The Government of the Bahamas could find itself in another battle with the powerful Organization for Economic Cooperation and Development which has reportedly given the country another year to comply with its demands, while giving developed countries another eight years to clean up so-called harmful tax practices.
The Minister of State in the Ministry of Finance James Smith told the Bahama Journal that the government is concerned that the OECD may be “cutting special deals” with European countries.
The OECD has been fighting for the elimination of harmful tax practices since 1998 through the creation of a global co-operative framework. In June 2000, the OECD listed 35 jurisdictions it considered to be tax havens, the Bahamas being listed among those jurisdictions.
The jurisdictions originally had until July 31, 2001 to make commitments for the elimination of harmful tax practices. But there are reports that that deadline has been extended.
Minister Smith said tax havens like Luxembourg and Switzerland and Liechtenstein had drawn the line in how far they were prepared to go with tax harmonisation or even information exchange.
“Rumours came out, which may be true, but no official position yet, where the OECD was prepared to cut a special deal with these countries and give them a longer time to conform to the year 2011, whereas they were telling the other offshore centres like the Bahamas and the Cayman Islands that they wanted information exchange by 2004,” he said.
“Well, this was basically and still is rejected outright because all of the counties that said to the OECD when they began talking with the OECD that they were prepared to make some concessions and were prepared to co-operate but only insofar as we have a level playing field where everybody within the OECD and outside the OECD would adhere to the same rules and regulations.”
Mr Smith said if special concessions are being given to Switzerland and others, then clearly the OECD has moved away from the concept of a level playing field and offshore centres like the Bahamas , Cayman and Panama will have to revisit the commitments they made to the OECD.
Mr Smith also said: “Many of us are of the view that the contact with the OECD and sovereign governments really is improper. Finance ministers should speak to other finance ministers, not to their advisors.”
The OECD criticized several low tax jurisdictions, stating that poor regulatory environments, low levels of transparency, banking secrecy, minimum business presence requirements and low tax features promoted and facilitated laundering of money derived from corruption, drug trafficking or other criminal activities.
Mr Smith said all of the offshore centres had made complaints to the OECD about the manner in which they were conducting business by developing their strategies and programmes in Europe and then imposing it on the other offshore centres.
“In response to that type of complaint from virtually all centres, it was decided that the OECD would meet with a group of offshore centres and they would form themselves into an organization called the ITIO (International Tax Investment Organisation,” he said.
“The grouping decided it would meet together, dialogue and try to resolve the issues because they all indicated that they wanted to assist generally in those issues that concerned the international community like money laundering and terrorism and that sort of thing.”
Mr Smith said the OECD had then produced what they called ‘talking papers’ regarding the manner in which they wanted to deal with information exchange and one matter in particular was in regard to the type of information each financial institution would keep in each jurisdiction.
“The group disagreed with the OECD that the kind of information they were asking for was onerous and that that financial information that was not kept in OECD countries, so the OECD said it would go back and work it out,” he said.
The Minister said the Bahamas presently does not know what its final steps will be to bring itself in line with OECD requirements and made it “quite clear” that if there is no level playing field then the deal is off the table.
“They’ve changed the rules of the game, if what we’ve heard is true that they are prepared to give longer periods for compliance to Switzerland and Luxembourg then clearly the Bahamas nor any of the others are going to stick to their timetable unless they get a full explanation as to why this discriminatory treatment to offshore financial centres, so that’s really the issue as of today,” he said.
A harmful tax practice is defined as one that meets one of four criteria: no effective exchange of information; lack of transparency; no substantial activities or ring-fencing from domestic activities; and simultaneously offering low, non-existent or nominal tax rates.
The Financial Action Task Force (FATF) had subjected the Bahamas to an extensive independent and transparent review of its anti-money laundering systems and the jurisdiction itself had responded by passing 11 substantial pieces of new or updated legislation.
With the 11 bills passed in 2000 and implementation procedures commenced early in the year, the Bahamas is now in full compliance with both the FATF and FSF.
The Bahamas ‘ application for Qualified Jurisdiction (QJ) status was submitted in mid-2000, but the US treasury deliberated for some months over the “Know Your Customer” (KYC) rules regarding the governing of bank transparency, the implementation of which is key condition for obtaining QJ status.
Government recently passed legislation to give financial institutions until December 31, 2003 to fully comply with KYC rules and verify the identities of their customers; it was then that the Bahamas gave a firm legislative basis to its KYC procedures, which had operated under a code of conduct for many years.
The code, introduced by the Bahamas ‘ Association of International Banks and Trust Companies, provides for standards of conduct and professional ethics governing certain basic relationships between members and their clients, and prevents the use of member companies for criminal purposes.
By Rogan M. Smith, The Bahama Journal
