Tuesday, March 24, 2009

OECD: some nuts and bolts

Recently we wrote a highly critical blog looking at what we see as the OECD’s feeble standards and criticising it for effectively setting itself up to fail: allowing the creation of a blacklist that singles out small island states and significantly absolves the large tax haven culprits like London, Switzerland, Luxembourg, Austria, Belgium: the OECD’s own. As happened in the last war on tax havens, which started just over 10 years ago, we suspect that this will lead to justifiable claims of unfairness and hypocrisy, and a widespread loss of support for the process.

Well, not everyone agrees with all of it. One opinion is that it may not have been the OECD Secretariat, so much as certain member states and groupings of states, that have led to the unfair black list/grey list outcome we described. Possibly so. Some also argue that by setting up a potential blacklist (there's still nothing published, though we now believe the list we mentioned to be substantially accurate), the OECD forced an extraordinary pace of change on jurisdictions which would never otherwise have happened. Several previously uncooperative jurisdictions — Andorra, Austria, Belgium Hong Kong, Liechtenstein, Luxembourg, Monaco, Singapore and Switzerland — have recently indicated that in effect they will adopt the OECD’s program of exchange of information upon request. This evidences that the momentum for transparency and for the override of bank secrecy and confidentiality in tax matters is growing. These are, one might argue, legitimate points. TJN would like to think it has played an important role in helping foster the political climate underpinning these changes.

For those who wish to know more about the technical aspects of what is involved with the OECD, here are some key opinions and technical details, provided by a correspondent close to TJN.
  • While we remain implacably critical of OECD standards as being hopelessly weak, especially when compared to the standards adopted by the European Union, the OECD does deserve credit at least for establishing the principle that a government’s obligation to exchange tax information should override its bank secrecy and confidentiality laws. (For tax geeks: this principle is embodied in the revised Article 26 of the OECD Model Income Tax Treaty and in Article 5 of the OECD Model Tax Information Exchange Agreement (TIEA). The UN Tax Committee has revised Article 26 of the UN Model Income Tax Treaty to adopt that same principle. We explain what these terms – TIEAs etc. - mean in a short section at the end of this blog.)

  • However, and as we’ve said before, the OECD’s program only requires those secrecy jurisdictions to exchange information on request. That is, the OECD member country must know enough information about the tax evader’s assets or accounts in the tax haven before it can request and then obtain more information. Clearly, exchange of information upon request is not effective exchange of information.

  • There are several other problems with the OECD’s approach of exchange of information on request. One is that the OECD program is implemented by bilateral agreements, and it will take many years for those jurisdictions to negotiate these agreements. Although there are 30 OECD member countries and 35 jurisdictions classified as tax havens, these tax havens have only negotiated about sixty five bilateral TIEAs since the OECD programme began in 1998. Another is that some of those tax havens/secrecy jurisdictions have indicated that they will apply special procedural requirements and or limitations upon exchange of information.

    For example, Singapore’s recent statement saying it has signed up to the OECD’s model also suggests that it will add some procedural safeguards to the procedure, to prevent `fishing expeditions' (that is, one country’s tax authorities making general requests to a tax haven about the taxable income of its citizens), and to protect confidentiality. Stipulations like this "Singapore will implement the Standard through our DTAs to assist on bona-fide requests for information rather than information fishing" are likely to create major additional obstacles to effective information exchange and further eviscerate the obligation of the secrecy jurisdictions to exchange information.

  • Even worse, the OECD programme is limited to bilateral agreements between OECD member countries and the secrecy jurisdictions. The OECD has not applied pressure on them to exchange tax information with non-OECD, developing countries. Why not?

  • The only effective procedure exchanging information is the automatic exchange of information, on a multilateral basis. The OECD does not do this. The EU Savings Tax Directive has adopted automatic exchange of information with regard to interest income, and is trying to expand such automatic exchange of information to other types of income, despite resistance from some member states. The EU is also trying to expand the Directive so that it applies to other countries; TJN strongly supports this too.

    This is not the only example. The United States automatically exchanges information about Canadian individuals’ bank interest income with the Canadian Government; and Mexico, as we recently noted, is now asking for the same thing. These are bilateral arrangements, however, which as we’ve indicated are inferior to the EU’s multilateral approach.
Explanatory section: TIEAs, income treaties and double tax agreements.

Income tax treaties and double taxation agreements (DTAs) are the same thing. They are comprehensive, in that they cover all types of income (either specifically or in general terms), and they specify what rates are applicable, and which of the two governments can tax which income and at what rates. They also cover procedural and administrative matters. Income tax treaties normally have a clause about exchange of information.

A Tax Information Exchange Agreement (TIEA) merely specifies the rules and procedures for exchanging tax information. However, in this respect the TIEA is more detailed than the exchange of information clause in income tax treaties. The TIEA details the procedural rules for how such information is exchanged.

(Separately, TJN's Nicola Liebert has prepared a comment for the Finance Committee of the German parliament on tax havens and explaining why OECD standards are not good enough. Click here - unfortunately it is only in German; no English translation is available.)

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