OECD "Harmful Tax" initiative
In May 1996, the Organisation for Economic Cooperation & Development (OECD) called for its members to "develop measures to counter the distorting effect of harmful tax competition". This led to an initiative designed to force OECD members and those non-OECD members identified as "tax havens" to eliminate harmful tax practices.
In 1998 the OECD listed 41 jurisdictions as "tax havens" and called on them to make commitments to end harmful tax practices. The identifying criteria for blacklisting were; low or no income taxes; ring fencing between resident and non-resident tax regimes; lack of transparency; and failure to exchange information.
Following criticism from non-OECD countries and a shift in US government policy under the Bush administration, the OECD modified these criteria by dropping the low or no taxes and ring fencing criteria. Cooperating jurisdictions were to commit to introduce or amend legislation to increase transparency and to facilitate exchange of information when requested by a competent authority in an OECD member state.
Uncooperative jurisdictions would face sanctions including:
- Making payments to that OFC non-deductible for tax purposes
- Requiring member states to deduct tax from any payment to that OFC
- Not allowing that OFC to use the banks and other financial institutions of the OECD member states.
By 2004 only five of the original 41 OFCs were still refusing to cooperate - Andorra, Liberia, Liechtenstein, the Marshall Islands and Monaco. But Antigua and St Vincent have recently suspended their commitments because, they claimed, the concept of a level playing field had been breached. The OECD admitted that it was aware that a number of financial centres - particularly Hong Kong and Singapore - had not been a part of this exercise and that there were widely diverging practices within the OECD.
The OECD's Committee on Fiscal Affairs has also agreed on new provisions for the exchange of information between national tax authorities in its Model Tax Convention on Income and on Capital. Article 26 has been changed to clarify that Contracting States should obtain and exchange information, irrespective of whether they also need the information for their own tax purposes, and to prevent bank secrecy from being used as a basis for refusing to exchange information.
Tax Information Exchange Agreements
The USA has pressured various OFCs into signing agreements for the exchange of information on tax matters. These agreements require the contracting states to exchange information that is relevant to the assessment and collection of tax and enforcement of tax claims or the investigation or prosecution of tax crimes. This includes information about the beneficial ownership of companies or trusts based upon a formal request being received by the competent authority in the signatory
nations. Requests must be made on an individual case basis and the subject of the request must be under investigation in the requesting jurisdiction. The requesting country must also have pursued 'all means available' within its own jurisdiction, and strict confidentiality provisions are contained within the TIEAs to ensure that information is not passed on to third parties. The US stated that its intention was to sign such agreements with all OFCs before the end of 2004.
European Union (EU) Savings Tax Directive
The EU has agreed to introduce measures designed to counter tax evasion across EU member states. The proposed Savings Tax Directive will affect any EU resident who holds an income producing account in another EU member state or in a territory under the control of another EU member state.
Under the measure, 12 EU states will share the banking details of EU citizens. Luxembourg, Belgium and Austria will, for a limited period, retain their bank secrecy laws but will impose a withholding tax on the income from savings of EU residents. The legislation was due to enter into force on 1 January 2005, but was delayed for at least six months. The Directive was contingent upon the EU signing deals with third countries - Switzerland, Liechtenstein, Monaco, San Marino and Andorra. A provisional agreement for Switzerland to withhold tax was reached in 2003.
The associated territories affected by the Directive are: Gibraltar; Jersey; Guernsey; the Isle of Man; the Cayman
Islands; Anguilla; British Virgin Islands; the Turks & Caicos Islands; and the Netherlands Antilles. It is anticipated that Bermuda will also be specifically included. These jurisdictions are expected to adopt a withholding tax rather than automatic exchange information.
Surprisingly, the legislation only effects individual account holders and, possibly, trust accounts. The legislation does not effect corporate accounts even if the account-owning corporation is registered in an EU member state which banks in another EU member state or controlled territory.
Additionally, some major banking centres around the world, especially Singapore, Hong Kong, Bahamas, Dubai and Uruguay, are not currently affected by the legislation nor are they being pressurised by the EU to introduce similar measures.
Financial Action Task Force (FATF)
The FATF is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing.
Established at the 1989 G-7 Summit, the FATF comprised the G-7 Member States, the European Commission, and eight other countries. It was given responsibility for examining money laundering techniques and trends, reviewing the action that had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering.
In April 1990, the FATF issued a report containing a set of Forty Recommendations, which provided a comprehensive plan of action needed to fight against money laundering. In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF.
The FATF is engaged in a major initiative to identify non-cooperative countries and territories (NCCTs) and ensure that all financial centres adopt and implement measures for the prevention, detection and punishment of money laundering according to internationally recognised standards.
In 2000, the FATF published a list of 15 jurisdictions that had either critical deficiencies in their anti-money
laundering systems or had demonstrated unwillingness to co-operate in anti-money laundering efforts.
The list of NCCTs now (2004) comprises: the Cook Islands, Indonesia, Myanmar, Nauru, Nigeria, and the Philippines. The FATF called on its members to ensure that their financial institutions give special attention to businesses and transactions with persons, including companies and financial institutions, in these countries.
Counter-measures were imposed against Myanmar in 2003 due to its failure to introduce comprehensive mutual legal assistance legislation. The effect of this is that all countries are introducing higher standards of due diligence and "know you client" principles and financial institutions are being ever more diligent and careful about the business they take on and the way that business is monitored. Customers of any financial institution or financial service provider (including ourselves) must expect to supply proof of identity, proof of residential address and references before they will be taken on as customers and to explain the source and business purpose for any substantial movement of funds. Compliance with these requirements brings additional costs and inconvenience but is entirely unavoidable and is now an absolute requirement imposed by local and international regulations and law.