Commentary
Financial Secretary in OECDtalks
Mr. George McCarthy
Hon George A McCarthy, OBE JP
Financial Secretary - Cayman Islands
The Hon. George McCarthy, Financial Secretaryis in Barbados this week participating in a multilateral meetingto discuss the OECD Harmful Tax Competition initiative, beingchaired and hosted by the Barbados Government in association withthe Commonwealth Secretariat and the Global Forum on InternationalTaxation of the OECD. Also accompanying Mr. McCarthy is Dr. ChristopherRose of the Finance & Economic Development Secretariat.
The high-level consultative meeting involves OECD member states,cooperative countries and countries which have yet to make a commitmentto the OECD initative. The Cayman Islands was one of six countrieswhich made an advance commitment in June 2000.
Mr. McCarthy will be speaking to the gathering on the topic ofpromoting a more inclusive dialogue in relation to the OECD initiative."All countries that wish to do so should have an opportunityto participate in a genuine and constructive consultative processon rules, standards and norms for international cooperation ontax matters," McCarthy explained.
Other issues which will be addressed include the economic impactof the
OECD proposals on small and developing states, the means of addressingconcerns about harmful tax competition, major policy and legalissues and the building of confidence and a shared perspective.
Speakers slated to present include Barbados Prime Minister OwenArthur; Don McKinnon, Secretary-General of the Commonwealth Secretariat;Gabriel Makhlouf, Chair on the Committee of Fiscal Affairs; SeiichiKondo, Deputy Secretary-General of the OECD; and the Secretary-Generalof CARICOM. The following is the full text of Mr. McCarthy's address:
"Promoting a more inclusive dialogue"
An 18th Century French political advisor,writing at a time during the ascendancy of imperialism and colonialism,is reputed to have described taxation as an art rather than ascience.
The analogy which he chose for his description, loosely translated,was that the art of taxation is the art of extracting from thegoose the maximum number of feathers with the minimum amount ofhissing.
Of course in those times, claims in regard to the legitimacy oftaxation were largely circumscribed by geography, and no one (exceptthe goose) expected the goose to either choose which farmyardto inhabit or whether to partake in any dialogue prior to beingdeprived of her feathers.
In those times, expanding one's tax base generally meant expandingone's empire through colonialism or other more overt aggression,and the view expressed subsequently by the German tactician Clausewitzto the effect that war was merely the continuation of diplomacyby other means, prevailed.
We are now at the beginning of the 21st century. The goose hasbecome sentient and acquired the ability to analyse which farmyard offers the best value for feathers plucked. Furthermore thegoose has new abilities to move from one farmyard to the nextin order to minimize the extent of plucking.
The operators of the modern farmyards have realized that if theycan send the goose to someone else's yard to feed and then laterdemand the return of the goose or at least the goose's feathers,they have effectively expanded their own farms at little or nocost.
International relations have also evolved to the point where thereis a legitimate expectation in the international arena that differencesin perspective can be discussed and common ground found in orderto resolve disputes and competing claims.
Those who have organized this conference are to be commended forcreating a new forum in which the search for such common groundcan go on.
The Cayman Islands recognises that globalisation and the globalcompetition among public sectors that is part of it, present bothpotential opportunities and potential threats for all jurisdictions.All jurisdictions are moving to optimize the opportunities andminimize the threats.
Recent trends toward globalisation have accentuated a number ofconcerns in regard to the viability of 19th and 20th century taxationregimes, and in particular concern over whether current expectationsof future transnational tax bases and future government tax revenuescan be fulfilled in the globally competitive environment of the21st century.
Many of the concerns over tax related economic competition arenot new. Jurisdictions have long competed in the internationalarena for investment and economic activity in order to provideemployment and wealth for their peoples as well as the tax revenuesfor governments.
Tax related economic competition among governments is documentedas far back as the 3rd century BC when the Romans created a specialeconomic zone in Delos to promote the relocation of trade fromRhodes (which Rome did not rule), to Roman controlled Delos.
