Application of OECD Tax Haven Criteria to Member States Shows Potential Danger to U.S. Sovereignty by Bruce Zagaris
A cursory application of the Organization for Economic Cooperation and Development’s criteria for harmful tax practices (HTP) to some of its own members shows the hypocrisy of its own report. Most importantly, it shows that if the OECD initiative proceeds, the laws and practices of many countries — especially those of the United States — will be in jeopardy. Until now, many of those countries have been sleeping giants insofar as those laws and practices go, because their laws have not been singled out. As international trade law and litigation in the World Trade Organization (for example, the litigation over U.S. foreign sales corporation preferences) demonstrate, the HTP practices of the U.S. and OECD countries will soon become controversial and are likely to be brought before an international body to determine whether they meet the very criteria for which the OECD is proposing countermeasures in other countries.
It will not matter that U.S. Assistant Secretary of the Treasury Mark Weinberger wants to ensure that the OECD harmful tax competition (HTC) initiative “does not have the unintended consequence of making the OECD an extraterritorial tax authority that imposes tax laws and tax rates on independent countries.” In fact, the OECD initiative is fundamentally an effort to prescribe the parameters for making tax policy and law by defining “bad” or “harmful” tax policy and then requiring countries to change their laws or face economic sanctions.
Once the United States, through the OECD, drags the so-called tax havens down the HTC road, its own laws and practices will be fair game, especially considering the enormous value of U.S. laws and practices. Many other OECD countries will be right behind.
In fact, modern-day commercial diplomacy, combined with international financial enforcement regimes, has countries accusing one another over the extent to which they are complying with international tax and anti-money-laundering rules. In addition to the case brought by the European Union against the United States over its FSC regime, the French and Swiss governments are skirmishing over whether each is properly complying with anti-money-laundering standards.
Similarly, the EU brought a case against Austria in the European Court of Justice when Austria refused to abolish anonymous savings accounts in alleged violation of the EU’s 1991 anti-money-laundering directive. The intergovernmental Financial Action Task Force on Money Laundering (FATF) notified Austria of its suspension from EU membership unless it abolished the savings accounts.
This article discusses the obligations contained in the OECD Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practices (hereafter, the OECD HTC MOU).