With the EU’s Savings Tax Directive dominating the headlines over the last 18 months or so, many people have forgotten about the Organisation for Economic Co-operation and Development’s anti-tax evasion initiative. Nevertheless, the OECD has been working persistently on reducing levels of banking confidentiality and making it harder for people to evade tax. Media headlines aside, another reason why people pay less attention to the OECD than the EU is simply because they are familiar with the EU and understand how it affects their lives. The OECD is unfamiliar territory.
The OECD influence, however, should not be underestimated. Its members are the world’s 30 wealthiest countries, “sharing a commitment to democratic government and the market economy”. With active relationships with 70 other countries, NGOs and civil societies, it has a global reach.Its motto is ‘building partnerships for progress’ and its main work covers economic and social issues.
In 1998, OECD Member Countries launched their ‘harmful tax practices’ initiative out of concern for what they deemed ‘the increased scope for illicit use of the financial system, including tax evasion’. In 2000 it published a ‘blacklist’ of 35 ‘unco-operative’ tax havens that it judged as having harmful tax regimes. Jersey, Guernsey, the Isle of Man and Gibraltar were included. It later established its criteria for determining whether or not a tax haven was unco-operative as ‘transparency and exchange of information’.
The OECD threat worked and a few years later almost all these jurisdictions have agreed to the required legislative changes and to establishing rules for the effective exchange of information. In today’s world, most finance centres prefer to position themselves on the right side of the global threat against terrorism and money laundering (tax evasion is specifically listed as a money laundering offence). Five tax havens remain on the blacklist: Andorra, Liberia, Liechtenstein, the Marshall Islands and Monaco. The OECD remains hopeful they will make similar commitments.
One important aspect remains to be resolved – the level playing field. Most jurisdictions made their commitments conditional on all competitors doing the same but Switzerland and Luxembourg are refusing to adopt some standards. The OECD is working hard to resolve this issue. A report suggested that it is now focusing its attention on creating a level playing field among its members. One persuasive tactic would be to threaten to put Switzerland and Luxembourg on its blacklist, as both countries have reputations to uphold. As one senior EU diplomat said, “the biggest chance for a U-turn from Switzerland comes from peer pressure within the OECD. Switzerland and Luxembourg do not like being singled-out as unco-operative.”
Luxembourg seems to accept that the days are numbered for banking secrecy. It has been moving away from private client business, focussing instead on its strong funds industry. The Luxembourg Bankers’ Association admitted that the “reasons to provide confidentiality… are shrinking”. Switzerland is more stubborn, but even its Banking Association has remarked that “financial privacy is an evolving thing, and who knows how the world will look in 10 years time.”The OECD initiative impacts on us all. Along with the EU Savings Tax Directive, it is effectively eroding the levels of banking confidentiality we took for granted less than 10 years ago. The EU may be a more familiar organisation, but the OECD has a wider scope, as it crosses all international borders. With its recent announcement that it is extending its investigations to Asia and the Middle East, the OECD is ensuring that it will soon be impossible to hide assets from the taxman anywhere in the world.
The OECD took another significant step forward in July when it issued new guidelines for the exchange of information between national tax authorities. The new arrangements are set out in a revised version of Article 26 of its Model Tax Convention (covering the exchange of information for tax matters). There are three key changes:
1. A new paragraph to prevent ‘domestic tax interest’ requirements from hindering exchange of information. This means that a member country can no longer refuse to provide information just because it does not tax such investments itself.
2. Another addition ensures that all ownership and other information held by banks, financial institutions, nominees, agents and fiduciaries can be exchanged, notwithstanding any national rules on banking secrecy.
3. Confidentiality rules changed to permit disclosure of information to oversight authorities (which supervise tax administration and enforcement).
Currently, more than 2,000 bilateral tax treaties are based on the OECD Model Tax Convention. On making the announcement, Bill McCloskey, Chair of the OECD’s Committee on Fiscal Affairs, noted that “the vast majority of OECD member countries already meet the new standard and I am looking forward to other countries, both inside and outside the OECD, moving towards the standard of information exchange now found in Article 26.”
This OECD announcement may not have generated as many column inches as the Savings Tax Directive, but it is of no less importance and I urge taxpayers to take notice. Times are changing, and our financial affairs need to change accordingly. The once fairly common practice of not declaring all one should on one’s tax return is now a high risk strategy. If you want to retain some financial privacy and lower your tax bill, it’s time to look into the various legitimate – and very effective – tax planning structures available.
• To keep in touch with the latest developments in the offshore world, check out the weekly news update on our website, www.blevinsfranks.com