Cover Story
Tax Haven Clampdown!
Small Pacific Islands under fire from wealthy, mainly European, economies. Why?
The Pacific¹s seven tax-haven countries hope to escape having their businesses wrecked by a bunch of hostile, mainly European, wealthy industrial and trading nations. Sanctions threatened by the Organisation for Economic Cooperation and Development (OECD) could force Vanuatu, the Cook Islands, Niue and other tax havens to end the secrecy that enables foreign business corporations to dodge taxation in their own countries.
They would be expected to expose the ultimate ownership of companies registered in their shores by people who want to escape tax at home; or for secret financial deals. If that happened there would be little or no purpose for the continued existence of tax havens in countries which rely on them for jobs, revenue, and investment they wouldn¹t otherwise have.
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That would be a serious blow for countries like Vanuatu, whose financial centre in Port Vila generates about 10% of the country's Gross Domestic Product.
The OECD, which has Australia and New Zealand in its membership, has set a July 31 deadline by which Pacific tax havens and some 27 in other parts of the world are expected to accept OECD-imposed rules for running their business.
Those that don't have been warned of being attacked with "defensive measures" and being listed as "non-cooperative".
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But in May a shift of policy by the United States, which says the OECD is going too far in interfering with the sovereign affairs of small countries, gave the tax havens hope for rescue. If the United States opposes the use of the full weight of retaliation other OECD countries want to hit tax havens with, then tax havens should be able to survive.
According to the Pacific Islands Forum Secretariat, the tax haven business is worth at least US$20 million a year to Pacific Islands economies. Not much by international standards but important for small islands economies. Vanuatu¹s financial centre, the oldest and largest in the region, directly employs about 400 people in the offices of banks, accountants and trust businesses. It generates US$3 million-US$4 million a year for the government.
The other tax havens are the Cook Islands, Samoa, Nauru, Niue, the Marshall Islands and Tonga, although the Tongans say theirs is practically inoperative.
What the OECD is trying to hit the tax havens with now reaches far beyond the money-laundering issue it has nagged them about for several years. The tax havens agree that since money laundering is for usually criminal purposes, they should co-operate by amending their laws to curb it. But the OECD now hopes to throttle tax havens as places which divert investment and tax revenue from OECD countries.
It argues that by not charging income or other taxes, tax havens are supposedly competing unfairly for investment and finance with countries that have taxation.
This "unfair" competition could extend to include tax free manufacturing zones with which Fiji, Samoa and other countries attract foreign investment in factories.
Fiji's garment trade, which after 1987 leapt from almost nothing to about 100 factories employing a peak of almost 20,000 people, is highly dependent for viability on tax free zone locations.
Last April, OECD officials were in Suva for talks with Forum governments about the curbs the OECD wants to tie the tax havens down with.
One regional official told Pacific Magazine that the hostility, threatening attitude and arrogance the OECD mission showed for small economies with high economic dependence on the tax haven business, was startling.
Threats were made about aid cuts and the applications of ruinous financial sanctions for island countries that didn't play ball.
The OECD attitude was clearly interference in the sovereign affairs of small islands countries that were easy to target for bullying, the official said. It was also hypocritical since the OECD made no mention of one of the world¹s largest tax haven centres, Hong Kong, to avoid angering China. After the April meeting in Suva the then acting secretary-general of the Forum Secretariat, Iosefa Maiava, spoke of a "David and Goliath standoff" with 30 OECD nations, including the richest, most developed countries in the world‹United States, Japan, Germany and the United Kingdom‹in negotiation with the seven listed Pacific nations.
The seven had a combined Gross Domestic Product of around US$1 billion, compared to Australia's annual Gross Domestic Product of around US$300 billion. And they have a total population barely one-eighth that of Sydney.
Niue, the smallest nation, has a population of 1800 and an annual government budget of around NZ$20 million, Maiava said.
He added: "These nations do not have the resources of OECD members to address the issue of harmful tax competition. This position is not helped by the trade deficits the Pacific islands have vis-à-vis most OECD nations and the need to balance these against the income from the offshore centres, which can comprise 8-10 percent of GDP. Such factors have hampered the ability of the listed nations to negotiate on an equal standing with the OECD."
According to the Forum Secretariat, the trip to the region by OECD representatives "improved their understanding of the vulnerable situation" of its tax havens and gave them and the tax havens an idea of efforts made by the Forum Secretariat to devise a deal to keep both sides happy.
The tax havens stressed to the OECD their "desire for good-faith negotiations" to avoid the threat of OECD sanctions. They pointed out the technical difficulties and high costs for them of implementing the surveillance the OECD wants them to press on foreign companies registered under their tax haven laws.
The OECD's tax haven hate list appeared in June 2000. It was discussed by the Forum Economic Ministers¹ Meeting (FEMM) that year and again at the Commonwealth finance ministers meeting. Those meetings led to a meeting in Barbados last January of all the Commonwealth listed countries plus a few extra with Pacific locations. Of the 35 tax havens on the list, three have agreed to accept OECD demands. At the Barbados meeting, the OECD had admitted that consultation had been very poor.
A joint working group of seven tax havens and six OECD nations was set up. This met first in London and then in March in Paris.
