OECD Releases Progress Report on Addressing Harmful Tax Practices
OECD countries have agreed on a number of modifications to the tax haven aspects of their efforts to eliminate harmful tax practices. These are set out in detail in a newly published Report, [1] which provides an update on all aspects of the work and which is now available on the OECD's website (www.oecd.org/daf/ctpa). The modifications relate to the commitments that the OECD is seeking from tax havens interested in co-operating with it to address harmful tax practices. The Report extends the time for making such commitments to 28 February 2002.
The Report describes progress made over the last year in identifying and addressing harmful tax practices within and outside the OECD. In addition to reporting on the work done in connection with tax havens, it also discusses the work related to Member countries and non-Member economies. It is a follow-up to the June 2000 Report [2] and responds to the 1998 Ministerial Mandate to address harmful tax competition (1998 Report) [3].
In developing this Report, the OECD seeks to establish a framework within which all countries - large and small, rich and poor, OECD and non-OECD - can work together constructively to eliminate harmful tax practices with respect to highly mobile activities such as in the financial and service areas. The OECD seeks to encourage an environment in which free and fair tax competition can take place in order to assist in achieving its overall aims to foster economic growth and development world-wide.
The focus of the Report is on progress made in connection with the tax haven work. There are now a total of 11 committed jurisdictions -- Aruba, Bahrain, Bermuda, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, Netherlands Antilles, San Marino, Seychelles. In addition, Tonga has taken measures to eliminate its harmful tax practices and no longer meets the tax haven criteria.
In light of concerns raised regarding certain aspects of the harmful tax practices project, a number of modifications have been made to the tax haven work that are likely to facilitate future commitments by tax havens. These can be summarised as follows:
(1) Commitments will be sought only with respect to the transparency and effective exchange of information criteria to determine which jurisdictions are considered uncooperative tax havens. The "no substantial activities" criterion will no longer be used in determining whether a tax haven is considered an uncooperative jurisdiction. Jurisdictions that have made commitments prior to the issuance of the Report have been informed that they can choose to review their commitments in respect of the no substantial activity criterion. The Report also states that OECD Member countries would welcome the removal by tax havens of practices falling within the no substantial activities criterion insofar as they inhibit fair tax competition.
(2) The potential framework of co-ordinated defensive measures would not apply to uncooperative tax havens any earlier than it would apply to OECD Member countries with harmful preferential regimes.
(3) The time for making commitments is extended to 28 February 2002.
(4) In order to ensure that committed jurisdictions have enough time to develop implementation plans, the time for making such plans has been extended from six months after the date of making a commitment to twelve months after that date.
The Report makes no changes with respect to the transparency and effective exchange of information criteria. Thus, effective exchange of information will continue to be sought in both civil and criminal tax matters in specific cases. Further, the Report notes that the modifications to the tax haven work do not affect the work in relation to Member Countries and non-member economies and do not alter the factors used in the 1998 Report to identify tax havens.
The OECD recognises that some jurisdictions have concerns about their administrative capacity to meet these commitments. OECD Member countries are now in the process of setting up a programme to offer through the OECD and other international organisations specific assistance to strengthen and improve the design of the administrative capacity of those jurisdictions which require assistance. The OECD is in discussion with the IMF, World Bank and regional development banks on other forms of development assistance that may be appropriate to help committed jurisdictions further develop their economies as they move to eliminate harmful tax practices.
In light of the above developments and the constructive and co-operative contacts with the jurisdictions, the OECD Member countries look forward to advancing this work.
For further information, journalists are invited to contact Nicholas Bray in the OECD's Media Relations Division (tel +(33) 1 4524 8090 or e-mail [email protected]).
1 The OECD'S Project On Harmful Tax Practices: The 2001 Progress Report (November 2001). Belgium and Portugal abstained from the 2001 Report but the abstentions do not affect their approval of the 1998 and 2000 Reports. Luxembourg and Switzerland recalled their abstentions to the 1998 Report and noted that those abstentions extend to the 2001 Report.
