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Lessons from the Last War on Tax Havens

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Lessons from the Last War on Tax Havens NEWS AND ANALYSIS on the issue. Solomon said he expected Treasury ECONOMIC ANALYSIS would continue the discussion of territoriality and (C) Tax Analysts 2007. All rights reserved. does not claim copyright in any public domain or third party content. get into details such as what kind of income would Lessons From the Last be exempt and what would be considered foreign income. War on Tax Havens Michael J. Boskin of Stanford University sug- gested implementing a credit-method VAT of 10 By Martin A. Sullivan — [email protected] percent to 14 percent, conforming book and tax income to address corporate tax shelter problems, In a war waged primarily from 1998 through imposing a 15 percent corporate rate, and broaden- 2002, 35 tax havens — including some of the ing the base, although he said Treasury’s examples world’s smallest countries — beat back an attack on of provisions to eliminate were ‘‘not possible or their offshore business led by the OECD, the pro- realistic.’’ tector of the collective economic interest of 30 of the Speaking to reporters after the conference, Solo- world’s biggest countries. How did these pea-pod mon and Robert Carroll, Treasury assistant secre- economies overcome the superpowers? In a nut- tary for tax analysis, said there is no deadline for shell: They kept the battle at a rhetorical level and Treasury’s study of competitiveness. then, with the support of like-minded third parties, ‘‘We have to sit down and really try to put developed verbal counterattacks to the OECD’s together some of the thoughts from today. That’s opening assaults. really what our next step is. And then we have to This is all described in a balanced and thor- figure out what we may do,’’ Solomon said. oughly researched study entitled Havens in a Storm: House Ways and Means Committee Chair The Struggle for Global Tax Regulation (Cornell Uni- Charles B. Rangel, D-N.Y., encouraged the admin- versity Press, 2006, 211 pages). The author, J.C. istration to join him at the table to reform the tax Sharman, is an Australian political scientist with code. little prior knowledge of taxation, but he may have written one of the best books out there for tax experts trying to make sense of big countries’ ‘Secretary Paulson knows that if he policies toward tax havens. wants to move forward on tax reform, my door is open — in fact, he doesn’t Play by Play even have to knock,’ said Rangel. The story begins in May 1996 when the heads of state of G-7 nations meeting in Lyon, France, asked the OECD to develop measures to ‘‘counter the ‘‘What has been missing from the debate thus far distorting effects of harmful tax competition.’’ The are tax reform proposals endorsed by this adminis- OECD talked it over for two years and in 1998 tration and a willingness to work across party lines released ‘‘Harmful Tax Competition: An Emerging to enact that reform,’’ Rangel said. ‘‘Secretary Paul- Global Issue.’’ All OECD member nations, except son knows that if he wants to move forward on tax tax havens Luxembourg and Switzerland, approved reform, my door is open — in fact, he doesn’t even the report. have to knock.’’ (For a press release from Rangel, see Doc 2007-17491 or 2007 TNT 145-36.) The landmark 1998 report listed characteristics of tax havens: low or zero tax rates, lack of tax information exchange with other countries (even if there is exchange for fraud and money laundering), a high degree of bank secrecy, and lack of real economic activity associated with the income gen- erated. The OECD established a Forum on Harmful Tax Practices to compile a ‘‘blacklist’’ of tax havens. Blacklisted countries faced veiled threats of multi- lateral actions in the form of sanctions euphemized as ‘‘defensive measures.’’ The Forum on Harmful Tax Practices scrutinized 47 jurisdictions. Six were deemed not to meet the tax haven criteria. Six others — Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino — made ‘‘advance commitments’’ to under- take specified reforms to avoid inclusion on the list. That left 35 jurisdictions on the OECD blacklist published in its June 2000 report, ‘‘Towards Global TAX NOTES, July 30, 2007 327 NEWS AND ANALYSIS The OECD June 2000 Tax Haven Blacklist (C) Tax Analysts 2007. All rights reserved. does not claim copyright in any public domain or third party content. 1. Andorra 13. Grenada* 25. Niue* 2. Anguilla* 14. Guernsey* 26. Panama* 3. Antigua and Barbuda* 15. Isle of Man* 27. Samoa* 4. Aruba* 16. Jersey* 28. Seychelles* 5. Bahamas* 17. Liberia 29. St. Lucia* 6. Bahrain* 18. Liechtenstein 30. St. Kitts & Nevis* 7. Barbados** 19. Maldives** 31. St. Vincent and the Grenadines* 8. Belize* 20. Marshall Islands 32. Tonga** 9. British Virgin Islands* 21. Monaco 33. Turks & Caicos* 10. Cook Islands* 22. Montserrat* 34. U.S. Virgin Islands* 11. Dominica* 23. Nauru* 35. Vanuatu* 12. Gibraltar* 24. Netherlands Antilles* *Jurisdictions subsequently committed to ‘‘improving transparency and establishing effective exchange of information in tax matters.’’ **Jurisdictions the OECD subsequently determined should not be included on the list of tax havens. Note: The countries in bold remain on the OECD blacklist. On its Web page providing access to the June 2000 report, the OECD warns: ‘‘More than five years have passed since the publication of the OECD list contained in the 2000 Report and posi- tive changes have occurred in individual countries’ transparency and exchange of information laws and practices since that time. The list has not been updated to reflect such changes. If a country chooses to use a list of countries derived from the OECD list, it should do so based on the relevant current facts. Thus, progress made in the implementation of the principles of transparency and effective exchange of information in tax matters should be taken into account by such countries and their legislatures.’’ Tax Cooperation.’’ Again, Luxembourg and Swit- bying to more sympathetic OECD states. The tax zerland abstained from endorsing the report. And havens aired their grievances directly at a January again, but this time with the blacklisted countries 2001 meeting between targeted jurisdictions and the identified, the OECD suggested that the uncoopera- OECD. And in March 2001 they formed the Inter- tive jurisdictions that did not adequately commit by national Tax and Investment Organization (ITIO, July 31, 2001, to eliminate harmful practices could later known as the International Trade and Invest- be subject to coordinated defensive measures, in- ment Organization) to further their anti-OECD ef- cluding: forts. • comprehensive information reporting for transactions involving listed tax havens; Previously restrained in their • denial of foreign tax credits to distributions opposition to the OECD, tax havens from listed tax havens; responded energetically to the • disallowance of deductions, exemptions, or credits related to transactions with listed tax publication of the blacklist. havens; • withholding taxes on payments to residents of But the big turning point was the change in the listed tax havens; U.S. support for the OECD initiative. Previously, • enhanced audit and enforcement activities re- under the guidance of Treasury Secretary Lawrence garding listed tax havens; Summers, the Clinton administration had led the • not entering into any new comprehensive in- crackdown on tax havens. In its last budget, re- come tax conventions with listed tax havens leased in February 2000, the administration pro- and possible termination of existing conven- posed U.S. legislation that would have required tions; and reporting of payments to havens and the denial of • charges or levies on specific transactions in- foreign tax credits associated with tax haven in- volving listed tax havens. come. (These two proposals were similar to the first Previously restrained in their opposition to the two OECD ‘‘defensive measures’’ listed above.) OECD, tax havens responded energetically to the The Bush administration did not immediately publication of the blacklist. At the Caribbean Com- oppose the OECD initiative. On the contrary, on munity summit of July 2000, and at a meeting of February 22, 2001, Treasury Secretary Paul O’Neill commonwealth finance ministers (25 of the listed signed on to the G-7 finance ministers’ communi- jurisdictions were former or current British colo- qué in Palermo, Italy, reaffirming American support nies) in September 2000, tax havens began to coor- for the OECD tax haven initiative. And at a Febru- dinate their defense to the OECD’s attack. Measures ary 17 press conference after the G-7 meeting, included promises to not sign up for the initiative, O’Neill stated: ‘‘While I indicated to my colleagues publicly challenging the OECD, and bilateral lob- that certain aspects of these efforts are under review 328 TAX NOTES, July 30, 2007 NEWS AND ANALYSIS by the new Administration, I support the priority placed on transparency and cooperation to facilitate (C) Tax Analysts 2007. All rights reserved. does not claim copyright in any public domain or third party content. effective tax information exchange.’’ And in an undated letter from early 2001, Trea- sury Assistant Secretary Mark Weinberger wrote Sen. Don Nickles: Countries generally should not engage in practices that make it easier for other coun- tries’ laws to be broken or frustrated. With respect to our tax laws, those practices might include bank secrecy rules or an unwillingness to exchange tax information with us that would permit taxpayers more readily to evade our laws. In this respect, we are mindful of the views expressed by the Senate Foreign Rela- tions Committee in late 1999 regarding its opposition to any softening of the United States’ commitment in the context of tax trea- ties to full tax information exchange, including information otherwise protected by bank se- crecy rules.
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