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Tackling tax abuse
Spotlight CLEAN TAX AND TRANSPARENCY Tax clarity and abuse
hedge funds, private equity funds–investing in high-yield securities and highly leveraged shareholder investment that drove the pre-crisis credit boom. Investors in offshore funds are of course responsible for reporting their offshore income and gains to their own tax authorities, and there are of course reasons other than tax minimisation for locating funds offshore. But tax secrecy can tip the balance between an unattractive, taxed investment and one which is only attractive on the basis of non-taxation.
Some would argue that tax is inherently distortive, and that all tax systems are far more complicated than they should be. It’s true that most countries’ tax systems have an inbuilt bias to companies financing themselves with debt. It’s also true that complexities and differences between many countries’ tax systems offer opportunities for tax arbitrage that can distort investment decisions, irrespective of the level of transparency. And it may be that administrative burdens, complexity, or perceived ineffectiveness of
some tax systems encourage taxpayers to evade or avoid tax, with or without the use of tax havens.
However, if so many countries are now signing up to OECD’s tax information exchange standards, it is because they recognise that with the privilege of participation in the global financial market comes the responsibility of cooperation and transparency–not just for the benefit of the tax revenues of other countries, but also for the stability of the financial sector as a whole. All countries have a responsibility to use their tax systems to promote, and not distort, sustainable economic growth, and to bear down on tax-driven distortions in the economy, while addressing local public expenditure needs.
That is a tall order for any country, even within its own tax system. At an international level, it calls for an open, co-operative approach. It is inconceivable that any country could be part of a future stable, global financial market without a clear commitment to that approach. This is the message that came out clearly from the G20 summit, and that the OECD will continue to promote.
*The views expressed in this article are those of the author and do not necessarily reflect those of the OECD or its member countries.
Though OECD work on making international tax fairer began over 50 years ago, it was not until 1998 and a report on harmful tax competition that the OECD stepped up its work against tax evasion, tax havens and abuse. Since then it has been committed to counter harmful tax practices and improve compliance, encourage exchange of information, combat aggressive tax planning and corruption, and improve co-operation between tax and anti-money laundering authorities.
The 1998 report defined a tax haven as a country or territory where there is no or nominal tax on the relevant income, combined with a lack of effective exchange of information, a lack of transparency, and no substantial economic activities.
The OECD has also developed standards of transparency and exchange of information that have been endorsed by governments and international organisations throughout the world and which serve as a model for most of the 3,000 bilateral tax conventions in existence today.
The standards require several things, such as exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the treaty partner, and respect for taxpayers’ rights. Strict
confidentiality of all information
exchanged is also required. Progress on improving transparency, informationsharing and compliance with tax laws accelerated in the lead-up and aftermath of the G20 summit in April 2009, which set the fight against tax havens as a priority.
All 30 OECD countries now meet the standard. Of the 40-plus tax havens that the OECD identified in 2000, nine–the Netherlands Antilles, Aruba, Bermuda, the British Virgin Islands, Cyprus, the Isle of Man, Guernsey, Jersey and Malta–are actively implementing the OECD standard either by means of Tax Information Exchange Agreements (TIEAs) or tax treaties, and the international community needs to recognise this progress. Macao and Singapore, as well as Hong Kong, China, have endorsed the standards and will take steps before the end of 2009 to start implementing them. Andorra, Liechtenstein and Monaco have also agreed to implement the standards. The Global Forum on Taxation, which is now the pre-eminent platform for international dialogue on this issue, will monitor commitments and push for compliance in more jurisdictions, as well as work to prevent the creation of new tax havens.
OECD (1998), Harmful Tax Competition: An Emerging Global Issue, Paris
For more details, see also www.oecd.org/tax/evasion