2 Progress in Identifying and Eliminating Harmful Tax Practices (June 2000).
3 Harmful Tax Competition: An Emerging Global Issue (April 1998).
The 2001 Progress Report
Questions & Answers
1. What is the purpose of the progress report?
This report discusses the progress made over the last year in all aspects of the project. It announces certain modifications to the work relating to tax havens.
2. What are the modifications to the tax haven work?
Four main modifications are set out in the Report.
- First, the time for making commitments has been extended to 28 February 2002.
- Second, a potential framework of co-ordinated defensive measures would not apply to tax havens that do not make a commitment any earlier than it would apply to OECD member countries that do not eliminate the harmful aspects of their preferential regimes..
- Third, the "no substantial activities" criterion will not be applied to determine whether a jurisdiction is uncooperative. This means that any jurisdiction that agrees to achieve transparency and effective exchange of information will not appear on a list of uncooperative tax havens.
- Fourth, the time for a committed jurisdiction to develop an implementation plan to achieve transparency and effective exchange of information has been extended. Committed jurisdictions will now have twelve months from the date of making their commitments to develop implementation plans rather than six months.
3. Has the "no substantial activities" criterion been dropped?
While the "no substantial activities" criterion will not be used to determine whether a jurisdiction is uncooperative, it is still relevant for purposes of determining whether or not a jurisdiction is a tax haven. OECD Member countries would welcome the removal by tax haven jurisdictions of practices falling within the no "substantial activities" criterion insofar as they inhibit fair competition.
4. Why were these changes made at this stage of the project?
The OECD has always sought to pursue this project through dialogue. The changes were made in response to the dialogue that has taken place. [Questions regarding any particular Member country's position should be referred to that country's delegates.]
5. What do these changes mean for jurisdictions that have already committed with respect to the no substantial activities criterion?
The 2001 Report explicitly states that jurisdictions that have made commitments prior to the issuance of the Report can choose to review their commitments in respect of the no substantial activities criterion. These jurisdictions will not be held to a higher standard than those who commit after the issuance of the 2001 Report. OECD member countries would, however welcome the removal of practices falling within the no substantial activities criterion insofar as they inhibit fair competition.
6. Was the project modified to limit exchange of information to criminal tax matters?
No. The OECD Member countries continue to seek commitments for the effective exchange of information in connection with specific tax inquiries in both civil and criminal tax matters.
7. Do the modifications to the tax haven work affect the work in relation to preferential regimes in member countries?
No. The criteria used to identify harmful preferential regimes have not been modified.
8. What do these modifications mean for the non-member economy work?
As the 2001 Progress Report indicates, the modifications in the tax haven work do not change the application of the 1998 or 2000 Reports in respect of Member countries and non-member countries. Many non-member economies are interested in working with the OECD to take forward the project.
9. When will a framework of co-ordinated defensive measures apply?
The project and all of the consultations that have occurred over the last year should make clear that the Committee intends an approach that promotes change through dialogue and consensus. This dialogue will continue with all of the jurisdictions identified in the 2000 Report that have not yet made a commitment. Those jurisdictions that do not commit will not be subject to a framework of co-ordinated defensive measures any earlier than such a framework would apply to OECD Member countries that have not removed the harmful features of their harmful preferential regimes. Of course, the Committee hopes that there will be no uncommitted jurisdictions to which a framework of co-ordinated defensive measures would need to apply.
10. Why doesn't the Report focus more on Member country and non-member economy work?
The Report makes important changes to the commitment process and the time table set out in the Report issued last year. Therefore, although it updates progress in all areas, it naturally focuses on those areas where modifications were made, i.e., the tax haven work.
11. Do the Belgian and Portuguese abstentions mean that they have joined Switzerland and Luxembourg in abstaining from the whole project?
No. The Belgian and Portuguese abstentions apply only to the 2001 Progress Report.
12. How will the abstentions of Belgium and Portugal affect the commitment process with regard to tax havens?
There will be no effect. Commitments will be evaluated under the standards set out in the 2001 Report.