*EPF107 03/29/2004
Text: OECD Reports Progress on Harmful Tax Regimes, Tax Havens
(Five tax havens considered uncooperative, report says) (3100)

Industrialized countries have made significant progress in their efforts to eliminate harmful tax practices in their economies and to engage tax haven authorities on transparency and information exchange issues, the Organization for Economic Cooperation and Development (OECD) says.

The OECD said that a March 2004 progress report states most preferential tax regimes identified in a 2000 report as harmful have been abolished or modified, and some have been found not to be actually harmful. The progress report provides an update on work to eliminate or discourage practices that undermine OECD countries' ability to enforce their own tax laws.

In a March 22 news release, an OECD official hailed the results of the self- and peer- review process as "real change" leading to fairer tax competition.

The two countries that, so far, have not sufficiently addressed their problematic tax practices are Switzerland and Luxembourg, it added.

The first report on harmful tax competition issued in 1998 established several criteria for identifying harmful practices, including lack of transparency, lack of effective information exchange, and no or nominal taxes in tax havens.

The OECD said that most of the 42 non-OECD countries and jurisdictions identified in 2001 as tax havens have been cooperating with the OECD to develop international standards of transparency and effective exchange of information and thus, from now on, are considered participating partners. Five jurisdictions -- Andorra, Liberia, Liechtenstein, the Marshall Islands and Monaco -- are still deemed uncooperative tax havens, the organization said.

The OECD said that participating partners continue to seek bilateral agreements that would provide the legal framework for effective tax information exchange.

The OECD is a group of 30 countries that tries to promote good governance and fair competition.

Following is the text of the news release and highlights of the progress report:

(begin text)

Organisation for Economic Co-operation and Development

OECD Announces Further Progress in Eliminating Harmful Tax Practices

22/03/2004 -- OECD countries have made major progress in their efforts to eliminate harmful tax practices in their economies, modifying or abolishing more than 30 of the preferential tax regimes identified in 2000 as potentially harmful.

According to a report issued by the OECD's Committee on Fiscal Affairs today, out of a total 47 preferential tax regimes cited in 2000, 18 regimes have been abolished or are in the process of being abolished, 14 have been amended so that any potentially harmful features have been removed, and 13 have been found on further examination not to be actually harmful.

Two regimes, Switzerland's so-called 50/50 practice (previously referred to as the Administrative Company regime) and Luxembourg's 1929 Holding Company regime, on which proposals for modification are currently before the Luxembourg Parliament, are to be the subject of further discussion later this year. The full list of preferential tax regimes reviewed by the Committee can be found in the publication "The OECD's Project on Harmful Tax Practices: The 2004 Progress Report."

Bill McCloskey, Chairman of the OECD's Committee on Fiscal Affairs, which is leading the drive against harmful tax practices, hailed the positive results of the OECD's work on harmful tax practices. "The work has resulted in real change," he said in a statement. "OECD countries have shown that they will take action to ensure that tax competition is fair."

The report provides an update on efforts to combat practices, such as lack of transparency and lack of information exchange for tax purposes, that undercut the ability of OECD countries to enforce their own tax laws. Such practices undermine public confidence in the fairness of tax systems and create obstacles to the potential gains, such as lower tax rates, that can arise from fair tax competition.

In parallel, OECD countries are continuing to work with non-OECD countries and jurisdictions that have made commitments to improve transparency and information exchange in tax matters. A total of 33 non-OECD countries and jurisdictions are Participating Partners in the OECD project on harmful tax practices. Five jurisdictions -- Andorra, Liberia, Liechtenstein, the Marshall Islands, and Monaco -- remain on the OECD's List of Unco-operative Tax Havens, but the OECD continues to seek their co-operation.

Mr. McCloskey emphasised the importance of fair and open competition on taxes for economic growth and prosperity. But he also stressed the importance of integrity of tax systems for democratic, open economies.

