Tax, transparency and the global economy

The OECD’s campaign against harmful tax competition garnered a higher profile at the start of 2008 with disclosures concerning widespread tax evasion by Germans and others through Liechtenstein. The revelations drew wide media attention in Germany and beyond, and have prompted fresh resolve in many OECD countries to fight tax evasion via offshore havens. In fact, investigations have been launched in over a dozen countries since then, including Australia, Canada, France, Germany, Italy, New Zealand, Spain, Sweden, the UK and the US.
For the OECD, the Liechtenstein affair highlights a much broader challenge in today’s interdependent globalised economy: how to respond to countries and territories that seek to profit from tax dodging by residents of other jurisdictions.For a borderless financial world to thrive and be fair, the other side of the competition coin is greater co-operation. This includes offshore financial centres, which should be prepared to engage in effective exchange of information with other countries in return for the business opportunities that a borderless world provides.That is why OECD countries and co-operative financial centres around the world have been working together for a number of years to address the problems posed by excessive secrecy, both in OECD countries and offshore. Together, they have developed standards of transparency and exchange of information in tax matters that balance the interests of financial privacy with the need for countries to be able to enforce their own tax laws. Agreements on information exchange between Guernsey and the Netherlands and between the Isle of Man and Ireland in April 2008, are some recent examples of implementation of those standards.No-one knows exactly how much public money is lost illicitly to tax havens–after all, if it could be measured, it would already be taxed. Nevertheless, while the OECD does not provide an estimate, the leakage is thought to run into several billion dollars.In 2002, the OECD published a list of uncooperative tax havens, initially including seven countries. Several have now made commitments to work with the OECD and its partners to improve transparency. But three remain on the list: Andorra, Monaco and Liechtenstein.As long as there are financial centres that refuse to co-operate in bilateral tax information exchange and that fail to meet international transparency standards, residents in other countries will continue to be tempted to evade their tax obligations through such secrecy jurisdictions.Some say it is high taxes that drive people to cheat on their taxes by going offshore. But as long as there are taxes, there will be tax cheats. Even low tax countries suffer from tax evasion.The OECD is trying to help countries tackle evasion; it is not trying to stop countries from competing with each other. On the contrary, the organisation encourages tax competition, on the basis of transparency and non-discriminatory provisions, the quality of the economy and the range of services different countries provide. All countries should be free to set their own tax rates and establish their own tax systems. What is not acceptable is competition on the basis of excessive secrecy.Bank secrecy in itself is not the issue. All countries have some form of bank secrecy, which serves a legitimate purpose in the financial world, not least the protection of privacy and individual rights. However, privacy rights are not absolute and have to be balanced with the legitimate needs of governments to enforce their own laws, including tax laws.
The OECD believes this balance can be achieved by assuring some transparency for the effective exchange of information. That means prohibiting the use of anonymous accounts, which all OECD countries now do, and improving quality and availability of ownership information on shell companies, foundations and other non-transparent entities that are used by tax cheats and other abusers of the financial system such as money launderers to shield their identities and assets from law enforcement authorities.The Liechtenstein affair has sounded an alarm in many countries that it is time to reinvigorate efforts to improve transparency and international co-operation in tax matters. But Liechtenstein is only the latest place where tax cheats have been caught red-handed. That is why the OECD will continue to work towards a level playing field in transparency and exchange of information practices so that tax cheats will have fewer places to hide.
©OECD Observer No 267 May-June 2008

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