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The OECD Harmful Tax Competition Initiative

The Organization for Economic Cooperation and Development (OECD) is an international organization with 30 member countries, including the U.S., Canada, Japan and most European countries. In May of 1996, Ministers instructed the OECD to "develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases." In April 1998, the OECD Council adopted a Recommendation to the Governments of Member Countries and issued a report entitled "Harmful Tax Competition: An Emerging Global Issue."

In that report the OECD outlined a series of sanctions that OECD countries should impose on "tax havens" that do not comply with a series of steps designed to reduce "unfair tax competition." In the view of the OECD, low-tax policies "unfairly erode the tax bases of other countries and distort the location of capital and services."

The OECD considers a country a tax haven if the country: (1) has low or zero income taxes, (2) allows foreigners investing in the country to do so at favorable rates, and (3) the country affords financial privacy to its investors or citizens. The OECD has identified 41 countries (mostly developing countries) as "harmful tax regimes." The United States, the United Kingdom, Switzerland and Luxembourg would also be considered "harmful tax regimes" under the OECD analysis except that OECD members are not targeted. In time, however, the U.S. can expect the high-tax European Union to bring pressure to bear since the U.S. allows foreigners to earn interest or capital gains here free of tax, because U.S. tax rates are generally low, and because we do not generally report information about foreigners investing here to foreign governments.

The OECD is demanding that the low tax countries sign a Memorandum of Understanding (MOU) by July 31, 2001. If they do not do so, the OECD will black list the country as a harmful tax regime and recommend to OECD countries that devastating sanctions be imposed. The MOU would require, for example, that all targeted countries remove favorable treatment for foreigners investing in the country and provide all banking and tax relevant information to any OECD country. The MOU provides for the total abolition of any financial privacy as it relates to the 30 OECD member countries and the 41 targeted countries. Once that step has been made, there will be no principled reason for the exchange of information not to be generalized so that any government in the world will be entitled to the information. The logic of the OECD proposal is the total abolition of financial privacy and a world where all governments can access the financial information of any individual living anywhere in the world.

Sanctions that would be imposed on targeted low tax countries include the termination of tax treaties, denying income tax deductions for purchases made from a targeted country's businesses, imposing withholding taxes on payments to residents of targeted countries, denying the foreign tax credit for taxes paid to the targeted government. The OECD also proposes to explore measures designed to disrupt normal banking and business operations.

 

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