GUEST Commentary
What have the following sixTax Havens in common?
Bermuda, Cayman Islands,Cyprus, Malta, Mauritius and San Marino
Each have recently signed what the OECDrefers to as 'advance commitment letters' prior to the releaseof the Committee on Fiscal Affairs' ('the Committee') 'Reporton Progress in Identifying and Eliminating Harmful Tax Practices'in fact, released on 26 June 2000 ('the Report').
This Report, it will be remembered, is the follow-up to the, famousor infamous depending upon your point of view, publication inearly 1998 of the OECD's Report 'Harmful Tax Competition: An EmergingGlobal Issue'.
By signing these letters each of these tax havens managed to escapethe initial wrath of the Committee by not being named in the Reportas a tax haven; but perhaps more importantly, have in all probabilityalso avoided being categorised as an 'uncooperative' tax havenin the yet to be published 'List of Uncooperative Tax Havens'which was expected to be published by 31 July 2001.
An appearance on this latter list will mean being the target ofwhat the Committee calls 'coordinated defensive measures' to beimplemented by all OECD members. Such measures might include,for example, the disallowance of deductions related to transactionswith these havens; the imposition of withholding taxes on paymentsto such havens; the levying of additional 'transactional' chargeson transactions involving these havens; etc etc.
At the time of writing, however, only these six havens appearin principle willing to state, at least publicly, their intentionto refrain from adopting so-called 'harmful tax practices'. Asa consequence very shortly some 35 other identified tax havensare likely to be categorised as 'uncooperative'; havens such asBarbados, the British Virgin Islands, Cook Islands, Isle of Man,Jersey, Netherlands Antilles and US Virgin Islands.
All reasonably clear so far.
However, on the 5 April earlier this year the FSF (or to the uninitiatedthe Financial Stability Forum, part of G7) also released its listof 'bad boys' (my, not their, term). The FSF went one step furtherthan the OECD and prepared three categories of 'relative badness'.Category 1 comprises the least 'bad' Offshore Financial Centres('OFCs'); Category 3 the 'baddest'; and Category 2 OFCs somewherein between. The FSF adopted the arguably more politically correctterm of OFC rather than tax haven to describe territories possessingattributes such as low/nil local taxes, no withholding taxes,light and flexible supervisory regimes, etc.
The FSF adopted the arguably more politically correct term ofOFC rather than tax haven to describe territories possessing attributessuch as low/nil local taxes, no withholding taxes, light and flexiblesupervisory regimes etc.
Of the OECD's list of six 'goodies' (ie Bermuda, etc) accordingto the FSF three are placed in Category 3 (the 'baddest' OFCs)They are Cayman Islands, Cyprus and Mauritius. Of the OECD's remainingthree 'goody' havens Bermuda appears in Category 2 whilst Maltaand San Marino are not listed by the FSF.
Conversely, in FSF's Category 1 (the 'goodies') appears, interalia, Guernsey, Jersey and the Isle of Man all, at least currently,'baddies' according to the OECD!!
And what about the Edward's Report of 1998 ? Well, it would seemthat the OECD in potentially categorising Guernsey, Isle of Manand Jersey as 'uncooperative' has simply chosen to either overlookor treat as unimpressive the alleged legislative and related otherimprovements in each of these regimes following the Edwards Reviewof these three Crown Dependencies in 1998 (see UK Treasury PressRelease of 25 May 2000).
This approach of the OECD appears to have prompted the the Jerseyauthorities to have condemned the OECD's Report as 'seriouslyflawed' according to The Times newspaper (27 May 2000).
OECD, FSF and Edwards- total confusion? Perhaps. Total agreement?Clearly not. So what should the international tax planner makeof it all?
First, I suggest that clients with operations in any tax havenor OFC, whether classified as 'good' or 'bad', should not panic.The OECD's proposed measures to be adopted against the 'uncooperative'havens are not agreed and the current deadline for havens to removeharmful practices has been set at 31 December 2005, some fiveyears away. It also seems highly likely that this deadline willinevitably be extended.
Second, life being what it is, issues not currently recognised,economic upturns and downturns, etc often contrive to make redundant,measures felt appropriate at one point in time but completelyinappropriate at a later date. For example, European tax rateharmonisation was all the rage at one time when there was significantdifferent rates of tax within the European Union, allegedly distortingeconomic decision making. The EU's harmonisation programme waseventually abandoned and it was left to external economic factorsultimately to force a move towards similar rates of tax.
Third, not all the 'baddies' are tax havens. Within the OECD itselfa certain amount of internal house-keeping is also needed. TheOECD Report identified a not insignificant number of harmful orpreferential tax regimes, forty seven in total, within its ownmembers' own tax regimes; for example, attractive banking legislationwhich subsists in, inter alia, Ireland, Italy and Portugal; financingand/or leasing incentives which exist in, inter alia, Belgium,Ireland, Luxembourg, Netherlands and Spain; etc etc. In fact inthis regard the above referred to the Times article also statedthat the Jersey authorities had also suggested that the OECD hadmade little progress in reforming its own members' harmful practices.Perhaps the adage 'People in glass houses should not throw stones'comes to mind.
Fourth, arguably, despite numerous attacks over the years manyof the world's tax havens have simply gone from strength to strength.
Having said this it would be foolish to completely ignore thewarning signs.
As is often the case much of what is really relevant will be containedin the detail or fine print of any proposed changes or measures.In this regard it is perhaps too early to know precisely quitewhat impact any measures will have on existing or proposed taxhaven based structures. Accordingly it does not seem too unreasonablefor clients with existing in-place structures to adopt a 'waitand see' strategy and to not rush to reorganise and transfer operationsat this time.
For proposed new operations it also seems a little premature toplace too much emphasis on any of the pronouncements to date whenchoosing amongst competing tax havens although for proposed longterm investments/structures a bit of crystal ball gazing in thelight of current intelligence could pay dividends.
One final comment. Although amongst others the Cayman Islandshave signed an advance commitment letter much may change overtime. It is clear from the Report that a tax haven may be classifiedas 'cooperative' at one point in time but may be reclassifed as'non-cooperative' at a later date if the OECD is unhappy with,for example, the time or manner of implementation of any correctivemeasures. Too much meaning and significance should not thereforebe read into the signing of the six commitment letters.
Watch, wait and see seems the optimal strategy for now.
About the Author:
MALCOLM FINNEY has over twenty yearsexperience in the international tax field. His client base includesboth multinationals and high net worth individuals. He is a frequentspeaker at international tax conferences around the world andsits on a number of editorial boards. An expert on captives, Malcolmhas written the only UK text on "Captive Insurance Companies:A Tax and Financial Analysis" .
Malcolm Finney may be contacted by e-mail at malcfinney@aol.com