As with any recession, the need for governments to narrow the gap between their income and expenditure becomes acute. It is, therefore, unsurprising that some look with envy towards the so called ‘tax havens’. In the view of some, these centres represent a significant drain on other economies as they provide a refuge for money hidden from the taxpayer’s home jurisdiction. For others, their tax practices, though legal, represent a distortion to the global economy.
The Organisation for Economic Cooperation and Development (OECD) has expressed concerns about harmful tax practices and tax evasion for a number of years. As part of its drive to end such practices an internationally agreed tax standard was developed by them in co-operation with non-OECD countries and was subsequently endorsed by the G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting.
OECD also developed a model agreement on exchange of information on tax matters. The purpose of this Agreement is to promote international co-operation in respect of tax through the exchange of information. It was the OECD’s view that the lack of effective exchange of information is one of the key criteria in determining harmful tax practices. The Agreement, which was released in April 2002, is not a binding instrument but contains two models for bilateral agreements. These require exchange of information, on request, in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.
On April 2, 2009, following the London G20 meeting, the OECD produced a report on progress by financial centres around the world towards implementation of the standard. The report consisted of four parts:
Firstly there was a ‘white list’ of jurisdictions that have substantially implemented the internationally agreed tax standard.
Those on the white list were: Argentina, Australia, Barbados, Canada, China, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Korea, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Russian Federation, Seychelles, Slovak Republic, South Africa, Spain, Sweden, Turkey, United Arab Emirates, United Kingdom, United States and the US Virgin Islands.
The next two lists (the Grey lists) comprised tax havens and other financial centres that have committed to the internationally agreed tax standard but have not yet substantially implemented it. These were Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Dominica, Gibraltar, Grenada, Liberia, Liechtenstein, Marshall Islands, Monaco, Montserrat, Nauru, Netherlands. Antilles, Niue, Panama, St Kitts and Nevis, St Lucia, St Vincent & Grenadines, Samoa, San Marino, Turks and Caicos Islands, and Vanuatu. These were referred to by the OECD as ‘tax havens’. There were seven other financial centres on the grey list. These were Austria, Belgium, Brunei, Chile, Luxembourg, Singapore and Switzerland.
Finally, there was the “black list” of jurisdictions that had not committed to the internationally agreed tax standard. These were, Costa Rica, Malaysia (Labuan), Philippines and Uruguay.
In order to place a standard definition on whether jurisdictions had done enough to be on the white list, the OECD put a threshold of them having at least 12 tax information exchange agreements (TIEAs) in place as the demonstation of sufficient progress. The OECD has however stated that ultimately countries must aim to have agreements implemented with all other interested countries.
The reaction by the centres on the black and grey lists was swift. Within a week the OECD announced that Costa Rica, Philippines, Malaysia, and Uruguay were no longer on the ‘blacklist’ after these countries have committed themselves to collaborate with international standards on bank information disclosure.
Bermuda was removed from the grey list on June 10, after it signed TIEA with the Netherlands, the 12th such agreement it has entered into with other countries, having previously signed TIEAs with the United States, the United Kingdom, Australia, New Zealand, Sweden, Finland, Norway, Denmark, the Faroe Islands, Iceland, and Greenland.
By late June Luxembourg had treaties signed with Bahrain, Denmark, France, India, the Netherlands and the United States, which meet the OECD standard. Switzerland was also negotiating with a number of countries and had recently concluded its negotiations on revising its treaties with Denmark, France, Mexico, Norway and the US.
Gibraltar signed its first agreement with the US just prior to the summit and has recently concluded one with Ireland; The Government of Gibraltar is committed to signing further agreement in the months ahead and therefore should be removed from the ‘grey list’ during 2009.
Other centres have also been making significant efforts to be removed from the list.
A similar picture arises with the Cayman Islands, which On April 1, just one day before the G20 London summit managed to sign seven bilateral treaties and has subsequently negotiated a number of others
The agreements themselves cover a range of taxation issues. For example, the Gibraltar-Ireland agreement covers, in the case of Ireland:
(i) the income tax;
(ii) the income levy;
(iii) the corporation tax;
(iv) the capital gains tax;
(v) the capital acquisitions tax; and
(vi) the value added tax.
It is important to remember that the information is provided ‘upon request’. It is not an automatic disclosure mechanism. However, information is exchanged regardless of whether the requested party needs such information for its own tax purposes or the conduct being investigated would constitute a crime under the laws of the requested party.
Furthermore if the information in the possession of the requested party is not sufficient to enable it to comply with the request for information, they are obliged to use all applicable information gathering measures necessary to provide the requesting party with the information requested, notwithstanding that the requested party may not, at that time, need such information for its own tax purposes.
Finally the requested information only needs to be ‘foreseeable relevant’ to tax administration and enforcement to be obtainable.
The risk of bilateral action against white list countries is real. For example, in Germany, the Federal Ministry of Finance recently produced a draft for an Act for the “Combating of Tax Fraud and Other Harmful Tax Practices”. The draft includes the following measures significantly affecting business relationships with and capital income from such countries:
Similarly the Norwegian Commission on Capital Flight from Developing Countries has recently released a report on illicit financial flows from developing countries and tax havens and put forward recommendations for reform efforts to be considered by the Norwegian Government.
The Commission made recommendations for reform measures including:
There is however, a carrot and stick approach, with centres signing agreements being warmly praised. For example when Jersey recently concluded its fourteenth TIEA, the UK Financial Secretary to the Treasury, Stephen Timms, said:
"I warmly welcome Jersey’s continuing progress in concluding Tax Information Exchange Agreements. Jersey’s firm commitment to transparency and exchange of information in tax matters is very encouraging and I call on others to follow their example”.
So what happens next? Some pressure groups such as the Tax Justice Network (TJN) are pushing for exchanges of tax information to be automatic rather than on request. Indeed, the issue of automatic exchange is gaining currency. According to TJN, the Obama Administration is proposing to amend the US. Qualified Intermediary (QI) rules, in order to require foreign financial institutions to automatically provide to the US Government information about US persons with foreign (non-US.) financial accounts whether those accounts generate US. source income or foreign source income.
In respect of TIEAs the OECD Global Forum will strengthen its peer review process to focus on the effective implementation of the transparency and exchange information standards.
For those who believed the drive to greater tax transparency would be a temporary phenomenon the reality is proving somewhat different. The tax efficient jurisdictions of the future will look very different from their historical ancestors and some centres may not be able to make that transition.
Marcus Killick OBE
Marcus is an English Barrister and member of the New York State Bar as well as a Chartered Fellow of the Chartered Institute for Securities and Investments and a member of the Chartered Management Institute (Diploma in Management and Leadership) and the Chartered Insurance Institute, Marcus was awarded the OBE in the 2014 New Year’s Honours List Marcus was also Chairman of the Gibraltar Investors Compensation Scheme and the Gibraltar Deposit Guarantee Board as well as the Group of International Insurance Centre Supervisors Prior roles include Chief Executive Officer of the Gibraltar Financial Services Commission, Deputy Chief Executive of the Isle of Man Financial Supervision Commission, Head of Banking and Investments at the Cayman Island Monetary Authority and Director in KPMG's Financial International Regulatory Services Team. Marcus was one of the founding directors of the United Kingdom Association of Compliance Officers (Subsequently renamed the Compliance Institute).