US eases stance on 'tax havens'

Barbados: one of 35 jurisdictions accused of harbouring tax evasion

The threat of sanctions for small island states accused of supporting tax evasion is receding after supportive testimony to the US Congress from US Treasury Secretary Paul O'Neill.

I was troubled by the notion that any country or group of countries should interfere in any other country's decisions about how to structure its tax system

Paul O'Neill, US treasury secretary

The states, mostly in the Caribbean and the Pacific, have been fighting moves by the Paris-based organisation for Economic Co-operation and Development (OECD) to prevent what it calls "harmful tax practices".

The OECD says that unless 35 "potential tax havens" agree to strengthen information exchange and transparency, and curtail their offshore banking they could face economic sanctions.

But Mr O'Neill told a Congressional committee that he will seek bilateral treaties to share information on suspected tax dodgers, rather than support curbs on preferential tax regimes for foreign individuals and corporations.

Defensive measures

Mr O'Neill said that the OECD has now agreed not to implement any "defensive measures" against non-members before they come into effect on OECD members themselves.

OECD harmful tax deadlines

November 2001: Non-member countries must sign up to OECD plan

April 2003: OECD member states must bring laws in line with proposals; defensive measures can begin

2005: Non-member signatories must bring laws in line with OECD proposals

Mr O'Neill said the OECD's approach involved trying to push non-members into getting rid of tax systems which favour non-residents.

These systems, which Mr O'Neill said were described by the OECD as "poaching", could simply make for a more attractive investment environment, he said.

"I was troubled by the notion that any country or group of countries should interfere in any other country's decisions about how to structure its tax system," Mr O'Neill told the committee.

Mr O'Neill said the OECD has agreed to drop this stipulation from its definition of which countries should incur sanctions.

An OECD spokesman said that broadly represented the organisation's position, which was agreed at a meeting of its Global Tax Forum in June.

More movement needed?

But the non-OECD member states are understood still to be unhappy with the situation.

Despite more than a month having passed since the forum met, the OECD has yet to make an official statement of its own, leaving the state of negotiations unclear.

Owen Arthur: leading voice against OECD tax initiative

Led by Barbados Prime Minister Owen Arthur, the non-member states have complained about double standards.

They say the aim is to cut small developing states out of offshore finance.

And they have pointed out that some OECD members including Switzerland and Luxembourg continue to abstain from agreeing with the plans.

Change of heart

The treasury secretary told the committee, chaired by Democrat Carl Levin, that he hopes to have treaties concluded with at least half of the 35 countries on the OECD's list within a year.

Mr O'Neill said that without such treaties it would remain almost impossible to prosecute tax cheats.

Deadlines

This part of the initiative could act as a barrier to getting information exchange up and running, he said.

The deadline for the 35 non-members - six of whom have already signed up - to come on board has already been moved back to November 2001 from July.

Previous US administrations have backed the OECD initiative to the hilt.

Until Mr O'Neill first mooted a change of heart in May, the OECD had been adamant that the date was not negotiable.