Ethics and governance in the European Financial centers

The OECD on 28 August issued a document to clarify its approach to counter tax evasion.

 

A couple of paragraphs are worth being quoted:

 

[The experts the OECD’s Committee on Fiscal Affairs and the Global Forum have suggested that] a good indicator of progress is whether a jurisdiction has signed 12 agreements on exchange of information that meet the OECD standard. This threshold will be reviewed to take account of (i) the jurisdictions with which the agreements have been signed (a tax haven which has 12 agreements with other tax havens would not pass the threshold), (ii) the willingness of a jurisdiction to continue to sign agreements even after it has reached this threshold and (iii) the effectiveness of implementation. 

 

In 1998 the OECD set out a number of factors for identifying tax havens.

The four key factors were:

1) No or nominal tax on the relevant income;

2) Lack of effective exchange of information;

3) Lack of transparency;

4) No substantial activities.

No or nominal tax is not sufficient in itself to classify a country as a tax haven.

The fourth factor above “no substantial activities” was not considered when determining whether a jurisdiction was cooperative. Thus, in order to avoid being listed as an uncooperative tax haven, jurisdictions which met the criteria were asked only to make commitments to implement the principles of  transparency and exchange of information for tax purposes.

 

The key principles of transparency and exchange of information for tax purposes can be summarised as follows:

• Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of a treaty partner.

• No restrictions on exchange caused by bank secrecy or domestic tax interest requirements.

• Availability of reliable information, particularly accounting, bank andownership information and powers to obtain it.

• Respect for taxpayers’ rights.

• Strict confidentiality of information exchanged 

 

First, tax information received from another country can only be used for the purposes stated in the agreements. Second, a country is free to decline a request for information in a number of situations. One reason for declining to provide information relates to the concept of public policy/ordre public. “Public policy” generally refers to the vital interests of a country, for instance where information requested relates to a state secret. A case of “public policy” may also arise, for example, where a tax investigation in another country was motivated by racial or political persecution.

 

The OECD does not have power to impose sanctions on countries that do not implement the standards. Individual countries whether OECD or non‐OECD will decide for themselves what actions they consider necessary to ensure the effective enforcement of their tax laws. The G20 has produced a list of potential measures based upon an analysis provided by the OECD. The OECD will continue to provide a forum where countries can discuss how to make these measures more effective.

 

 

 

In a nutshell, the OECD admits that

 

1) there are loopholes for a given jurisdiction to decline a request for information and its decision is discretionary,

2) it does not have power to impose sanctions on countries that do not implement the standards.

 

 

 

Those who believe that the signature of agreements based on the OECD thax model is the panacea to counter tax evasion are very naive. Aren’t they?