The academic literature on modern tax related economic competitionsimilarly goes back almost 100 years. Such competition has takenmany forms over time. In some cases it has involved the activecreation of various types of reduced rate direct tax regimes forpotential investors.
In other cases it has involved various tax expenditure regimesand the direct payment of subsidies for specific types of investment.In still other cases, jurisdictions have been essentially passive,as is the case where multi-national enterprises have sought outexisting fiscal regimes based on indirect taxation rather thandirect taxation.
The focus of this conference and a great deal of other internationalactivity is on the perceived need for the creation of a new setof universally applicable rules for international tax relatedeconomic competition. This will likely be a process of constructiveand vigorous negotiation.
It is natural for jurisdictions, whether acting singly or collectively,to attempt to set the rules of economic competition, includingthose involving international tax, so as to achieve the greatestlevel of benefit for themselves.
In the area of tax related economic competition, as in all othersin which nations compete, there is a need for all jurisdictionsto behave responsibly in accordance with accepted internationallaw and standards. Engaging in meaningful dialogue is a vitalelement in this process, as is creating a non-confrontationalenvironment in which dialogue can occur.
The Cayman Islands has long recognised that it is better to bepart of any meaningful dialogue than to be excluded from it. Inthis regard, the Cayman Islands welcomes the opportunities thathave arisen to engage in such meaningful dialogue in regard totax related economic competition.
We applaud those who have created such opportunities, throughthe OECD Global Forum on International Taxation and through thegood offices of the Commonwealth Secretariat, to mention justtwo. We welcome any bilateral or multilateral contact with anyjurisdiction willing to join in the process of meaningful dialogueon this subject.
Creating an environment for dialogue
The Cayman Islands would like to suggest that the way forwardin the search for a greater degree of consensus in matters ofinternational tax related economic competition involves a numberof components, of which three key components are:
· The facilitation of more inclusive dialogue;
· Enhancing transparency through the articulation of abroad set of shared assumptions; and
· Enhancing transparency through the promulgation of abroad set of guiding principles for the process as it moves forward.
The achievement of these three components will go a very longway to creating the international understanding necessary forthe process to achieve its optimal outcome. It will also go along way towards eliminating any existing misunderstandings andpreventing new ones from arising.
Finally, it will refute any perception that "might makesright" and confirm the legitimacy of the process in whichwe are now engaged. It will also confirm to the internationalcommunity that it is the rule of international law rather than"the rule of the big stick" that determines the outcomeof the process.
The Facilitation of More Inclusive Dialogue
A clear invitation to participate in meaningful dialogue is criticalto the process. The Cayman Islands is pleased to have receivedsuch an invitation and to have taken it up. The facilitation ofmore inclusive dialogue will also involve:
Mutual education and a shift in focus toward a more broad recognitionof the concerns of individual jurisdictions, the legitimacy ofthe various types of fiscal regimes that exist within the internationalcommunity, and the legitimacy of economic competition within definedboundaries,
The use by all participants of inclusive rather than exclusivelanguage and an avoidance of the use of pejorative and discriminatoryemotive language, and
The use of many means and many fora, both new and established.
Addressing the last of these three points first, this multilateralconference hosted by the Government of Barbados in associationwith the Commonwealth and the OECD is one example of a new forumthat provides a very valuable opportunity to facilitate more inclusivedialogue. I would like to once again commend all of those whohave given of their time and effort in the organization of thisconference.
Recent dialogue among the non-OECD jurisdictions that have joinedthe international process commenced by the OECD, is another exampleof a new forum in which all such jurisdictions that have joinedthe process and those who are contemplating joining the processare welcome. The Cayman Islands would be happy to share informationon this emerging process with any delegation wishing further information.
Mutual Education
Mutual education is vital. Therehas been a great deal of misunderstanding, seemingly fuelled bynarrow self-interest and rhetoric, both in regard to what arethe legitimate expectations of individual nation states in regardto transnational taxation, and in regard to what each state mayreasonably expect of other states in the international arena.Much of this misunderstanding will be eliminated once there isa common understanding of the political economics and jurisprudenceof each participant and the legitimate expectations of each participant.
