As part of its Harmful Tax Competition Initiative, the Organisation for Economic Cooperation and Development (OECD) has sought substantial changes in the design and transparency of the world's offshore financial centres. It also has threatened sanctions for offshore centres that choose not to comply with its demands.

Throughout the process, there have been complaints of an "exclusionary and confrontational approach", with offshore centres contending that the standards being promoted were not being uniformly adopted by the OECD. Essentially, it has been felt by many that the international agency was not proceeding with sufficient regard to fairness or to the concerns of non-members.

The OECD recently has said that it is prepared to work on a framework for establishing a level playing field. This commitment was given to the International Tax and Investment Organisation (ITIO) on the occasion of a meeting this month in St. Lucia.

The meeting between ITIO members and the OECD and its member states was organised by the Commonwealth Secretariat. ITIO is a grouping of small and developing economies (SDEs) set up in March 2001 to help members respond to global tax and investment challenges.

International financial centres are free to operate income tax-free fiscal regimes; however, it has to be recognised that onshore countries can prevent or restrict access to banking and securities markets for institutions and their clients in jurisdictions that are perceived to be poorly regulated or overly secretive. Such was the threat of OECD sanctions against non-cooperating jurisdictions.

Most of those identified by the OECD as tax havens have now made a commitment to the OECD's project, although conditioning such commitment on a level playing field. Seven countries have not agreed to co-operate with the initiative. These include: Andorra, Liechtenstein, Liberia, Monaco, The Marshall Islands, Nauru and Vanuatu. In addition to the international financial centres, the OECD also identified "harmful tax practices" in its own member states. Most of its members agreed to reform practices as necessary by April 2003. Centres such as Hong Kong and Singapore did not appear on the OECD tax haven list, and nor are they members of the OECD. Switzerland and Luxembourg, both OECD members, dissented from the 1998 Report and continue to resist pressure to exchange information for tax enforcement purposes.

Level Playing Field

U.S. Treasury Secretary O'Neill has supported the crucial importance of a level playing field, indicating that 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. This same support has been voiced by the Commonwealth Heads of Government and most recently by Ministers attending the Third United Kingdom-Caribbean Ministerial Forum in Georgetown, Guyana.

In addressing the consistent call for fairness, the OECD has said that it recognises and understands the concerns expressed. Chairman of the OECD's Committee on Fiscal Affairs, Gabriel Makhlouf, said "We know that they all have concerns about establishing a level playing field. We understand those concerns. Financial services are extremely mobile and it is in no one's interest that harmful activities move to jurisdictions that do not meet acceptable standards of transparency and effective exchange of information."

The Chairman feels the OECD has come a long way towards achieving a level playing field as a result of having a very large number of on and offshore financial centres commit to the same principles. He continued, "And our aim is that the framework of co-ordinated defensive measures applying to uncooperative financial centres prevents them from gaining an economic advantage"

Sanctions

In earlier releases, the OECD has said these co-ordinated defensive measures would not apply to uncooperative tax haven jurisdictions any earlier than they would apply to similarly-situated OECD member countries. Thus, such measures would be delayed until the deadline for OECD member country compliance with demands -- i.e. April 2003, at the earliest.

The United States does not support efforts to dictate to any country what its own tax rates or tax system should be, and has gone on record as saying that it will not participate in any initiative to harmonise world tax systems. Treasury Secretary O'Neill, nevertheless, has reiterated robust support for seeking information exchange, on request, for specific criminal tax investigations as well as for civil tax examinations.

Secretary O'Neill also has said that defensive measures are by their nature highly coercive and should be reserved only for jurisdictions acting in bad faith. The Secretary indicated that the United States would "strongly prefer working cooperatively with jurisdictions rather than contemplating the imposition of coordinated defensive measures" which he suggested must be truly measures of last resort.

Model Agreements - Universal Standard

The premise has been offered that offshore centres will be better positioned to negotiate information exchange agreements through reliance on a universal standard acceptable to all. This will ensure that any negotiations over information exchange are conducted within broadly agreed parameters. Without some external standard, it has been said, offshore centres could find themselves under pressure to agree to information exchange with no reference points to restrain the demands of aggressive high tax countries.

The Bahamas conditioned its commitment to the OECD's initiative on the application of a level playing field in relation to all jurisdictions with which The Bahamas is materially in competition in the provision of cross-border financial services. At the time of signing, the OECD indicated that The Bahamas will now be invited to join the OECD's 30 member countries in setting standards for implementation of its commitment. Effectively, this will be achieved through the work of the Global Forum on Taxation.

Recently, the Forum's Working Group on Effective Exchange of Information developed a model agreement for effective exchange of information in tax matters. The Working Group included representatives from both OECD and non-OECD member countries. It was co-chaired by the Netherlands and Malta and marks the first results of the OECD's collaboration with the jurisdictions that have committed to improve transparency and establish effective exchange of information in tax matters. (Note: This model agreement had not been reviewed by The Bahamas prior to finalisation, as the nation only recently became a member of the Global Forum)

Donald J. Johnston, Secretary General of the OECD, welcomed the release of the model and in particular the constructive participation by the non-member financial centres in this endeavour. He also said, "I am very pleased to see that this framework has not only proved to be successful as a vehicle for dialogue but has also been able to produce concrete results that members and non-members alike can use to improve co-operation in tax matters."

International Dialogue

Last month, the OECD joined with the International Monetary Fund and the World Bank to propose the establishment an "International Tax Dialogue", intended to promote enhanced international cooperation on taxation.

The ITD is intended to facilitate technical discussions and experience-sharing between government officials responsible for tax administration and policy. An additional goal of the dialogue will be to enhance collaboration among organisations that provide technical assistance in the tax area.