Over the past four years the Organisation for Economic Co-operation and Development (OECD), an organisation of 30 countries that include the G7, European Union (EU), Switzerland and Luxembourg, amongst others, demanded transparency of international financial centers and information exchange to assist the OECD countries in collecting taxes.
The OECD called this its Harmful Tax Competition Initiative. Meanwhile, other agencies of the same (or substantially the same) countries demanded changes with respect to anti-money laundering (i.e. the FATF) and banking regulation and supervision (FSF).
Financial information exchange to prevent and detect money laundering and terrorist financing is widely acknowledged as appropriate and important for any respectable financial center. However, information exchange to assist other countries in collecting taxes has (for centuries) been viewed differently.
The rules of a financial center on banking confidentiality are a significant factor in its competitiveness amongst other financial centers. Indeed, Switzerland, for example, has long cherished banking confidentiality and this has contributed greatly to its present competitive position amongst financial centers.
In June 2000 the OECD placed The Bahamas and several other non-OECD countries on a list of financial centers against which it threatened to take so-called defensive measures if they did not give the OECD a commitment to transparency and information exchange for tax purposes.
The Bahamas expended considerable effort in advancing the argument that there was to be a level playing field. That is, that the same rules (as regards standards and timelines) the OECD was seeking to apply to The Bahamas should apply to all competitors in the international financial industry. This was especially important as some OECD countries were not themselves prepared to commit to transparency and information exchange in tax matters (e.g. Switzerland and Luxembourg).
In March 2002 the former Government of The Bahamas made a conditional commitment to the OECD to exchange information for tax purposes. Amongst the conditions was that there be a level playing field amongst all jurisdictions, OECD and non-OECD, with which The Bahamas was materially in competition as regards financial services.
Meanwhile, the EU had agreed to pursue information exchange for tax purposes amongst its members and dependent territories pursuant to the EU Directive (“EU Savings Directive”) on taxation of savings income.
Developments in Europe during late January 2003 have substantiated the concerns The Bahamas held at the time of its commitment letter in 2002: namely, that the proponents of tax information exchange were not prepared or able to ensure fair-play and a level playing field amongst all financial centers. On the matter of the EU Savings Directive, the European Council has reportedly decided to exempt 3 (Austria, Belgium and Luxembourg) of the 15 EU members from a requirement to exchange information for tax purposes. Instead, they may withhold a percentage of savings income.
Additionally, Switzerland, an OECD member, continues to reject information exchange for tax purposes. In short, these European financial centers may maintain banking confidentiality in tax matters thereby having a distinct competitive advantage over jurisdictions that would engage in tax information exchange. EU members were a major driver of the OECD’s Harmful Taxation Initiative and the exemptions granted last month lays bare their double standard.
The reaction of Panama, Antigua and the Cayman Islands has been swift and decisive. In a matter of days, Panama and Antigua wrote the OECD protesting the preferential treatment accorded by Europe to some of their own. Cayman wrote the European Commission and published a statement of protest stating that the European exemptions have compromised the OECD’s Harmful Taxation Initiative and that the Caymanian Government “will continue to defend the best interests of the people of the Cayman Islands.”
Given the vital interest of Bahamians in maintaining a competitive financial services industry and the conditions contained in the commitment letter of The Bahamas to the OECD, it is surprising that to date there has been no official comment by The Bahamas on the developments in Europe. In the meantime, it is hoped that the best interests of the people of The Bahamas are being defended.
By John K.F. Delaney, The Nassau Guardian
