TMAY75UDGSR4 On January 19, the OECD released its “background briefing” document ambiguously entitled “Promoting transparency and exchange of information for tax purposes.” Ambiguous because the title adroitly avoids mentioning who the OECD is directing its missive at. The target could be offshore financial centers with a history of banking secrecy, or the OECD’s paper could be construed as targeting politicians in the US and Europe who are failing to get the message that offshore centers have been frantically cleaning up their act through 2009.
Certainly, there is no doubt that tax avoidance has been a huge problem for many national governments in the developed world. This avoidance has been aided and abetted by offshore centers who for decades grew their financial services sector on the back of zero or low taxes and the promise of privacy (particularly from their own tax authorities) for the clients of banks that set up in the centers.
However, the crash gave politicians in Europe and the US an excuse for turning their guns massively on the tax havens, blaming them—or rather, the plethora of hedge funds set up in these offshore centers, particularly in the Cayman Islands and the British Virgin Islands—for massively amplifying the scale of the disaster.
This charge, as it turns out, is now seen as largely baseless. The US banks and financial institutions were overwhelmingly the architects of their own woes. But the fallout forced all offshore financial centers to rethink their entire position, and the OECD has played a huge role in defining for them what they need to do to get off its black list and onto its white list of financial centers with acceptable regulatory practices.
In brief, the OECD has set the bar for transparency at a minimum of 12 information sharing agreements signed by a particular offshore centre and nations outside that centre. Although some of the first agreements signed by offshore centers were with other offshore centers, which would make some observers sniff derisively, there has also been a rush to sign agreements with the major economies, the US, the UK, France, Germany, and so on.
This was, of course, shocking news for anyone who had spent the last few decades squirreling away cash in an offshore bank account and not paying tax on it. The OECD quotes the US Senate, which estimates that tax evasion costs the US $100 billion a year, and adds that it costs European countries billions of euros. “This translates into fewer resources for infrastructure and affects the standard of living for all of us in both developed and developing economies,” it says.
However, in its briefing paper it also makes it clear that in 2009 “more progress towards full effective exchange of information (between tax havens and nation states) has been made than was made in the whole of the past decade.” Even jurisdictions that were opposed to exchanging bank information with outside tax authorities have endorsed the OECD’s tax transparency standards.
“By addressing the challenges posed by the dark side of the tax world, the campaign for global tax transparency is in full flow,” the OECD secretary-general Angel Gurría commented. According to the OECD, more than 300 international information sharing agreements were concluded during 2009 by jurisdictions that the OECD had labeled as insufficiently transparent. In all some 19 jurisdictions have been removed from the OECD’s “black list” as a result. Every crash, it seems, has its silver lining.
- Understanding Reputation Risk and Its Importance, by Jenny Rayner
- Managing 21st Century Finances, by Terry Carroll
- How Taxation Impacts on Liquidity Management, by Martin O’Donovan
Tags: OECD , offshore financial centers , regulation , tax , transparency