Offshore Revolution - To Be or Not To Be
By: E (Ben) Bendelow
When I was asked to write this article some months ago, there were a few dark clouds on the geo-political horizon but there was not the veritable hurricane that now seems to be ploughing its way through the group consciousness of offshore practitioners.
I think it might, therefore, be helpful to go back and review the main protagonists in the current controversies in relation to the Organization for Economic Co-operation and Development ("OECD"), and the various other entities, related and unrelated, which are hurling thunderbolts about, which deal with such issues as so called harmful tax competition, and money laundering.
Our story starts back in 1998 when the OECD produced the report called "Harmful Tax Competition: An Emerging Global Issue" (The 1998 Report). This report argued that global capital movements were being distorted by harmful tax competition. This was followed in June 2000 by a report entitled "Addressing Global Tax Co-operation", which simply, according to the OECD, was trying to promote an international taxation regime of:
Transparency
Disclosure
Fairness
The Secretariat of the OECD aimed to achieve these three redoubtable aims by pursuing a constructive relationship with offshore jurisdictions, and encouraging them to make a commitment to these three core principles. It should also be stated that the OECD's public position is that it is also seeking to Identify harmful or preferential regimes in OECD member countries
Agree the three core principles with associations of countries outside the OECD
Unfortunately for the Secretariat the powers that be within their organization have determined that, before they do any significant work on harmful or preferential regimes within the OECD or trying to encourage other associations to adopt their three key principles, they should focus on attempting to force jurisdictions that they have identified as tax havens into accepting their analysis of what is wrong with the global fiscal system.
As will be widely known, the OECD produced a preliminary list of harmful or uncooperative jurisdictions in June 2000 and since that date there has been much discussion and contact between the OECD and the various interested parties This has led to the creation of the Global Taxation Forum, a contact group between representatives of the international finance centers (aka tax havens) and the OECD. Of course, it will be understood that the OECD is not alone in its so-called "name and shame" strategy, others have followed. Notably the Financial Action Task Force (FATF), which perhaps should be viewed as an offshoot of the OECD as it shares offices and other facilities in Paris with the OECD's Secretariat, and the Financial Stability Forum (FSF) whose role has now been subsumed by the World Bank.
The latest authorative announcements from the OECD were in January 2001, when Seiichi Kondo, Deputy Secretary General of the OECD, made a speech to the Global Taxation Forum. In his speech Mr Kondo stated that the task of the forum was to ensure fair competition between different national tax regimes in a globalized economy. He goes on to state, rather comfortingly, "We want competition that promises diversity and innovation in tax systems while at the same time leaving countries free to decide both on their rates of tax and their tax structures". Another interesting quotation from his speech is that "Our watchword is freedom for governments to design their own tax systems and freedom for citizens to prosper in an environment where investment decisions are not distorted by tax considerations".
Again, even more interestingly, Mr Kondo attempts to do what many other parties who are against personal enterprise and legitimate privacy attempt to do, having stated earlier in his speech that his watchword is for freedom for governments to design their own tax system, he then in the very next paragraph goes on to say that "We (without defining who this "we" is) must urgently address, however, the dark side of globalization" and "The international community is attempting to address these challenges in a number of ways. For example, FATF, with its regional counterparts, is achieving progress in the war against money laundering. Whilst we in the OECD have launched a number of important initiatives to improve good governance, including our present work aimed at counteracting harmful tax practices".
However, there are a number of small problems with the OECD Secretariat's analysis of international tax competition.
Firstly, any economist worth his salt will tell you that competition in any marketplace is good for all participants in that marketplace. After Mrs Thatcher and Ronald Regan led the world in reducing tax rates in the 1980s (ie indulging tax competition!) the world's economy flourished.
The next key concept is that of democratic accountability. The OECD Secretariat is an un-elected bureaucracy blatantly set up to promote policies which will benefit its members. Its policy of naming and shaming small jurisdictions is in fact an attempt at raw power politics and coercion.