"We're pleased with the progress that OECD countries have made in eliminating harmful tax practices as they relate to their preferential tax regimes and with the progress that we are making in establishing a co-operative working relationship with non-OECD countries and jurisdictions," he said. "We will continue to promote the kind of tax competition that is based on high standards and leads to real and lasting benefits. Tax competition provides a useful discipline for governments, but it should not lead to an abuse of tax measures since this would undercut the faith of honest taxpayers in their countries' tax systems."

(end text)

(begin text)

The OECD's Project On Harmful Tax Practices
A Briefing Note for Journalists

Details of the project can also be found on the OECD's Web-site (www.oecd.org/ctp).

I. Introduction

1. In the last 15 years, there has been a dramatic expansion in cross border financial services and financial flows as a result of the opening up of new markets, the development of new financial products and new advances in technologies. One significant challenge for governments is the increased scope for illicit use of the financial system, including for tax evasion.

2. In response, OECD Ministers launched, in 1996, the harmful tax practices initiative aimed at combating international tax evasion by promoting transparency and exchange of information both within and outside the OECD. The starting point for the project is that tax competition is good. Low tax by itself is not an issue and indeed can be welfare enhancing where it is the outcome of a fair competitive process. It is the manner in which tax competition is conducted that is at issue. The OECD aims to discourage measures that undermine a country's ability to enforce its own tax laws. In this respect, the project can assist governments to reduce tax rates as dishonest taxpayers begin to contribute to financing the public services from which they benefit.

3. The harmful tax practices work is primarily carried out through the Forum on Harmful Tax Practices, a subsidiary body of the Committee on Fiscal Affairs. The work has proceeded on three fronts: 1) identifying and eliminating harmful tax practices of preferential tax regimes in OECD countries, 2) identifying "tax havens" and seeking their commitments to the principles of transparency and effective exchange of information, and 3) encouraging non-OECD economies that are not tax havens to associate themselves with the harmful tax practices work.

4. The first report on this work, "Harmful Tax Competition," was issued in 1998. (Luxembourg and Switzerland abstained from Council approval of the 1998 Report and their abstentions apply to all follow-up work as well.) That report limited the harmful tax practices work to geographically mobile activities such as financial and other services, including the provision of intangibles. Thus "bricks and mortar" activities, such as manufacturing, are not covered by the work. The report establishes four key criteria for identifying harmful tax practices:

-- No or nominal taxes, in the case of tax havens, and no or low taxation, in the case of member country preferential tax regimes;

-- Lack of transparency;

-- Lack of effective exchange of information; and

-- No substantial activities, in the case of tax havens, and ring-fencing, in the case of member country preferential regimes.

5. The no/nominal/low taxes criterion is merely a gateway criterion to determine those situations in which an analysis of the other criteria is necessary. The adoption of low or zero tax rates is never by itself sufficient to identify a jurisdiction as a tax haven or a preferential tax regime as harmful. The OECD does not prescribe appropriate levels of taxation or dictate the design of any country's tax system.

6. With regard to transparency, the harmful tax practices project has been advancing standards that encourage an open and consistent application of tax laws among similarly situated taxpayers and ensuring that information needed by tax authorities to determine a taxpayer's correct tax liability is available (e.g., accounting records and underlying documentation).

7. With regard to exchange of information in tax matters, the OECD has been encouraging countries to adopt information exchange on an "upon request" basis. Under this standard, information is exchanged between tax authorities under bilaterally negotiated income tax treaties or tax information exchange agreements when an exchange partner has made a specific request with respect to a specific taxpayer that is already under examination. An essential element of such information exchange is the implementation of appropriate safeguards to ensure that the information obtained is used only for the purposes for which it was sought.

8. 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 the case of OECD countries that offer preferential regimes, the 1998 Report includes as a factor whether a country insulates its core tax base from the effects of providing the preference. For example, if a country offering a preferential tax regime denies that regime to resident taxpayers or domestic activities, it means that it is not willing to bear the cost in lost revenues with respect to its own tax system. Such a regime is said to be "ring fenced."

