The OECD v. Tax Havens, Part II: Initial Recommendations

As discussed in Part I, “What Is A Tax Haven“, the OECD originally went after tax havens in a 1998 document titled, Harmful Tax Competition, An Emerging Global Issue. They defined a tax haven as a low or no tax jurisdiction that employs secrecy and does not exchange information with other taxing officials. To counter-act the effect of havens, the OECD proposed a number of options. There are several that stand out.

Recommendation concerning Controlled Foreign Corporations (CFC) or equivalent rules: that countries that do not have such rules consider adopting them and that countries that have such rules ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices.

Most advanced economies have some form of CFC rules, the purpose of which is to attribute offshore income to onshore shareholders. The US adopted its rules in the early 1960s, as did most of the larger European countries.

Recommendation concerning foreign information reporting rules: that countries that do not have rules concerning reporting of international transactions and foreign operations of resident taxpayers consider adopting such rules and that countries exchange information obtained under these rules.

The US tax system — as with most other tax systems — is a self-reporting system. Taxpayers annually report their income, and the threat of an audit prevents abuse. However, in the age of electronic banking, it’s very easy for people to open an account and then fund it in an unreportable manner. This led to the passage and implementation of FATCA rules.

Recommendation concerning greater and more efficient use of exchanges of information: that countries should undertake programs to intensify exchange of relevant information concerning transactions in tax havens and preferential tax regimes constituting harmful tax competition.

While the OECD Model Tax Treaty contains an exchange of information section, after the organization published the Harmful Tax Competition document, they began to encourage the signing of mutual assistance treaties between countries that focused exclusively on the exchange of relevant information. A report issued in 2007 noted the progress that had been made:

The 2006 Report showed that both OECD and non-OECD countries had implemented or made considerable progress towards implementing the transparency and effective exchange of information standards that the Global Forum wishes to see achieved. It also showed that further progress is needed if a global level playing field is to be achieved. Thus, the Statement of Outcomes issued after the Global Forum meeting in Melbourne on 15-16 November 2005 outlined a series of steps involving individual, bilateral and collective actions which would be needed to both achieve and maintain the goal of a level playing field.

Countries continue to sign mutual assistance treaties.

The report contained other recommendations; those listed above are simply the more important proposals.

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Mr. Stewart has a masters in both domestic (US) and international taxation from the Thomas Jefferson School of Law where he graduated magna cum laude. Is currently working on his doctoral dissertation. He has written a book titled US Captive Insurance Law, which is the leading text in this area.

He forms and manages captive insurance companies and helps clients in international tax matters, US entity structuring, estate planning and asset protection.

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