Another issue, which needs to be closely considered is that of personal freedom and sovereign rights. Article 12 of the Universal Declaration of Human Rights states that "No one shall be subject to arbitrary interference with his privacy, family, home or correspondence... Everyone has the right to protection of the law against such interference...". There are, of course, similar provisions in the International Covenant on Civil and Political Rights, the American Convention on Human Rights, and the European Convention for the Protection of Human Rights and Fundamental Freedoms. This principle is usually enshrined either in statutory or common case law and protects the individual from oppression from the State.
What the OECD is proposing is even more onerous in that financial privacy is to be dispensed with at possibly the request of several allegedly interested States. For example, some States tax on a worldwide arising basis, some tax on a country basis, and a few on the basis of nationality, which State in this scenario would be entitled to information from a foreign bank? Possibly, according to the OECD, all three!
The final and most difficult area of the OECD's attempt to attribute certain aspects of alleged fiscal crime to an extended definition of money laundering, is that the worldwide battle against the laundering of drugs money and the proceeds of other serious crime, including terrorism, may be subverted and/or hindered when it becomes clear that for short term fiscal gain or, alternatively, ignorance tax planning is being tarred with the same brush as money laundering. There is good evidence for this. For example, between 1994 and 1996, nearly 45,000 "suspicious" reports were made to the authorities in the UK. Yet of the 25 convictions for money laundering, only one prosecution resulted from a suspicious transaction report. There were, however, 200 known prosecutions for other offences in 1996, most of which were fiscal, as a result of reports passed on to the police or investigative authorities.
After a few years it will become increasingly clear as these statistics are collated and published that the All Crimes Anti Money Laundering Legislation, which most responsible international jurisdictions (save the US!) have adopted, was probably in practice being used as an alternative form of taxation enforcement regime.
The OECD's position is to say the least incongruous in its attempts to characterize a distortion in world investment patterns as due to international finance centers. For example, their report brands as harmful any tax regime that allows a person to deduct costs when corresponding income is not taxed. The difficulty of course is that this is the standard treatment for real estate income in such countries as the USA! The OECD then goes on to say a harmful tax regime is one that specifically attracts mobile activities but, of course, this is a rather simplistic view. For example, Mexico has very low taxes but positively repels mobile capital. In other words, low taxation by itself is only a necessary and not sufficient condition for the attraction of mobile capital.
The contradictions in what the OECD asserts are too numerous to discuss here but full discussions on this topic can be found in Mason Gaffney's lecture "Tax Competition: Not at all a Bad Thing (Opportunities for International Financial Centers in the 21st Century)", Carlo Pinto's article of 22nd April 2001 on "(Harmful) Tax Competition within the European Union: Concept and Overview of Certain Tax Regimes in Selected Member States", and "The High-Tax Empire Strikes Back" by Dan Mitchell in The 2001 OFC Report (Camden).
In summary, therefore, it is my submission that the OECD starts off with an almost acceptable agenda as outlined by Seiichi Kondo but then, in the implementation of its thesis, the facts become more and more distorted until we end up with published black lists of countries against which unspecified counter measures will be taken. Not to put too fine a point on it, the OECD's 2000 Report is effectively a declaration of economic warfare by an alliance of large countries against a number of smaller powers. It is ill founded in economic theory, international law and practical experience.
It is also somewhat outrageous that a private organization, constructed and funded to promote its members interests should be used to attack the policies of democratically elected governments in non-member countries. However, there are substantial signs that a heavy counter attack is under way from a number of different directions. For example, both Switzerland and Luxembourg, who are members of the OECD, declined to accept the main conclusions of the 1998 and 2000 Reports. The OECD relies heavily on the support of its members and, unfortunately for the Secretariat, there has been a change of President in the US and it is as yet unclear as to whether the incoming administration will continue to support the initiative, especially as American businesses come to realise that rather than achieving a so called level playing field, the achievement of the OECD Secretariat's aims will produce higher taxes, greatly expanded information exchange costs, rights of privacy diminution and add yet another layer of the dead hand of bureaucracy on enterprise and wealth generation.
