For the past twenty-plus years, international financial centres have been dealing with harassment and pressure from high-tax governments. Working primarily through the Organisation for Economic Cooperation and Development (OECD), these governments have created blacklists, adopted laws, and taken other steps to undermine the competitiveness of smaller tax-neutral jurisdictions.
The issue became global with publication of the OECD’s 1998 report on “Harmful Tax Competition”, which focused on coercing offshore jurisdictions into weakening their human rights laws regarding privacy for non-resident investors. More specifically, the OECD wanted high-tax nations to have the ability to request and obtain financial information in order to enforce their onerous tax laws. These countries wanted the ability to track – and tax – flight capital, even if it meant trampling the sovereignty of smaller jurisdictions.
At the time, critics warned that the OECD’s demand for “information exchange upon request” was just the first step and that the Paris-based bureaucracy would follow up with additional pressure. This suspicion was based on the fact that many member nations of the OECD had dismal finances. Even though they imposed high tax burdens, their expansive (and expensive) welfare states were becoming increasingly unaffordable and debt levels kept increasing.
Politicians did have the option of reforming their tax-and-transfer social welfare programmes, of course, but they decided instead to chase after the purported pot of gold at the end of the offshore rainbow.
The OECD’s campaign was stymied for several years, largely as a result of public pressure in the United States by free-market groups and taxpayer organisations. But Barack Obama’s election in 2008 resulted in greater sympathy for dirigiste policies in Washington, and financial centres largely had to acquiesce when faced with combined pressure from major European nations and the United States.
And once low-tax jurisdictions surrendered to the idea that they were responsible for helping to enforce the bad tax laws of other nations, the goalposts were quickly moved and “information exchange upon request” became “automatic information exchange”.
Indeed, the expectation now is that governments will join the OECD’s multilateral convention on mutual administrative assistance in tax matters, which is premised on the notion that private financial data should be freely turned over to governments and then promiscuously shared – even though many of the participating governments are venal, dictatorial, and/or corrupt.
High-tax nations also started a campaign to extract more money from the business community. Once again, the OECD was the vehicle for their project and the Paris-based bureaucracy launched a “base erosion and profit shifting” initiative that was largely designed to curtail the ability of firms to use financial centres as tax-neutral platforms for their cross-border economic activity, i.e., it will force companies to declare more income – and thus pay more tax – in OECD nations.
This issue of Cayman Financial Review will focus on recent OECD developments, particularly with regards to the BEPS campaign to collect more money from the business community.
Several articles will address what’s happening in the battle over tax competition, fiscal sovereignty and financial privacy, including expert analysis by Constantin Gurdgiev, Oliver Treidler, Andy Quinlan and Brian Garst.
Constantin takes a close look at the OECD’s tax agenda and analyses the likely impact on economic vitality.
Oliver looks at the tax agenda of the European Union, like the OECD, almost entirely focused on generating more money for governments.
Andy focuses on the OECD’s attack on digital companies.
Brian reviews the OECD’s tactics in its campaign to undermine tax competition and fiscal sovereignty.
As always, this issue is filled with many other articles to give readers a better and broader understanding that are shaping business conditions for financial service professionals, investors and regulators.