Taken from the Commonwealth News Information Service, No.13
Protecting the Interests of Small Offshore Financial Centres (Feature
article by Professor Bishnodat Persaud)
The Organisation for Economic Co-operation and Development's plan to
blacklist 35 offshore financial centres (OFCs) which do not provide
commitments to eliminate 'harmful' features of their tax system (as defined
by the OECD) is meeting stiff opposition, especially from within the
Commonwealth. Of the 35 countries named, 26 are connected with the
Commonwealth either as members or through other forms of association.
The ongoing debate came to a head at the Commonwealth Finance Ministers
Meeting in Malta on 19-21 September 2000, at which the affected Commonwealth
OFCs mounted a concerted attack on OECD policy. Pressure was put on the OECD
to relax the July 2001 deadline for declaring its list of 'unco-operative
tax havens', and wider multilateral discussions of the issue were called
for.
This stand, supported by continuing strong dissatisfaction expressed by
countries outside the Commonwealth, such as the Channel Islands, has
elicited a softening of the OECD's stance. In response to the call for wider
international discussions, a meeting is being organised by the Commonwealth
for early 2001 in Barbados, which will involve the OECD, the OFCs and
relevant international organisations.
However, whether this change represents more form than substance remains to
be seen. The OECD is maintaining bilateral pressure on the 35 listed OFCs to
secure their compliance. Many of them, although deeply disturbed by the
whole process, are anxious to avoid the severe economic consequences of
being classified as unco-operative. At this stage, the most they can hope
for is a softer application of the criteria for such classification. This
would however still damage their economic prospects.
There are many worrying features in the OECD action, not least of which is
the element of dictation, coercion and excessive demands on a group of small
and powerless states. The OECD action is discriminatory in that although 47
tax regimes in OECD states themselves were found by OECD criteria as
suitable to be classified as harmful, these have been categorised less
pejoratively as 'preferential tax regimes' and deemed only 'potentially'
harmful. They would be subject to a more consultative process in determining
actual harmfulness and in effecting reform.
The sanctions regime is much more specific and stringent in the case of the
small OFCs. While there is the provision for a shorter period for the
completion of reform measures for the OECD states - by April 2003 as against
December 2005 - for the small OFCs a programme would have to be in place and
significant action taken in the first year of compliance.
A still more basic and worrying question is the technical legitimacy of the
whole notion of tax competition as harmful, which is the cornerstone of OECD
action. Even though there have been subsequent endeavours to shift the
emphasis from tax competition to harmful tax practices, low or no taxes
remain the first of four criteria of harmfulness.
If the OECD accepts that states must retain their sovereign right to
determine their own forms and levels of taxation, then defining harmful
practices must focus only on issues of financial regulation, transparency
and money laundering. But while these are serious issues, they are not all
tax issues and in all of them the reform process has accelerated. It remains
the case also that much larger amounts of money are laundered in major
financial centres such as Zurich, London or New York.
OFCs recognise their own interest in regulatory reform and are making major
efforts to achieve this. There is recognition that improved practices could
help to make OFCs more reputable and durable. In the fight against money
laundering, numerous international organisations are involved - the Bank of
International Settlements, the UN, the G7's Financial Stability Forum and
the OECD's own Financial Action Task Force. Model legislation and other
forms of co-operation, such as mutual legal assistance to curb criminal
activities, are increasingly being adopted. The Caribbean Community
(CARICOM), for instance, has set up its own financial action task force with
requirements that exceed those of the OECD's.
The OECD, prompted largely by worries over tax competition and the emerging
difficulties for high tax states from the increasing mobility of economic
activities through the use of the Internet, is setting a dangerous precedent
by usurping roles appropriate to more widely representative international
organisations. Furthermore, the European Union and OECD have themselves
adopted plans for greater access to bank information, but progress in
implementation is likely to be slow because of the continuing unhappiness of
such countries as Austria, Luxembourg and Switzerland. Thus the demands the
OECD is making on the OFCs are in excess of what it is able to achieve
internally. This is clearly discriminatory.
OFCs offer a useful means of extending the very limited range of
opportunities available to very small states to promote diversified, durable
and skill-intensive development. Tax competition is one of the few areas in
which small size confers an economic advantage. Where OFCs are well
established, their GDP (Gross Domestic Product) contributions often range
between 20 and 40 per cent, and employment contributions, although lower,
tend to be of a high-income and skill-intensive type. Removing the
legitimate attractions of OFCs could greatly set back economic development
in small states.
(Professor Persaud is a Director of the Commonwealth Partnership for
Technology Management and a former Professor of the University of the West
Indies.)
Dr. Amanda Sives
Postdoctoral Research Fellow
Commonwealth Policy Studies Unit
Institute of Commonwealth Studies
28 Russell Square
London, WC1B 5DS
Tel: +44 0207-862-8865
Fax: +44 0207-862-8820
Website: http://www.sas.ac.uk/commonwealthstudies/
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