The global financial crisis has given new political impetus to longstanding calls for increased regulation of offshore financial centres (OFCs) and other jurisdictions labelled as "tax havens" by policymakers (see
box, Unfair use of the term "tax havens?").
Notably, the G20 communiqu? issued at the close of the London Summit on 2 April 2009 (G20 communiqu?) sets out the organisation's intention to take action, including potentially imposing sanctions, against non-cooperative jurisdictions such as tax havens as part of a package of measures aimed at strengthening global financial supervision and regulation (see
G20 Global plan for recovery and reform).
This communiqu? coincided with the publication of the Organisation for Economic Co-operation and Development's (OECD) Progress Report (see
OECD Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard). The Progress Report divides 84 financial centres, both offshore and onshore, into a black list, a grey list and a white list based on their commitment to and implementation of the internationally agreed tax standard (International Standard) (see
box,
OECD Internationally Agreed Tax Standard).
The implementation aspect is currently measured by the number of Tax-Information Exchange Agreements (TIEAs) or double tax treaties containing OECD-compliant tax information exchange provisions signed by a given country (see
below,
Model Tax Convention on Income and Capital). Admission to the white list requires the signature of at least 12 of these agreements.
Against this background, this article examines recent developments aimed at enhancing international tax information exchange and their impact on OFCs, in particular:
- The OECD's work in the area of harmful tax practices.
- Tax information requests in practice.
- Recent initiatives to boost international oversight of OFCs.
- The likely legal and commercial impact of recent developments on some key OFCs, notably Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey and Jersey, as well as on Luxembourg and Switzerland (which, although technically onshore, are often considered OFCs for practical purposes on account of their tax and regulatory regimes).
- The future of OFCs.
[h=2]The OECD's work in the field of harmful tax practices[/h] According to Peter Tarn, Global Head of Banking & Finance at
Harney Westwood & Riegels, "Although it is unquestionable that 2009 is shaping out to be a year of increased political and regulatory pressure for OFCs, recent initiatives need to be viewed as part of a continuum of measures stretching back to 1998".
The OECD's work in the field of harmful tax practices has been at the heart of this process over the last decade. Key milestones include its:
- 1998 Report.
- 2000 Report.
- 2001 Progress Report.
- Model Agreement on Exchange of Information on Tax Matters.
- Model Tax Convention on Income and Capital.
Each of these is considered briefly below.
[h=3]The 1998 Report[/h] The OECD launched its Harmful Tax Practices Project in 1996. To date, the Forum on Harmful Tax Practices (Forum), a subsidiary body of the Committee on Fiscal Affairs, has undertaken the bulk of the work.
The Forum produced its first report in 1998 (1998 Report), which distinguished between:
- Countries that raise significant revenues from income tax, but whose tax systems have harmful tax competition features; and
- "Tax havens", defined as countries with no or nominal income taxes and which offer themselves to non-residents as places to escape tax in their country of residence (see OECD Harmful Tax Competition: An Emerging Global Issue).
The 1998 Report identified four distinguishing factors relating to tax heavens:
- The imposition of no or only nominal taxes.
- Laws or administrative practices precluding the effective exchange of information.
- Lack of transparency.
- The absence of substantial business activity within the country itself.
[h=3]The 2000 report[/h] A further report published in 2000 (2000 Report) listed 35 tax havens based on the definition established in the 1998 Report (see
OECD Towards Global Tax Cooperation: Progress in Identifying and Eliminating Harmful Tax Practices).
Although also technically covered by the OECD definition, Bermuda, the Cayman Islands, Cyprus, Malta, San Marino and The Bahamas were excluded from the list after making an advance commitment to eliminate "harmful tax practices". They later joined OECD members to become participating partners in the Global Forum on Transparency and Exchange of Information (Global Forum).
The 2000 Report also clarified that the "no or nominal taxes" factor was not in itself sufficient for a jurisdiction to be considered a tax haven and that any assessment ought to cover all the facts and circumstances.
[h=3]The 2001 Progress Report[/h] The 2001 Progress Report:
- Reaffirmed that the "no or nominal taxes" requirement was merely a "gateway criterion".
- Downplayed the importance of the "lack of substantial activities" requirement.
- Singled out exchange of information as the focus for future standard-setting work (see OECD's Project on Harmful Tax Practices: The 2001 Progress Report).
Chokri Bouzidi, Principal at the London office of Luxembourg law firm,
Oostvogels Pfister Feyten, highlights that the OECD's current approach is that "if a tax-efficient jurisdiction is not allowed to share information with other jurisdictions, it will most likely be classified as a tax haven". Adds Peter Tarn, "In the absence of a global tax regime, the lack of tax information exchange is the only issue that can be opposed on a standalone basis. It is therefore logical that, over time, this has become the focal point of the OECD's efforts".
The OECD's focus on tax information exchange led to the publication of three key documents on 18 April 2002:
- A list of seven "uncooperative jurisdictions": Andorra, Liechtenstein, Liberia, Monaco, The Marshall Islands, Nauru and Vanuatu (see OECD List of Unco-operative Tax Havens).