If you will indulge me, I would just like to give a simple examplefrom our experience of the type of misunderstanding that can inhibitdialogue. Most of you will know that the fiscal regime that hasevolved in the Cayman Islands employs indirect taxes rather thandirect taxes. The Cayman Islands has never had direct taxes onincome, capital gains, wealth, or any of the other direct taxesthat have appeared for various reasons in the industrialized statesover the past hundred years or so.
Our culture has always favoured taxes based on consumption, assuch taxes are more consistent with the fundamental beliefs ofour people and our desire to protect our fragile environment.It has also been the experience of the Cayman Islands that theacademic models are quite correct in their prediction that consumptiontaxes have a very low compliance cost for business and individuals.It is also well established that if properly implemented, consumptionbased taxes are as equitable and broad based as any other model,and can be efficiently administered by a relatively small andinexpensive public sector agency.
Despite the fact that our fiscal regime is both simple and transparent,there are some we have encountered in the international arenawho have the completely muddled and misguided impression thatthe Cayman Islands somehow recently created a fiscal regime specificallyto attract international business, whereas in reality the CaymanIslands simply never adopted direct taxation measures that internationalbusiness finds somewhat less than appealing at times.
The Use of Inclusive Language
Language is very powerful. The Bookof Proverbs (Chapters 12 & 18) teaches that words can playa decisive role, whether for good or evil. They can be as destructiveas sword thrusts or the means of healing.
Temperate language is essential in the process we are now engagedin, if there is to be progress. Intemperate language is rarelyconstructive. Vilification and demonisation are well known techniqueswhich may seem to be expedient in regard to the mobilization andshaping of domestic public opinion or some other narrow politicalobjective when simple facts are not helpful or sufficient.
However, these methods do not contribute to international harmonyand they are rarely effective in the long term, as history hasably shown.
The Articulation of Assumptions
There may be much yet to be establishedin terms of achieving a fair playing field that is accessibleto all in the international arena of tax related economic competition.However, there are things that we all share such as adherenceto the rule of international law. We can choose to build uponthese shared beliefs.
Articulation of our respective assumptions can also help to identifyareas for discussion and consensus building. The generation of,and response to, various position papers and other public documentsover the past few years has been very useful in bringing to thefore subjects which require international debate and consensusbuilding.
Some of the academic and in some cases pragmatic questions thathave emerged and re-emerged in regard to these subjects include:
What assumptions define certain forms of tax related economiccompetition as 'harmful' and other forms acceptable? The perceptionof some on the outside of the current processes is that the focusand scope of recent initiatives indicates that these initiativesare merely a means for large rich countries to preserve and projectforward the existing global economic order at the expense of smallerless developed countries.
What are the legitimate limits of state sovereignty in regardto international taxation in general and the extra-territorialapplication of fiscal regimes in particular? The perception ofsome on the outside of the process has been that the limits proposedby the large developed states are just another case of might attemptingto define right.
What is 'fair' in terms of allowing for economic diversificationin smaller states? The perception of some on the outside of theprocess has been that no economic diversification is to be toleratedif it potentially competes with the interests of large developedstates.
To what extent is it appropriate for the rich and developed nationsto restrict the movement of investment capital to small less developedstates which offer investors the potential for diversificationand a higher after tax rate of return on their investments? Thisquestion is often coupled with the parallel question regardinginvestment incentives offered by large states that have distortingeffects on international investment activities.
To what extent are historical events and current aspirations forthe future relevant? The perception of some on the outside ofthe process appears to be that the historical removal of peopleand wealth from what are now the developing regions for the benefitof the now rich and developed regions is relevant.
The question that is asked is that if wealth started out, forexample in the West Indies and went to Europe, when did it stopbeing wealth to which the now developing nations have a claim?Similarly, when does money leaving the now developed world ceaseto be money on which the developed world has an ongoing claim?
To what extent is there a relevant question of proportionalityin regard to international taxation? The extra-territorial applicationof fiscal regimes, for example through Controlled Foreign Companiesregimes, results in the potential for arguably disproportionatetaxation of none monetary inputs, that is the taxation of inputsarising from the natural and human resources of another jurisdiction.