9. In addition to the key factors, the 1998 Report also provides a number of other factors that do not so much add additional criteria but spell out in more detail some of the key principles and assumptions that are implicit in the key factors themselves. Any evaluation of a regime requires an overall assessment of each of the relevant factors and once a regime has been identified as potentially harmful, the economic effects of the regime may need to be examined.

10. The 1998 Report also examined how measures designed to protect a country from the deleterious effects of harmful tax practices ("defensive measures") could, if necessary, be co-ordinated in a way that would enable individual countries to support each other's efforts.

11. In 2000 the OECD issued a report entitled "Progress in Identifying and Eliminating Harmful Tax Practices". That report identified 35 jurisdictions that were found to meet the tax haven criteria. (Six other jurisdictions -- Bermuda, Cayman Islands, Cyprus, Malta, Mauritius and San Marino -- were not included in the 2000 Report because they committed to eliminate their harmful tax practices prior to the release of that report.) It also identified 47 potentially harmful preferential tax regimes in OECD countries. These were classified by category (e.g. insurance, financing and leasing, fund managers, etc.) with some regimes falling within more than one category. Thus, while there are 61 entries in the table of potentially harmful preferential regimes in the 2000 Report, there were only 47 potentially harmful preferential regimes. Although holding companies and similar preferential regimes (e.g. participation exemptions) were not included in the list of potentially harmful regimes because of the complexities they raised, the Committee also instructed the Forum to continue its work with respect to those types of regimes. The 2000 Report, following the OECD Council Recommendation of 16 June 2000, also proposed a process whereby the identified tax havens could commit to eliminate harmful tax practices and mandated that a list of uncooperative tax havens be produced listing those tax havens that were not willing to make such commitments. Thus, the key distinction for OECD countries became whether a tax haven was co-operative or unco-operative.

12. Another report was issued in 2001, "The 2001 Progress Report," which made certain modifications to the tax haven work and updated the progress made in the harmful tax practices work. There were two principle modifications. First, a tax haven that committed to eliminating lack of transparency and lack of effective exchange of information would be considered co-operative and therefore would not be included on the OECD's list of unco-operative tax havens. Thus, no commitment would be required with respect to the "no substantial activities" criterion. (The 1998 Report had acknowledged that the determination of when and whether an activity was substantial could be difficult.) A second modification was that a potential framework of co-ordinated defensive measures would not apply to unco-operative tax havens any earlier than it would apply to OECD countries with harmful preferential tax regimes.

13. In April 2002, the OECD issued the list of uncooperative tax havens called for by the report and the Council Recommendation. The list initially had 7 jurisdictions, but two jurisdictions -- Nauru and Vanuatu -- made commitments in 2003 and the list now contains only 5 jurisdictions: Andorra, Liberia, Liechtenstein, the Marshall Islands and Monaco.

II. The 2004 Progress Report

a) OECD member country work

14. In March 2004, the OECD's "2004 Progress Report" provided updated information on the harmful tax practices work as it relates to preferential tax regimes in OECD countries. Acknowledging that further work needed to be done to assist member countries in assessing which of the 47 potentially harmful preferential tax regimes identified in 2000 were, or could be applied to be, actually harmful and to determine how to remove any harmful features, the Committee, through the Forum, developed "application notes" on transparency and exchange of information, ring-fencing, transfer pricing, rulings, holding companies (and similar preferential regimes), fund management, and shipping. The separate notes have been combined into a single "Consolidated Application Note," which is available on the OECD website (www.oecd.org/ctp).

