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Taxation Law - The Background to Taxation Information Exchange.

Date: August 05, 2010

Authors: Tony Anamourlis B.A., LL.B., MTaxLaw, GradDipLegPrac, SJD Candidate (La Trobe); ATIA

With the increased fiscal leakage caused by tax evasion the OECD and countries in the European Union have raised concerns as to how the issue should be addressed. In a recent paper[1] the OECD commented that:

“Tax avoidance and tax evasion threaten government revenues throughout the world. The US Senate estimates revenue losses amount to 100 billion dollars a year and in many European countries the sums run into billions of euros. This translates into fewer resources for infrastructure and affects the standard of living for all of us in both developed and developing economies.”

This paper seeks to examine some of the recent OECD Reports which address the issue of tax evasion and the exchange of information between countries. [2] However the limit to the exchange of information caused by bank secrecy is also examined. Finally the paper also examines the impact of the Brussell’s agreement, between the USA and the European Union (EU), on the exchange of information and banking secrecy in the European Union.

The Reports of the OECD on Information Exchanges

(a) The OECD 1994 Report

In 1994[3], an OECD report was produced by the Committee on Fiscal Affairs and on the exchange of tax information between member countries, to ensure the correct and speedy application of domestic tax legislation. Its prime objective was to assist local tax authorities to ascertain facts in relation to which the convention was to be applied. It also sought to assist other OECD member countries to prevent tax avoidance and tax evasion by increasing their access to relevant information held in other countries. This was to ensure that taxpayers who had access to cross-broader transactions did not have access to greater tax avoidance and evasion possibilities than taxpayers operating in their domestic markets.

The report indicated that the nature and scope of exchange of information is an important form of administrative assistance between tax authorities. Moreover the report indicated that   with the rapid acceleration of globalization and liberalization of economies of the OECD member countries, and in view of sophistication of methods of tax avoidance and tax evasion, the contracting states[4]had a growing interest in the reciprocal provision of shared tax information.

(b) The OECD 1996 Report 

In 1996, the OECD was called upon by its members to develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions[5]. In 1997, the G-7 countries issued a communiqué that said:

"…tax schemes aimed at attracting financial and other geographically mobile activities can create harmful tax competition between States, carrying risks of distorting trade and investment and could lead to the erosion of national tax bases”[6] .

(c) The OECD 1998 Report

In 1998 the Committee of Fiscal Affairs of the OECD published the first part of its review of harmful tax competition[7] however two OECD member countries, being Switzerland and Luxembourg, refrained from voting on the 1998 report and stated that they would neither be bound by the report nor its recommendations to counteract harmful tax competition[8]. At that time these countries had no interest in  addressing the issue of tax avoidance and the use of tax havens. Later reports referred to these countries as tax havens[9].

The 1998 report also provided criteria that the OECD, used to identify tax havens and harmful preferential tax regimes[10]. The report outlined four major factors in identifying whether a country was a tax haven.

These factors included:

  1. No-or Nominal Tax Rates
  2. Other Key Factors, such as lack of effective information exchange
  3. Lack of transparency
  4. A relaxed regulatory framework or the presence of a solid business infrastructure

However some aspects of the 1998 report have been criticised by Venardos[11]. He suggested that one of the major limitations of the 1998 report was the indistinct notion of “harmful tax practices” While the OECD had maintained that tax competition could be beneficial it did not indicate in its report how or in what circumstances normal tax activities transgress and become a harmful tax regime. Such a transgression would predominately be based on a subjective view. On this issue, the author suggests that the OECD had failed to provide in its 1998 report a precise figure that determined whether a tax jurisdiction has a low or nominal tax rate, which would determine the ultimate designation as a tax haven.

In this respect, it should be remembered that, the activities of tax havens are quite damaging and harmful as they are based on concealing revenue and assets in other jurisdictions which in turn impacts on commercial transactions undertaken in normal taxing jurisdictions in the EU and other countries.

(d)The OECD 2000 Report

In 2000, the OECD published another report on Global Tax Co-operation.[12] This report indicated that the activities of certain OECD member countries were potentially harmful due to the operation of cross border transactions and the use of tax havens within their jurisdiction. The 47 tax regimes included a series of tax measures involving insurance, banking, shipping, service and other miscellaneous practices[13].

The purpose of the potentially harmful list was to permit OECD member countries to determine if their practices were actually harmful. In that regard, member states indicated that they were determined to eliminate harmful preferential tax schemes within their jurisdiction by April 2003. If any taxpayers were benefiting from such regimes on 31 December 2000, the report indicated that such benefits were to be grandfathered until 31 December 2005[14]. However, if a country did not eliminate its harmful tax regimes by the prescribed dates, the OECD made recommendations which indicated that other countries may wish to take defensive measures, to both nullify the harmful benefits and encourage offending countries to modify or eliminate the harmful practices[15].

The 2000 report also identified 35 tax haven jurisdictions.[16] These included the following countries Jersey, Guernsey, British Virgin Islands, Panama, Netherlands Antilles, Bahamas, and Vanuatu[17].

[1]“Promoting transparency and exchange of information for Tax Purposes” OECD April 2010, p.2

[2] Anamourlis and Nethercott “The role and relevance of Tax Information Exchange agreements and Bank Secrecy”. Bulletin for International Taxation.Volume 63 Number 12 2009.

[3] Organization for Economic Co-operation and Development (1994), Tax Information Exchange between OCED Member Countries: A survey of current practices: A Report by the Committee on Fiscal Affairs. 

[4] The 35 committed jurisdictions committed to improving transparency and establishing effective exchange of information in tax matters can be found at www.oecd.ord 

The OECD has determined that three other jurisdictions – Barbados, Maldives and Tonga – indentified in the 2000 progress report as tax havens should not be included in the list of unco-operative tax havens.

[5] OCED Ministerial Communiqué, May 1996

[6] G7 Communiqué issued by the Heads of the State at the 1996 Lyon Summit. The G7 countries were Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

[7] Harmful Tax Competition: An Emerging Global Issue (1998), OECD. Paris. Switzerland and Luxembourg were reluctant to participate and did not vote in favour of the report.

[8] Ibid at Annexure II at p.73 of the report.

[9] Ibid at p.42

[10] Supra 19. See chapter 2

[11] Venardos, A, “The Hypocritical Stance by the OCED, Representing the Developed Nations – Inappropriate Pressure on Less Developed Nations to Adopt Compliant Regimes”, Revenue Law Journal. Vol 16, Issue 1, 2006, Article 4, p56-57

[12] Towards Global Tax Co-operation: Report to the 2000 Ministerial Counsel Meeting and Recommendations by the Committee on Fiscal Affairs-Progress in identifying and Eliminating Harmful Tax Practices (2000), published by the OCED

[13] supra note 22, section IIIA

[14] Id., section 15

[15] Id., section 16

[16] Id, section III.B.

[17] Supra note 22, section 20

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