Tax Planning

OECD: Too Much Competition is “Harmful Competition”

Leave it to bureaucrats to decide that while some competition is good, too much is bad.  In a nutshell, that's what the Organization for Economic Cooperation and Development (OECD) crackdown against low-tax jurisdictions is all about.

The OCED's twisted logic is bad enough.  But what's even more galling is the fact that the OECD's employees are working tax-free in Paris, in a sumptuous palace built by the Rothschild family.  Not to mention the process—and the hypocrisy—of the OCED's campaign.

But perhaps I'm getting ahead of myself.  Let's review the history of the OECD's vendetta against "harmful tax competition" (which it wisely relabeled "harmful tax practices").

Back in 1998, the OECD's Committee on Fiscal Affairs released a report outlining what it perceived as a dangerous trend: more and more countries were reducing taxes and providing fiscal incentives for residence and investment.  This trend toward what the OECD then called "harmful tax competition" was dangerous, according to the Committee, because it had the potential to reduce tax revenues in nations that didn't wish to engage in tax competition.

To help fight this fearful phenomenon, the OECD proposed that low tax countries be required to dismantle bank secrecy to the extent that it applied to foreign tax investigations.  It also called for sanctions against jurisdictions engaging in harmful tax practices, including termination of tax treaties, ending tax credits, and imposing extra domestic reporting requirements for people or entities doing business in those countries.

The OCED escalated the fight in 2000, when it identified 35 so-called "uncooperative tax havens" and outlined a series of sanctions to be imposed against them unless they agreed to rewrite their tax and financial privacy laws according to OECD specifications. The report gave the 35 jurisdictions until 2001 to sign compliance agreements with the OECD that would obligate each one to bring its tax regime into line with "international standards" set by the OECD.

The OECD initiative stalled in 2001, when the United States announced that it would not support it out of respect for other nations' rights to determine their own tax system. But the 2008 election of Barack Obama as President, a sworn enemy of low tax jurisdictions, reinvigorated the OECD's campaign.

In early 2009, the OECD prepared a "grey list" of countries that are allegedly not in full compliance with international tax cooperation rules—set, naturally enough, by the OECD.

This "international standard" requires grey-listed countries to release information on financial accounts held by a foreign investor at the request of foreign tax authorities.  The request may be in regard to any tax inquiry—civil, criminal, or administrative.  The country receiving the request may not invoke a domestic bank secrecy law to block it.  Further, the OECD has demanded that grey-listed countries ratify at least 12 "tax information exchange agreements" with other countries.  Only after all these demands are met will a country be removed from the grey list.

Who appointed the OECD to play this role?  The OECD, naturally.  Behind the scenes, of course, the governments that finance the OECD with your hard-earned tax dollars are happy to go along with the OECD's "non-binding" recommendations.

I mentioned a moment ago that what I found the OECD's campaign hypocritical.  Many OECD members are themselves low-tax centers for non-resident investors: especially the United States. As international tax lawyer Marshall Langer explains:

"Most OECD member countries are guilty of tax competition that is much more harmful than that of which the OECD is complaining.  It does not surprise people when I tell them that the most important tax haven in the world is an island.  They are surprised, however, when I tell them that the name of the island is Manhattan, in the United States… 

The 1998 OECD Report on harmful tax competition set forth four key factors for identifying and assessing harmful preferential tax regimes.  Applying these factors to some of the U.S. regimes for taxing nonresidents, the United States is clearly such a regime:

The United States imposes no tax on relevant income.  The United States taxes its residents, citizens and domestic corporations but exempts all nonresident aliens and foreign corporations on interest paid by banks, savings and loan associations and insurance companies.  It does the same with respect to portfolio interest and most capital gains.

The U.S. regime is "ring fenced."  Residents, citizens, and domestic corporations are excluded from taking advantage of these benefits.

There is a lack of transparency.  Most U.S. residents are completely unaware that foreigners enjoy these benefits.  Although the U.S. government does not advertise the existence of these benefits to foreigners, banks and brokerage houses see to it that any foreigner who needs to know does know all about them.

There is a lack of effective exchange of information.  With one exception, the United States does not provide information concerning those who benefit from these regimes to its tax treaty partners.  The IRS does not even collect information about most of the income and gains arising from them.  It will try to get information in response to a specific request by a tax treaty partner but only if that country can tell the IRS where to look.  It cannot do even that for a country that does not have a tax treaty or Tax Information Exchange Agreement (TIEA) with the United States.

Langer wrote these words a decade ago, but nothing has changed in the intervening years.  Indeed, the situation is more one-sided than ever.  The U.S. government has forced dozens more countries to sign TIEAs with it, but the information flow is almost always one-way—from the low-tax country to the United States.

It's also still possible to incorporate in numerous U.S. states, virtually anonymously.  In contrast, the OECD (and its bastard step-child the Financial Action Task Force), have forced dozens of low-tax jurisdictions to eliminate the opportunity for anonymous incorporation.  After all, that might facilitate "tax evasion."  Go figure!

Two of the most damaging allegations against low-tax jurisdictions are that they provide havens to stash their wealth and encourage crimes such as tax evasion and embezzlement.  In the name of ending "harmful tax competition," the OECD has taken it on itself to eliminate these havens for dirty or untaxed monies.

Now, OCED, how about grey-listing the good old USA? I'm not holding my breath….

Copyright © 2010 by Mark Nestmann

(An earlier version of this post was published by The Sovereign Society,

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