that the jurisdictions are being asked to meet. OECD member countries should hold themselves to standards and timelines at least as rigorous as those to which they hold jurisdictions that are not part of the OECD."

• Acceptable to use tax as an investment incentive

"Countries may have good reason to provide different levels of taxation to income earned by nonresidents or to income earned by residents from foreign activities, such as to provide investment incentives or to improve access to capital markets. If such policies are not coupled with a lack of transparency or a refusal to exchange information and otherwise do not interfere with the enforcement by other countries of their tax laws, they should not be targeted by the OECD initiative."

3. GLOBAL TAX FORUM

Standards on exchange of information and transparency are being discussed in the the OECD's Global Tax Forum. In principle, this is open to all jurisdictions that show a genuine interest in curbing harmful tax practices. In practice, the OECD has excluded small and developing economies with offshore centres from the Forum unless they first enter into detailed commitments to the OECD process.

Meanwhile, the OECD has encouraged over 55 other non-member countries, such as Argentina and South Africa to participate in the Forum, without first requiring similar commitments. The ITIO believes this unfair approach compromises the objectivity, quality and viability of the Forum.

4. INTERNATIONAL TAX AND INVESTMENT ORGANISATION

The International Tax and Investment Organisation (ITIO) was set up in March 2001 to help SDEs respond to global tax and investment challenges. It explicitly considers the development implications of these challenges.

The ITIO currently comprises Anguilla, Bahamas, Barbados, Belize, British Virgin Islands, Cayman Islands, Cook Islands, Malaysia, St Kitts & Nevis, St Lucia, Turks & Caicos and Vanuatu. The Commonwealth Secretariat, Pacific Islands Forum Secretariat and CARICOM Secretariat have observer status.

The ITIO grew out of the work of the OECD-Commonwealth Joint Working Group on Harmful Tax Competition. The experiences of the SDEs in this group convinced them of the need for a new, inclusive organisation.


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