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Thursday, 18 April, 2002, 14:47 GMT 15:47 UK
Tackling tax havens - a difficult business
Picture this. You're rich - by licit or illicit means is unimportant - and you want to stay that way.
Like many rich people, you object to paying a chunk of your earnings to the revenue.
For you, life has just got a touch harder.
The rich nations' club, as the Paris-based Organisation for Economic Co-operation and Development is sometimes termed, has spent the past three years or more persuading all the useful little places where your money is squirreled away from your home country's taxman to lift the veil of secrecy guarding your accounts.
Named and shamed
And now it has published a list of seven jurisdictions which it says are "uncooperative tax havens" and are refusing to promise transparency and effective information exchange about civil and criminal tax matters.
A further 31 have agreed to play ball, promising to clean up their acts by 2005.
OECD members themselves - with two important exceptions, to which we'll return later - are committed to doing the same by next year.
From April 2003, anyone not on board and making progress will be liable to what the OECD likes to call "defensive measures" which it stresses are not sanctions, the effect of which might be to cut off access to the international financial system to non-co-operators.
No access, no point in hiding your money there, runs the theory.
Or, as Gabriel Makhlouf, head of the OECD's Committee on Fiscal Affairs likes to put it, "Putting your money in Vanuatu may be your choice - but caveat emptor [let the buyer beware]."
Raising the stakes
The water really started getting hot for jurisdictions - many islands in the Caribbean or the Pacific, but some rather close to home such as the Isle of Man, Jersey, Guernsey and Monaco - in 2000, with a tentative list of 35 potential tax havens.
The jurisdictions concerned were up in arms. How dare the rich countries threaten them with punishments for simply trying to make a buck?
After all, for years they'd been told to get into financial services.
Now they were threatening the business of their bigger neighbours, they were being told to lay off.
Push and pull
Given the sound and fury, how come so many of the alleged tax havens have signed up?
As with all deals between big countries and small ones, a combination of the carrot and the stick are involved.
The carrot, put simply, is continued membership of the global financial community - and the chance of a say in working out the rules for exchanging information.
Indeed, at the same time as announcing the blacklist, the OECD unveiled a model agreement for information exchange drawn up by a committee of which 11 members had been named in 2000.
The OECD is also a promise to contribute in both money and manpower terms to help the co-operating territories bring their regulatory systems up to scratch.
And given the new stress on finding funny money in the wake of the 11 September atrocities, development funding these days is coming with strings attached, requiring effective oversight of financial services.
The stick, of course, concerns defensive measures. Not, of course, that the OECD itself can apply them.
That is down to its 30 members. And no-one's finalised yet just what shape the stick will be.
"We've made no decision yet on what the defensive measures might be," Mr Makhlouf says.
"Our focus has been on dialogue with as many jurisdictions as possible. We've parked a lot of the work on defensive measures till now."
But in the end, what difference is this going to make? Are the homes of hot money really going to shut up shop?
Obviously, everything depends on what the defensive measures are - and how they are applied.
Starting with the Isle of Man late in 2001, many of the committed jurisdictions have explicitly said that nothing can be done to anyone unless it applies equally to OECD members and non-members alike.
Mr Makhlouf is keen to acknowledge this.
"At the end of the day, the distinction we make will be between who's co-operating and who isn't," he says.
But there are two big sticking points.
Firstly, no-one yet knows what form the help offered to small countries who could stand to lose a huge slab of their foreign earnings will take.
A big meeting in the Caribbean, involving the World Bank, the IMF, the Commonwealth Secretariat and a host of other organisations will discuss it in a week's time.
If it doesn't materialise, the "level playing field" the OECD extols could get rather lumpy rather fast.
Flies in the ointment
And secondly, there are Switzerland and Luxembourg to consider.
Both have practices identified as "potentially harmful". Both have abstained from signing up to the process throughout.
In theory, then, both stand to be hit with defensive measures if they do not play ball by April next year.
And if they are not hit, that invalidates the whole process from the point of view of the non-members.
This is where Gabriel Makhlouf gets slightly vague.
He prefers, he says, to concentrate on the likely benefits of everyone co-operating: a safer, more structured international tax system.
In any case, the OECD can't speak to the question of whether the two could be hit.
That's up to member states.
And his colleague Jeffrey Owens, head of the OECD's Centre for Tax Policy, points out that the "potentially harmful" practices are just that: only potentially harmful.
Whether that amounts to passing the buck or ducking the issue remains to be seen. There's another year to go before we find out.
18 Apr 02 | Business
05 Jan 04 | Americas
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