Some may ask whether an international convention could be developedwhich would define the scope in respect of which the jurisdictionwhich was the most recent source of the money, only has a taxclaim in respect of a portion of any income or gain in wealthproportionate to that jurisdiction's relative contribution tothe creation of new wealth.
It is highly unlikely that consensus in respect of the answersto even these few semi-rhetorical questions can be achieved duringthe course of this conference. However, if we can openly identifywhat the questions and assumptions are, then we will be able toestablish working groups or other forms of communication to enableus to build consensus and work towards an acceptable outcome.
Developing a set of guiding principles to take the process forward
Achieving transparency in regard to the principles which are tobe followed in the process, as well as in the mechanisms of theprocess itself, will go a long way to encouraging dialogue andachieving a workable outcome. The Cayman Islands would like tosuggest by way of illustration, that the guiding principles thatparticipants in the dialogue may wish to consider and adopt couldinclude the following concepts in one form of words or another:
Acceptance of the general principles of public international lawincluding the defined sovereign rights of states,
Acceptance of the general presumption against the validity ofthe extra-territorial application of laws of individual states,
Acceptance of the legitimate expectation of consistency and equitabletreatment,
Acceptance of the right of individual jurisdictions to negotiatethe terms of international tax arrangements and to determine whetherthat particular state wishes to enter into bilateral or multilateralarrangements, or similarly whether any arrangements should takethe form of double taxation agreements or otherwise,
Acceptance of the general proposition in favour of the right toprivacy of the individual in respect of personal information includingfinancial information,
Acceptance of the right of all individuals to due process beforethe law,
Acknowledgement of a general presumption in favour of followingthe format of existing international conventions and practiceto the extent applicable and practical, except where there isa clear international consensus for change to a specific new formatwhich is consistent with the other principles listed above.
It may be that for one reason or another, one or more of the conceptsset out here are not acceptable to one or more participants inthe dialogue. If so, even that information would assist in thedialogue. Similarly, there are likely to be suggestions for modificationsto those general principles listed here, or additions which oneor more jurisdiction might wish. The Cayman Islands welcomes anysuggestions in this regard and would be glad to participate inany forum in which these principles can be further developed andarticulated.
Conclusions
Having begun with one agrarian analogyin regard to farmyards and geese, I would like to end with another,this time having to do with water.
On our planet water in its liquid form often defines our borders.It moves internationally in rivers and oceans. It leaves its liquidform in evaporation, travels the winds across international boundariesin clouds, returns to liquid form in condensation and falls asrain, whether close to where it originated or in distant lands.Having fallen as rain, it again begins the life-giving processof flow, nourishment and evaporation. In all of these forms andwith all this movement it is what gives us life. If we stop itsmovement it becomes stagnant and fetid. If we conserve its naturalcycle and use it wisely, it will sustain us all.
Perhaps in regard to the international economic flows that arethe focus of the discussions here, there are analogies that willgive us perspective. The potential wealth of this planet is aresource we all share. We would hopefully all agree that no upstreamnation would be justified in unreasonably depriving its downstreamneighbours of life sustaining water by virtue of the geographicor historical accident that put them upstream.
Similarly, no nation should pollute waters that move internationallymaking them unhealthy or unproductive for their neighbours. Further,there are internationally accepted limits to which a nation maygo in causing water to deviate as it flows internationally. Finally,conservation is to be applauded in all jurisdictions.
The approach of the Cayman Islands is to participate fully andconstructively in the international process of establishing newinternational law and norms in regard to tax related economiccompetition. The Cayman Islands encourages all jurisdictions toparticipate in this process and would be pleased to engage indialogue with any jurisdiction in this regard. The Cayman Islandscommitment to the OECD is part of our involvement in the process.The terms of our commitment to the OECD is a matter of publicrecord and we would be happy to share the full text of this commitmentwith any of the delegations gathered here.
I would once again like to thank those involved in the planningand organization of this conference for allowing me this opportunityto speak and to extend an invitation to dialogue to any jurisdictionnot currently engaged in the process.