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Wednesday, 17th April 2024
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Sunset on tax havens? Back  
The OECD have identified tax havens. It has served them with an ultimatum to end “harmful tax competition” by a deadline.
The OECD have published a report on harmful tax competition. It has dealt firstly with harmful tax regimes within its own members, and secondly with tax havens.

Those in the club
Ireland did feature but only in a minor way. All of the regimes identified as being “harmful” in Ireland are those we have already agreed with the EU to get rid of. To that extent the report will have no direct impact in Ireland.

An earlier report in 1998, which was the genesis of the present report, specifically stated that tax harmonisation was not an OECD objective and it was not seeking to impose any minimum rate of tax on its member states. It was thus admitting that Ireland’s 12.5% corporation tax rate, no matter how much other member states may dislike it, is not presently of concern to the OECD.

In contrast, several other states such as Belgium (co-ordination centres), Hungary (offshore companies), Luxembourg (finance branches, management companies, reinsurance companies), Switzerland (administrative companies), Portugal (Madeira international business centre) are targeted by the report. The report may be more worrying to those states than it is to Ireland.

The OECD ducked one issue. That is the issue of holding company regimes which is one of the “hottest” areas of tax competition amongst its members. Many member states, including the Netherlands, Denmark, Belgium, Spain, Hungary, Cyprus, offer low tax or tax free holding company regimes. The OECD has long-fingered its study of these regimes.

The havens
The attack on tax havens is quite robust. The report lists jurisdictions it considers to be tax havens. These havens have been given until 31 July 2001 to commit themselves to eliminating their harmful tax measures not later than 31 December 2005. Six states were left off the list of tax havens by reason of having already given that commitment before the report was issued.

If states fail to make the necessary commitment by 31 July 2001 (or subsequently fail to honour it) there will follow “co-ordination of defensive measures” by OECD members. Readers will recall Adolf Hitler’s defensive measures in the 1930’s and 1940’s!

The defensive measures proposed by the OECD have the potential to hurt the havens. They include denying deductions for transfers to the havens; imposing withholding taxes on payments to the tax havens; and cancelling tax treaties with such of them as have tax treaties. However no gun boats are proposed at this time.

The OECD have not spelt out what they expect from those tax havens who “surrender.” The 1998 report however does offer clues. It defines a tax haven as being one which
• imposes no or only nominal taxes
• offers itself as a place to be used by non residents to escape tax in their country of residence
• prevents the exchange of relevant information with other governments on taxpayers benefiting from the low tax jurisdiction
• has a lack of transparency and
• has an absence of a requirement that activity be substantial, which would suggest that the jurisdiction may be attempting to attract transactions that are purely tax driven.

Given that the OECD claim that they are not seeking to enforce some minimum tax rate, presumably they will not be focusing on whether the tax rate of a tax haven is low or nominal. The focus is therefore likely to be on the exchange of information, and the requirement that those benefiting from the tax regime of the haven should have to engage in some substantial activity in that haven. A banning of brass plate operations, and an exchange of information, therefore seems likely to be the minimum requirements to be met if a tax haven is to avoid punitive action.

EU also active
The OECD report finds an echo within the EU. The controversy regarding the draft directive on the taxation of savings interest has been sustained in part by the refusal of some member states to contemplate exchange of information with other Revenues regarding non residents earning interest in their jurisdiction. Austria and Luxembourg in particular have had difficulties with this concept.

The solution patched together at the recent EU summit would appear to offer the prospect of introducing full exchange of information between Revenues regarding interest income earned by non residents in their territories, in approximately seven years time. That is subject to many potential obstacles, such as the possibility that an Austrian referendum will not occur, or that other key non EU states will decline to join the initiative.

It is paradoxical that the major developed economies of the OECD are threatening tax havens over their excessive confidentiality regarding non resident taxpayers’ affairs, while some of the same economies have shown little taste for exchange of information in an EU context.

It is difficult to predict the final outcome of the EU moves and the OECD moves. But it is safe to say that the future of locations offering low tax and total secrecy is coming to an end.

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