Perhaps an indication of the future would lie in the letter to Paul O'Neill, Secretary of the Treasury in the new Bush administration, from Dick Armey, who is the leader of the Republican Party in the American Congress. In this letter Mr Armey states:
"I encourage you to act quickly to reverse the previous administration's misguided policy. Many low tax nations, facing a threat of financial protectionism as early as this July, are under tremendous pressure to comply with the OECD's demands. As the world's largest economy but also as the national that symbolizes freedom and entrepreneurship, we have a moral obligation to come to the aid of these persecuted regimes".
"By every possible criterion, the OECD's effort is misguided. It is designed in effect to create a tax cartel for the benefit of a small handful of high-tax nations." "I look forward to working with you to stop the OECD's initiative and to adopt, instead, common-sense proposals that will maintain tax competition and the sovereignty of all nations".
The other point to end is that, of course, the OECD is not a legislative or enforcement body. It has no powers to coerce even its own members to do anything and, whilst I do think that there will be some change in international relations between the major offshore centers and certain large powers, I do not think the wholesale changes currently being attempted to be forced through by the OECD and their partner organisations will actually come to pass.
For info contact: Mr E (Ben) Bendelow
Basel Trust Corporation (Channel Islands) Limited
PO Box 484, Basel House, St Helier
Jersey, JE4 5SS Channel Islands, British Isles
Tel: +44 1534 500900 Fax: +44 1534 607876
E-mail: info@baseltrustjersey.com Website: http://www.baseltrustjersey.com
It is also somewhat outrageous that a private organization, constructed and funded to promote its members interests should be used to attack the policies of democratically elected governments in non-member countries. However, there are substantial signs that a heavy counter attack is under way from a number of different directions. For example, both Switzerland and Luxembourg, who are members of the OECD, declined to accept the main conclusions of the 1998 and 2000 Reports. The OECD relies heavily on the support of its members and, unfortunately for the Secretariat, there has been a change of President in the US and it is as yet unclear as to whether the incoming administration will continue to support the initiative, especially as American businesses come to realise that rather than achieving a so called level playing field, the achievement of the OECD Secretariat's aims will produce higher taxes, greatly expanded information exchange costs, rights of privacy diminution and add yet another layer of the dead hand of bureaucracy on enterprise and wealth generation.
Perhaps an indication of the future would lie in the letter to Paul O'Neill, Secretary of the Treasury in the new Bush administration, from Dick Armey, who is the leader of the Republican Party in the American Congress. In this letter Mr Armey states:
"I encourage you to act quickly to reverse the previous administration's misguided policy. Many low tax nations, facing a threat of financial protectionism as early as this July, are under tremendous pressure to comply with the OECD's demands. As the world's largest economy but also as the national that symbolizes freedom and entrepreneurship, we have a moral obligation to come to the aid of these persecuted regimes".
"By every possible criterion, the OECD's effort is misguided. It is designed in effect to create a tax cartel for the benefit of a small handful of high-tax nations." "I look forward to working with you to stop the OECD's initiative and to adopt, instead, common-sense proposals that will maintain tax competition and the sovereignty of all nations".
The other point to end is that, of course, the OECD is not a legislative or enforcement body. It has no powers to coerce even its own members to do anything and, whilst I do think that there will be some change in international relations between the major offshore centers and certain large powers, I do not think the wholesale changes currently being attempted to be forced through by the OECD and their partner organisations will actually come to pass.
For info contact: Mr E (Ben) Bendelow
Basel Trust Corporation (Channel Islands) Limited
PO Box 484, Basel House, St Helier
Jersey, JE4 5SS Channel Islands, British Isles
Tel: +44 1534 500900 Fax: +44 1534 607876
E-mail: info@baseltrustjersey.com Website: http://www.baseltrustjersey.com
