The Organisation for Economic Co-operation and Development released a seminal report on tax information collection and exchange practices on 29 May. The study, entitled Tax-Cooperation: Towards a Level Playing Field (the “Report”), took nearly two years to prepare and is a definitive comparison of the disclosure standards applied in the 82 countries surveyed. The Report appears in the context of an ambitious OECD program seeking global data tracking and exchange to improve the tax enforcement capability of its members.
The controversy over comparative standards is not an arid debate over regulatory policy; big money is at stake. Financial services generate two trillion US dollars in annual revenue. This is forecast to triple by 2020 and to account for 10% of global GDP. International financial services are highly mobile, and consumers readily shift jurisdictions to pursue regulatory arbitrage opportunities. The new Report will accordingly shape the odds for jurisdictional success or failure in one of the most profitable sectors of the global economy.
This paper considers the controversial background for the OECD program on international tax information exchange and reviews the key findings in the new Report.
The Story so Far
Conduct that encourages, facilitates or is oblivious to tax evasion in another jurisdiction is morally reprehensible, and often criminal. However, international law is clear that there is no unilateral obligation on any jurisdiction to assist another to collect taxes.
The OECD, an exclusive Paris-based club of thirty wealthy countries, launched a campaign in April 1998 to reverse this rule and oblige the smaller countries to help its members with tax enforcement. The OECD’s 1998 report, entitled Harmful Tax Competition: An Emerging Global Issue, proposed an ambitious jump in global tax enforcement capability through: (i) government access (around the world) to beneficial ownership and financial data, and (ii) cross-border exchange of such data on request to tax authorities, everywhere.
The OECD demanded formal commitments from the so-called “tax havens” (small international financial centres) to actively assist with its program for global “transparency” (collection and exchange, on request, of financial data). These demands were backed by threats to shut non-cooperating international financial centres out of the world’s banking and securities markets. The OECD launched its program for data tracking without an effective means of ensuring participation in its program from key countries within its own membership.
Switzerland and Luxembourg, OECD states with substantial “offshore” financial services business, both dissented from the 1998 report and remain reluctant to support the OECD information exchange program. Portugal and Belgium, also OECD members, dissented from the project in 2001 and retain reservations.
Non-Member Commitments to the OECD Project
By 2002 most of the small international financial centres had agreed, under duress, to support the OECD project for tax information exchange. This process was slow initially, because these “traditional” offshore centres found that clients were migrating elsewhere in anticipation of those commitments. In particular, many clients were moving to take advantage of the more relaxed data collection and exchange standards available in Switzerland and the United States, the principal cross-border finance centres within the OECD.
Following an early Isle of Man commitment in December 2000, the smaller offshore centres took the commercially sensible precaution of conditioning their commitments on a “level playing field”, i.e., an assurance that OECD countries (and others left out of the project) would adopt similar standards. The traditional offshore centres were apparently willing to co-operate, but only on the basis that all financial centres would “join hands and jump into the cold pool together”.
EU Savings Tax Directive Skewers the OECD
The OECD’s lack of success in extending its program to its own members with substantial “offshore” financial services businesses became embarrassingly conspicuous in 2004 when the European Union made concessions in its own parallel program for tax information collection and exchange (the “Savings Tax Directive”). Unlike the careful management of the OECD initiative (where the key debates were conducted behind closed doors), the EU argument over the competitive and financial costs of compliance became a highly public confrontation between the EU and Switzerland.
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