"The OECD has since taken the line that the joint working group has run its course, done all it can on its terms of reference and that's it," a regional official told Pacific Magazine. The listed countries take a different view of things.
The "bilaterial defensive measures" that "non-cooperative" tax havens will be punished with range from very specific to very broad things. They range from turning off financial flows to tax havens to trade and aid sanctions. "In effect there are sanctions, but that is not the term used," the official said.
"There are two separate issues; the money laundering issue which clearly all the Pacific nations highlighted have been having problems in that area and working very hard to address. They can see there's good economic and moral reasons in that. "The OECD has not admitted plainly that what it doesn't like about tax havens is that they suck away funds OECD countries would otherwise have "They run the line that the low (or no) taxation of offshore financial centres is attracting capital investment away from the OECD countries, so removing tax revenue from OECD countries," the official explained.
"Initially they were certainly targeting Œunfair competition, although they now tend to drop the use of the word competition anywhere in their argument."
Now the OECD is talking about " exchange of information." While that sounds a good idea and partly is, the official said, "this is tax type information, but it becomes laborious when you consider that some tax havens don't have income tax. If they accept this agreement they can be approached by an OECD country to provide income tax information, which means having a special unit to collate information on the off chance, so a big cost is involved."
Then, there is a requirement for non discrimination between the offshore and onshore sectors, so that if you give special investors incentives in your tax free areas compared with investors incentives domestically, you would no longer be able to do.
That would mean the end of tax free manufacturing estates which Fiji, Samoa and other countries regard as a legitimate development tool.
At this stage the OECD wants to apply "non discrimination" only to financial services. But "the potential for it is to spread."
The OECD made it clear in an initial report in July 1998 that the attack on tax havens was step one, and that it was a model to be used again in other sectors, including export processing zones.
OECD demands for exchange of information, non discrimination and transparency sound fine. But the tax havens would have to supply information on the beneficial ownership of companies. OECD taxmen and other investigators could then trace through chains of different companies to discover who a business's real owner was. That would destroy the primary reason for the existence of Vanuatu's 30-year-old financial centre.
While the Pacific small tax havens are easy targets, the OECD has run into opposition from two of Europe oldest tax havens, Luxembourg and Switzerland. These influential OECD members have declared that they won't play ball. So far the OECD hasn't responded to this defiance which, according to the Forum Secretariat, it seems to not want to notice. In fact statements from Switzerland and Luxembourg don't seem to have been addressed by the OECD.
"They are still very much pushing the listed countries, but they are not so much following it up to ensure that it is being implemented by their own members,"Pacific Magazine was told.
The Barbados meeting of tax havens has led to the formation of the International Tax and Investment Organisation. This is a loose grouping that meets every few months to discuss defence against the OECD attack. The purpose is to reach a compromise position, but the OECD has not shifted. ³The Pacific nations are talking on an almost daily basis. The Forum Secretariat has been attending what meetings it can and undertaking a sort of lobbying role in that we have written on behalf of our members to OECD countries,² Pacific Magazine was told.
"We have Australia and New Zealand as (Forum and OECD) members so we also talk to them."
The Australian involvement with the OECD is run mainly by its treasury and tax departments. Now the foreign affairs department has become interested in ramifications for the Forum's tax haven members.
Since Australia and New Zealand are two of the largest suppliers of aid to the Pacific Islands any sanctions they agreed to use as OECD members would cripple Forum island country targets. New Zealand is felt to have made it fairly clear that it doesn't think the issue is one they should take "defensive measures" against.
Australia seems also to be tending that way, with a position that tax and financial information measures they have in place are sufficient for its needs.
The United States and Britain, in speeches, have indicated they won¹t necessarily come down hard on tax havens. So the Forum Secretariat treats the outlook as being "positive", except that the OECD is driven predominantly by Europeans and European Union aid is important to the Pacific.
The tide of events perhaps turned in favour of tax havens when in May the United States Secretary for the Treasury, in an article in the Washington Times, indicated that the United States had doubts about the OECD campaign, including the OECD push for harmonisation of taxes. The United States suspects that harmonisation would raise its taxes at a time when the country's new president is committed to promises to lower them.
Although the United States has led the attack on the use of tax havens for money laundering, a lot of the money invested in tax havens is United States money. The Americans are in a difficult position because their stand on taxes is in some cases in conflict with what the OECD wants.
The United States position, according Treasury Secretary Paul O'Neill, is that the OECD plan goes too far and should be limited to an information exchange designed to help countries catch their tax evaders rather than forcing their rules with threats of sanctions against offshore banking centres.
Agreed, O¹Neill suggested, the United States might go along. The US has caused considerable discussion within the OECD, with three more OECD meetings due to be held in June at which the US was expected to push its position.
After the July 31 deadline there will be some breathing space during which the Pacific's tax havens will be able to gauge how far OECD countries important to them, in particular the US, Australia, and New Zealand, might use trade and aid links against them. If the European Union¹s OECD members insisted on a hard line against tax havens, Vanuatu¹s important financial centre could be killed off entirely unless it invented innovations to adapt to the changed climate.
Innovations could be expected from a "fairly cutting edge" group of people in the market.
They would assess the nature of the changed market and decide what sort of tax products was needed to stay in business.
