Ethics and governance in the European Financial centers

Three jurisdiction that are said to be on OECD unofficial list of tax havens said today there are going to be more conciliatory :
- Andorra
- Liechenstein
- Belgium.

Which jurisdiction will be the last Mohican of banking secrecy opposable to foreign tax administrations ?
Switzerland ?
Austria ?
Or Luxembourg where Prime Minister compares banking secrecy to confessional secrecy while not having a tradition of banking secrecy in the jurisdiction?

In is answer to MPs the day before yesterday, Luc Frieden said that "en ce qui concerne les paradis fiscaux, il y a, à notre connaissance, une organisation internationale, à savoir l’OCDE, qui a établi des critères de qualification des paradis fiscaux. Parmi ces critères, le point de départ est qu’il faut qu’il s’agisse d’un territoire dans lequel il n’y a pas de fiscalité, ou une fiscalité très faible" (with regard to the tax havens, there is, to our knowledge, an international organization, namely OECD, which established criteria of qualification of the tax tavens. Among these criteria, the starting point is that it is necessary that it is about a territory in which there is no taxation, or a very weak taxation)

This is not the actual OECD framework on tax havens.

Four key factors are actually used by the OECD to determine whether a jurisdiction is a tax haven. These factors to be considered are :

Wether the jurisdiction imposes no or only nominal taxes.

The no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven. The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.

An analysis of the other key factors is therefore needed for a jurisdiction to be considered a tax haven.

Whether there is a lack of transparency

Transparency ensures that there is an open and consistent application of tax laws among similarly situated taxpayers and that information needed by tax authorities to determine a taxpayer’s correct tax liability is available (e.g., accounting records and underlying documentation).
The absence of balance sheets database is evidence of lack of transparency in Luxembourg. Secrecy is opposable to foreign tax administration in Luxembourg while the professionals of the financial sector help with tax avoidance


Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.

With regard to exchange of information in tax matters, the OECD encourages countries to adopt information exchange on an “upon request” basis. Exchange of information upon request describes a situation where a competent authority of one country asks the competent authority of another country for specific information in connection with a specific tax inquiry, generally under the authority of a bilateral exchange arrangement between the two countries. An essential element of exchange of information is the implementation of appropriate safeguards to ensure adequate protection of taxpayers’ rights and the confidentiality of their tax affairs. Banking secrecy is opposable to foreign tax administration in Luxembourg while the professionals of the financial sector help with tax avoidance

Whether there is an absence of a requirement that the activity be substantial

The no substantial activities criterion was included in the 1998 Report as a criterion for identifying tax havens because the lack of such activities suggests that a jurisdiction may be attempting to attract investment and transactions that are purely tax driven. In 2001, the OECD’s Committee on Fiscal Affairs agreed that this criterion would not be used to determine whether a tax haven was co-operative or unco-operative.
It is a key problem in the Luxembourg jurisdictions where the Corporate Registration is full of possible scams connected to other tax havens like the Seychelles, the BVI, Panama...


When Luc Frieden says that the starting point is that it is necessary that it is about a territory in which there is no taxation, or a very weak taxation, this is not what the OECD is stating : the OECD specifies that it recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate. An analysis of the other key factors is needed for a jurisdiction to be considered a tax haven. I am afraid that the three additional criteria are met in Luxembourg.

Read OECD criteria

In the context of the financial crisis where auditors are in question, I went through the website of the registered auditors in Luxembourg and in Belgium.

There are almost 1000 registered auditors at the IRE in Belgium and 350 in Luxembourg.

Logically there should be a kind of proportionality in the disciplinary activity of both institutes all the more than Luxembourg is most important in business (GDP and GNP much higher).

In Luxembourg there are only two disciplinary judgements available online:
- one dated 16 June 2005 and
- one dated 30 June 2006.

In Belgium there are disciplinary judgements available online every year:
2005: 23
2006: 29
2007: 42
2008: 22
2009: 2 (at 12 Mars 2009)

From 2005 to 2008 the average is 29 disciplinary judgements every year.


I have already quoted two reports : The Narcotic Control Strategy Reports 2008 observes that “the scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector” and the GRECO report Round III observes that “the number of cases coming before the courts appears to be very small”

What they state is confirmed with the disciplinary activity of auditors in Luxembourg.

Sources:
IRE Luxembourg
IRE Belgium