OECD set to categorize tax havens, may punish some for poor practices

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PARIS — In a rare political move, the Organization for Economic Cooperation and Development will publicize a list of tax havens before its ministerial meeting in late June and may impose sanctions if they do not improve their tax practices, OECD sources said.

The list will target 47 jurisdictions, including the Cayman Islands, Bermuda, Jersey and other dependencies and countries, which will be categorized into three groups.

The first group includes those that are “cooperative” with the OECD in showing commitments to improve their tax practices.

The second group includes those that are “less cooperative” but show understanding.

The third will group those considered “uncooperative,” the sources said.

If the less cooperative and uncooperative jurisdictions fail to make commitments to end their tax haven practices within one or two years, the member countries of the OECD may draft a legally binding agreement to impose sanctions.

These could include suspending bilateral tax treaties or freezing economic assistance, the sources said.

“It is extremely rare for the OECD to take such a political action,” said one official, who asked not to be named.

Experts say labeling a third country’s tax policies as “harmful” and taking measures against such policies could be considered a violation of sovereignty.

The OECD, often dubbed “the club of the richest” 29 advanced economies, primarily makes policy guidelines and recommendations for member countries through analytical research work.

It provides a setting for members to discuss all kinds of national policies except defense, but rarely makes legally binding agreements.

In 1999, the OECD asked jurisdictions on the list to send delegates to Paris for talks and encouraged them to change their tax practices.

But about half of the states, mainly those in the Caribbean, failed to show up in an apparent protest gesture, the sources said.

According to the OECD’s definition, a jurisdiction is regarded as a tax haven if it imposes no or only nominal taxes, and if it offers or is perceived to offer itself as a place to be used by nonresidents to evade taxes in their own countries.

Other factors used in determining tax havens include: lack of effective information exchange with other governments on taxpayers who benefit from low or no tax jurisdiction; lack of transparency; and the absence of requirements for substantial business activities.

The OECD decided to launch the tax haven project at its ministerial meeting in 1996, as Japan and other members of the Group of Seven major countries were concerned that a vast amount of tax revenues were being lost to firms that set up paper companies in tax havens.

At that time the pace of globalization was gaining speed and international transactions were increasingly being made through tax havens, some of which were suspected to be involved in money laundering.

The communique of the 1996 ministerial meeting called upon the OECD to “develop measures to counter the distorting effects of harmful tax competition on investment.”

The request was subsequently endorsed by the G7 countries at their 1996 summit in Lyon, France.

Although no concrete figure is available, some $1 trillion in annual tax revenues is said to be lost from OECD member countries because of tax havens, the sources said.

Discussions over the tax haven list and countermeasures will be one of the major topics at this year’s ministerial meeting in Paris on June 26 and 27, they said.

The problems of tax havens are not limited to OECD member countries. Some nonmember countries, including Brazil, China, India and Argentina, are also suffering from tax haven problems, the sources said.

The OECD will hold a high-level meeting with nonmember states in early June in Paris to engage them in a dialogue over harmful tax competition and other issues, they said.

“If we were to make the tax haven list really effective, we need to have participation of nonmember countries in our project,” one official said.