15. Using the Consolidated Application Note as guidance, each OECD member country performed a self-review of its identified preferential regimes. All member countries participated in the self-review process. A peer review process was then undertaken for each regime under which an assessment was made based on the harmful tax practices criterion and, where necessary, relevant economic considerations. The results of this review process are contained in paragraphs 11- 18 of the Report. Of the 47 regimes listed as potentially harmful in 2000,

-- 18 regimes have been abolished or are in the process of being abolished;

-- 14 regimes have been amended so that any potentially harmful features have been removed; and

-- 13 have been found not to be harmful.

Two regimes will require further discussion: the Luxembourg 1929 Holding Company regime and the Swiss 50/50 practice. Regarding the former regime, Luxembourg has submitted to its Parliament modifications to the regime which, in conformity with the 3 June 2003 ECOFIN [Economics and Finance Ministers of the European Union] and Code of Conduct conclusions, it has stated will remove all the harmful features of this regime as defined in the EU Code of Conduct agreed by ECOFIN. The Committee acknowledged the proposed modifications of the regime, but remains concerned that the harmful feature of lack of effective exchange of information has not been addressed. The Committee will discuss this point further. With regard to the Swiss 50/50 practice, referred to in the 2000 Report under the heading "administrative companies," the Committee considered that further analysis based on additional factual development would be required before a decision could be taken.

16. Regarding regimes that are in the process of being eliminated, the Committee decided that such regimes would be treated as having met the requirements of the 1998 Report if 1) no new entrants were permitted into the regime, 2) a definite date for complete abolition of the regime had been announced, and 3) the regime currently met the requirements regarding transparency and effective exchange of information.

17. It is important to emphasise that the OECD project recognises that preferential tax regimes can serve legitimate commercial and policy objectives (e.g., holding company regimes allow repatriation of profits without multiple layers of tax). It is not the preferential nature of the regimes that is of concern; it is only the characteristics of ring-fencing, lack of transparency, or lack of information exchange that can create potential harm.

b) Tax Haven Work

18. Part III of the 2004 Report updates the work with the jurisdictions that made commitments to transparency and effective exchange of information. These jurisdictions were referred to as "committed jurisdictions" in the 2001 Report, but given the involvement of these jurisdictions in elaborating the standards of transparency and effective exchange of information, they are now referred to, together with OECD countries, as Participating Partners. To date, there are 33 Non-OECD Participating Partners ("NOPPs") co-operating in the elimination of harmful tax practices. Three jurisdictions -- Barbados, Maldives, and Tonga -- that were identified as tax havens in the 2000 Report are not Participating Partners nor are they listed as Unco-operative Tax Havens. Barbados has been found to have longstanding information exchange arrangements with other countries that were found by its treaty partners to operate in an effective manner. Barbados is willing to enter into tax information exchange arrangements with those OECD countries with which it currently does not have such arrangements. It also has in place established procedures with respect to transparency. In addition, the Committee determined after careful review that the Maldives and Tonga no longer met the tax haven criteria.

Non-OECD Participating Partners

Anguilla
Antigua and Barbuda
Aruba
Bahamas
Bahrain
Bermuda
Belize
British Virgin Islands
Cayman Islands
Cook Islands
Cyprus
Dominica
Gibraltar
Grenada
Guernsey
Isle of Man
Jersey
Malta
Mauritius
Montserrat
Nauru
Netherlands Antilles
Niue
Panama
Samoa
San Marino
Seychelles
St. Lucia
St. Kitts & Nevis
St. Vincent
Turks & Caicos Islands
US Virgin Islands
Vanuatu

19. The NOPPs, together with OECD countries, work as Participating Partners under the auspices of the OECD's Global Forum on Taxation in developing the international standards for transparency and effective exchange of information in tax matters. A specially created working group developed the Model Agreement on Exchange of Information on Tax Matters (available on the OECD website at http://www.oecd.org/ctp) and the Joint Ad Hoc Group on Accounts is currently developing standards with respect to the transparency requirement as it relates to reliable books and records.

20. The Participating Partners continue to engage in negotiations of bilateral agreements that will provide the legal framework for the implementation of effective exchange of information.

(end text)

(Distributed by the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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