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OECD Moves Forward in Counteracting Harmful Tax Practices
 The next blacklist is due for publication shortly. We examine the philosophy behind the issue of harmful tax competition.
In pursuit of their effort to combat harmful tax practices, OECD governments identify jurisdictions which function as tax havens and are taking steps to eliminate the perceived adverse consequences which those jurisdiction have on the world economy. The identified jurisdictions are encouraged to eliminate the harmful features of their regimes as part of an ongoing co-operative dialogue with the OECD Forum on Harmful Tax Practices. In situations in which those discussions are unsuccessful, co-ordinated countermeasures by OECD member countries are foreseen.
The Forum, mandated by the 1998 Report on Harmful Tax Competition to produce a list of tax havens, has, over the last years, engaged in extensive factual review and dialogue with the jurisdictions initially identified for review (with the exception of a small number that chose not to participate). On the basis of these consultations, the Forum has undertaken an initial technical evaluation of whether each jurisdiction meets the criteria for being a tax haven, as set out in the 1998 Report. Those preliminary findings are presented annually to the Committee on Fiscal Affairs, the OECDs senior tax policy body, at a meeting in January. Any list of tax havens is submitted to the OECD Council in June.
Under the 1998 Report, a tax haven is a jurisdiction that
imposes no or only nominal taxes (generally or in special circumstances) and
offers itself, or is perceived to offer itself, as a place to be used by non-residents to escape taxation in their country of residence
possesses confirming criteria.
Those confirming criteria are:
lack of effective exchange of information
lack of transparency, and
attracting business with no substantial activities.
These criteria are consistent with the nature of the tax poaching schemes that are the object of the OECDs work: schemes that impede the ability of home countries to enforce their own tax laws.
Most offshore centres have been included in the list (excluding Luxembourg and Switzerland, both being members of the OECD).
After submitting its preliminary work to the Committee on Fiscal Affairs, a dialogue is said to have continued with the jurisdictions under review, and publication of the Forums findings is now expected after the June 2000 OECD Ministerial. The reporting to Ministers is expected to distinguish between uncooperative tax havens and jurisdictions that choose to commit themselves to work towards eliminating the harmful aspects of their regimes. No distinction will be made between jurisdictions that are independent states and those that are dependencies.
The OECD definition of A Tax Haven
nation that imposes nominal or no tax on income.
nation offering preferential treatment to certain types of income or low tax rates.
nation that offers or is perceived to offer non-residents the ability to escape taxes in their country of residence.
Activities that identify a tax haven are:
Practices which prevent the effective exchange of relevant information with other governments on taxpayers benefiting from a low or no tax rate.
General lack of transparency.
The absence of a requirement that the activity be substantial (investment that is purely tax driven.)OECD Recommendations
The OECD report makes 19 recommendations of how to deal with harmful tax practices. They are as follows:
Recommendations concerning domestic legislation and practices.
Controlled Foreign Corporations (CFCs) - Countries that do not have CFC rules consider adopting them.
Foreign investment fund or equivalent rules - Countries that do not have such rules adopt them to entities covered by practices considered to be harmful tax competition.
Restrictions on participation exemptions and other systems of exempting foreign income in the context of harmful tax competition - Countries that apply the exemption method to eliminate double taxation of foreign source income consider adopting rules that would ensure that foreign income benefiting from harmful tax competition practices does not qualify for the application of the exemption method.
Foreign information reporting rules - Countries that do not have rules concerning reporting of international transactions and foreign operations of resident taxpayers consider adopting such rules and that countries exchange information obtained under these rules.
Advanced rulings - Countries offering advanced rulings concerning the particular position of a taxpayer make public the conditions for offering or denying such rulings.
Transfer-pricing rules - Countries follow the guidelines set out in the OECD 1995 guidelines on transfer pricing and not promote harmful tax competition.
Access to banking information for tax purposes - Countries review their laws, regulations and practices which govern the access to banking information with the view to removing impediments to the access to such information by tax authorities.
Recommendations concerning tax treaties.
Exchanges of information - Countries should undertake programs to intensify exchange of information concerning transactions in tax havens and preferential tax regimes constituting harmful tax competition.
Entitlement to treaty benefits - Countries consider including in their tax convention provisions aimed at restricting the entitlement to treaty benefits for entities and income covered by measures constituting harmful tax practices.
Clarification of the status of domestic anti-abuse rules and doctrines in tax treaties - That the Commentary on the Model Tax Convention be clarified to remove any ambiguity regarding the compatibility of domestic anti-abuse measures with the Model Tax Convention.
List of specific exclusion provisions found in treaties - The Committee should prepare a list of provisions used by countries to exclude from the benefits of tax conventions certain specific entities and types of income.
Tax treaties with tax havens - Countries consider terminating their tax conventions with tax havens and consider not entering into tax treaties with such countries in the future.
Co-ordinated enforcement regimes (Joint audits, etc.) - Countries consider undertaking joint enforcement programs such as simultaneous audits and examinations, in relation to income or taxpayers benefiting from practices constituting harmful tax competition.
Assistance in recovery of tax claims - Countries should review the current rules applying to the enforcement of tax claims of other countries for the addition to tax conventions.
Recommendations to intensify international co-operation in response to harmful tax competition.
Guidelines and a forum on harmful tax practices - Member countries endorse the guidelines set out in the following list (see Guidelines below) dealing with harmful preferential tax regimes.
Produce a list of tax havens - The Forum mandated to establish within one year of the first meeting of the Forum, a list of tax havens on the basis of factors identified in this report.
Links with tax havens - Countries that have links to tax havens ensure that these links do not contribute to harmful tax competition and in particular, that countries with dependencies that are tax havens ensure that the links with these territories are not used to promote or increase harmful tax competition.
Develop and promote Principles of Good Tax Administration - The Committee be responsible for developing and promoting a set of principles to guide tax administrations in the enforcement of guidelines in this report.
Associating non-member countries with the Recommendations - The Forum engage in dialogue with non-member nations to promote these
associations
The 1998 Report foresaw that Member countries would complete a self-review of their preferential tax regimes by April 2000 and recommended that they eliminate any harmful features of such regimes by April 2003. The report also recommends an agreement to not adopt harmful taxation measures, an examination by member countries of any measures that are considered to be harmful tax competition, co-ordination of a forum to discuss such practices,
and the use of the forum to promote non-member nations to associate themselves with the guidelines. The results of this work are also expected to be presented to Ministers in June 2000.
It is also suggested that governmental meetings take place in the same month with economies outside of the OECD area, in an effort, to engage them further with the fight against the spread of tax havens and the use of harmful preferential tax regimes for financial and other geographically mobile services.
The OECD (Organisation of Economic Cooperation and Development) has 29 members. The member states are as follows: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States.
To read more about the OECD organisation and the latest new releases please click here:
http://www.oecd.org
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