By Sir Ronald Sanders

Back in 2000, the Organisation for Economic Cooperation and Development (OECD), delivered a body blow to small countries that operated offshore financial services by blacklisting them as “non cooperative”. Now it seems that OECD countries are the non cooperative culprits over their own rules.

Sir Ronald Sanders is a business executive and former Caribbean diplomat who publishes widely on small states in the global community. Reponses to: ronaldsanders29@hotmail.com

According to the OECD report in 2000, thirty-five countries with offshore jurisdictions had tax practices that were “harmful” presumably to them. Among these practices were low or no tax, bearer share companies, poor regulation and an absence of tax information exchange agreements.

Now a report, written by Camille Stoll-Davey of Oxford University and entitled “Assessing the Playing Field”, suggests that OECD member countries do not operate to a higher standard than so-called offshore centres and in important cases they operate to a lower standard.

Among the observations made in the report are:

• Many US states, including Delaware and Nevada, do not require companies to provide beneficial ownership information. Yet Delaware companies are arguably the corporate vehicles most frequently used by non-residents of the United States for so-called offshore transactions.
• The USA, UK, Canada, France, Germany, Italy, Switzerland, Austria, Luxembourg and Costa Rica still permit bearer share companies and therefore accept a reduction in transparency.
• Major players in international finance like Hong Kong and Singapore restrict exchanging tax information to domestic interests and Switzerland restricts it to cases of tax fraud and the like.

The report, published by the Commonwealth Secretariat in London, was commissioned by the International Trade and Investment Organisation (ITIO), a grouping of small countries with international finance centres.

From the outset of the OECD initiative on so called “harmful tax competition”, small jurisdictions had recognised it as a ploy by OECD countries to discredit them.

There appeared to be two objectives: the first was to coerce small jurisdictions into handing over financial information on OECD nationals and companies that could be used to tax them in their domestic jurisdictions; and the second was to cripple the offshore financial services sector in small countries so that they could not offer competition to OECD member states.

But the OECD had not counted on a robust reaction from several small jurisdictions which pooled their resources to counter the OECD effort. Nor, did it bargain for dissension within its ranks as Switzerland, Austria and Luxembourg broke away from the others, arguing that their economies had more to lose.

The OECD was forced to invent a so-called ‘Global Forum’ to which they invited participation from non-OECD countries seeking “to ensure the implementation of high standards of transparency and information exchange in a way that is fair, equitable and permits fair competition between all countries, large and small, OECD and non-OECD”.

Non-OECD countries viewed the purpose of the Global Forum differently. Many of them argued that was necessary in international financial services was a level playing field; not one set of rules and practices for OECD countries and another set for smaller jurisdictions.

What the latest report shows is that for the OECD, business has remained as usual. While the OECD has insisted that small jurisdictions remove banking secrecy laws, strengthen regulation, end bearer shares for companies, and adopt tax information exchange agreements, many of their own member states have not done so.

It seems, therefore, that the Global Forum still has much work to do before the playing field for competition in financial services will be anywhere near level.

But, the attacks on the offshore financial services sectors of small jurisdictions have not stopped even though many OECD countries continue to break or ignore their own rules.

For instance a bill was sponsored in the US Senate last February designed to stop perceived “tax shelter abuses”.

The sponsors of the bill claimed that the US Treasury was losing $100bn in revenue annually, and they identified three Caribbean territories among the so-called shelters – Cayman Islands, the British Virgin Islands and Anguilla.

This caused the Cayman Minister for international financial services Alden McNee McLaughlin to declare: "We do deeply resent and seek to dispel the idea that somehow because we are not located onshore we are illegitimate”.

The reality is that Caribbean jurisdictions have so greatly strengthened their legal and regulatory framework that they are fighting a losing battle in the effort to compete in international financial services with Switzerland, Austria, and certain states in the United States whose arrangements are far less stringent.

Further, while many OECD countries have insisted on tax information exchange agreements with small jurisdictions they have not been willing to provide complementary double taxation agreements.

Consequently, the gain has all been one sided. The OECD countries are able to get information on their nationals and companies for tax purposes, but small countries have not been able to secure investment from OECD nationals and countries that might be encouraged by double taxation agreements.

In the Caribbean, Barbados appears to be an exception to this rule because it has aggressively pursued tax and investment treaties, including double taxation agreements, with several countries.

A recent report by international tax expert Bruce Zagaris, says that “over the last year new tax and investment treaties have propelled the growth of Barbados international financial services sector”.

Meanwhile, Singapore has taken a different tact. Almost ignoring the OECD on banking laws and taxes, Singapore has launched a drive to carve a significant place in the global economy by bolstering banking secrecy laws and offering generous tax incentives.

Almost 40 private banks are now reported to have regional operations in Singapore, including Swiss institutions such as Bank Julius Baer managing an estimated $150 billion in private wealth. Citigroup's headquarters for all private banking outside the United States is now in Singapore, and so too is the global headquarters of Standard Chartered Bank of Britain.

Singapore’s financial sector is growing quickly. Money is said to be pouring in from Asia's fast-growing economies, Middle Eastern oil money, and Japanese and Europeans fleeing new efforts to tax their offshore earnings.

But, the bill introduced in the US Senate in February also names Singapore as a “possible shelter” for US taxes.

The struggle for a place in the international financial services sector is far from over. At the core of it remains the fact that many OECD countries maintain practices that they demand small jurisdictions give up.

Small jurisdictions should continue to work together at the highest levels to hold on to the crumbs of the industry that they have fought for valiantly. World wide business would also greatly benefit from their efforts.