Offshore Survey – January 2002 by Christopher Owen
The OECD modifies its campaign against harmful tax practices
The OECD has formally modified the tax haven aspects of its initiative to eliminate harmful tax practices by removing the no or nominal taxes and no substantial activities elements from the commitments it is seeking from co-operating jurisdictions. Commitments will now be sought only with respect to the transparency and effective exchange of information criteria to determine which jurisdictions are considered uncooperative tax havens. Effective exchange of information will continue to be sought in both civil and criminal tax matters in specific cases. The move, set out in a 2001 Progress Report of November 2001, came in response to the shift in US government policy under the Bush Administration announced by Treasury Secretary Paul O’Neill in May. Publication had been delayed by Spanish objections to the status given to Gibraltar as a fiscal jurisdiction independent of the UK. The modifications to the policies adopted by the OECD in two earlier reports – “Harmful Tax Competition: An Emerging Global Issue” published in April 1998 and “Progress in Identifying and Eliminating Harmful Tax Practices” published in June 2000 – can be summarised as follows:
- the “no substantial activities” criterion will no longer be used in determining whether a tax haven is considered an uncooperative jurisdiction;
- the potential framework of co-ordinated defensive measures will not apply to uncooperative tax havens any earlier than it would apply to OECD Member countries with harmful preferential regimes;
- the time for making commitments is extended to 28 February 2002;
- in order to ensure that committed jurisdictions have enough time to develop implementation plans, the time for establishing a schedule has been extended from six months after the date of making a commitment to one year.
The OECD said it sought to establish a framework within which all countries – large and small, rich and poor, OECD and non-OECD – could work together to eliminate harmful tax practices with respect to highly mobile activities such as in the financial and service areas. The focus of the report is on progress made in connection with the tax haven work. It said there was now a total of 11 committed jurisdictions – Aruba, Bahrain, Bermuda, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, Netherlands Antilles, San Marino, Seychelles. Tonga had also taken measures to eliminate its harmful tax practices and no longer met the tax haven criteria. Jurisdictions that had already made commitments have been informed that they can choose to review their commitments in respect of the no substantial activity criterion. But the report also states that OECD Member countries would welcome the removal by tax havens of practices falling within the no substantial activities criterion insofar as they inhibit fair tax competition. The jurisdictions found by the OECD last year to meet its tax haven criteria and which have not yet made a commitment are: Andorra; Anguilla; Antigua & Barbuda; the Bahamas; Barbados; Belize; British Virgin Islands; Cook Islands; Dominica; Gibraltar; Grenada; Guernsey/Sark/Alderney; Jersey; Liberia; Liechtenstein; the Maldives; Marshall Islands; Monaco; Montserrat; Nauru; Niue; Panama; Samoa; St Lucia; St Kitts & Nevis; St Vincent & the Grenadines; Turks & Caicos; US Virgin Islands; and Vanuatu.
The OECD said it recognised that some jurisdictions had concerns about their administrative capacity to meet these commitments. OECD Member countries are now in the process of setting up a programme to offer specific assistance and the OECD is in discussion with the IMF, World Bank and regional development banks on other forms of development assistance that may be appropriate to help committed jurisdictions further develop their economies as they move to eliminate harmful tax practices. The modifications to the tax haven work do not affect the work in relation to Member countries and non-Member economies and do not alter the factors used in the 1998 Report to identify tax havens. The OECD also reviewed harmful tax practices in its own member countries and listed 47 tax regimes across 21 countries. Belgium and Portugal abstained from the new report but the OECD said their abstentions did not affect their approval of the earlier reports. Luxembourg and Switzerland recalled their abstentions to the 1998 report and noted that those abstentions extend to the new report.