- A Statement by the OECD Deputy Secretary-General on ending tax haven abuse (see Seiichi Kondo, Ending Tax Haven Abuse).
- The Model Agreement on Exchange of Information on Tax Matters (Model Agreement) (see OECD Agreement on Exchange of Information on Tax Matters).
[h=3]Model Agreement on Exchange of Information on Tax Matters[/h] The Model Agreement's purpose is to promote international co-operation in tax matters through exchange of information. It is generally regarded as the main way of ensuring compliance with the International Standard. According to Richard Thomas, a partner in
Ogier's Jersey office, the Model Agreement is "a pro forma for the implementation of tax information co-operation".
The Model Agreement contains the following key features:
- It is available in bilateral and multilateral form, although the latter is more accurately described as "an integrated bundle of bilateral treaties".
- It is not prescriptive and recognises that other instruments or provisions may also satisfy the International Standard.
- It is limited to information that is "foreseeably relevant to the administration and enforcement of the laws of the applicant Party concerning the taxes covered" (Foreseeable Relevance) (Article 1). The information that a requesting party must provide in order to demonstrate Foreseeable Relevance is:
the identity of the person under examination or investigation;
- a statement of the information sought, including its nature and desired form;
- the tax purpose for which the information is sought;
- the grounds for believing that the information requested is held in the requested party or in the possession or control of a person within the jurisdiction of the requested party;
- if known, the name and address of anyone believed to possess the requested information;
- a statement of conformity with the law and administrative practices of the requesting party;
- a statement confirming that the requesting party has pursued all proportionate means available in its own territory to obtain the information (Article 5(5)).
[*]It covers direct taxes on income or profits, capital, net wealth, estate, inheritance or gifts. Parties to the bilateral version may omit one or more of the four categories, but will remain under an obligation to respond to requests for information in relation to taxes listed by the counterparty. Contracting parties may also include indirect taxes (
Article 3).
In practice, the taxes covered will vary according to the parties' tax regimes. For example:
[*]It establishes that a contracting party need only provide information when requested to do so (
Article 5). This crucial provision precludes fishing expeditions and automatic or spontaneous exchanges of information. Despite only endorsing reactive tax information exchange, Article 5 imposes some significant obligations, namely:
- an obligation on the requested party to use all relevant information-gathering measures to provide the requesting party with the information requested, even if the requested party may not need such information for its own tax purposes (Article 5(2)). The Model Agreement defines "information gathering measures" as the laws and administrative or judicial procedures that enable a contracting party to obtain and provide the requested information (Article 4 (1) (l));
- the Model Agreement's pivotal provision, according to Chokri Bouzidi "establishes that banking secrecy laws and other ?privilege rights' cannot in themselves form the basis for declining a request and imposes a duty on the requested party to ensure that it has the authority to obtain and provide upon request" information in possession of banks and financial institutions and information regarding the ownership of virtually all forms of business entity. (Article 5(4)); and
- There is a 90 day response window from receipt of the request. After this, if the requested party is unable to provide the requested information, it must immediately inform the requesting party, explaining the reason for this, the nature of the obstacles or the reasons for its refusal (Article 5(6)).
[h=3]Model Tax Convention on Income and Capital[/h] The OECD Model Tax Convention on Income and Capital (Model Convention) was first published in 1963 and has since been updated on several occasions. It is an internationally endorsed template for the negotiation of double taxation treaties (DTTs) and has served as a model for over 3,000 agreements (see
OECD, Articles of the Model Convention With Respect to Taxes on Income and On Capital and
PLC Practice Note, Double Tax Treaties: an introduction). By way of example of its significance, the English courts have used OECD commentaries on the Model Convention when interpreting provisions in DTTs entered into by the UK (
Sun Life Assurance Co of Canada v Pearson [1986] STC 335).
In its current form, Article 26 of the Model Convention provides an alternative means of complying with the OECD's International Standard in the context of a wider-reaching tax convention. Article 26(1) allows information exchanges on request, automatically and spontaneously. But as Paul Gully-Hart, a partner in the Geneva office of
Schellenberg Wittmer, emphasises, in practice a number of contracting parties generally exclude automatic and spontaneous information exchanges and only agree to provide information on request?.
Article 26 was updated in July 2005, with the addition of paragraphs 4 and 5. These clarify that a request for information cannot be refused merely because of a lack of interest in the information from a domestic tax perspective, or the fact that the information is held by a bank or other financial institution. This mirrors the principle in Article 5(4) of the Model Agreement.
Article 26 also provides that information passed to another jurisdiction must be treated as secret and can only be used for the purposes provided for in the Model Convention.
A further amendment to Article 26(1) replaces the previous requirement that the information requested was "necessary" with the Foreseeable Relevance standard.
Austria, Belgium, Luxembourg and Switzerland entered reservations to the revised Article 26 at the time of its adoption, but withdrew them in March 2009.
(For more information, see
PLC Private Client, Practice Note, Double taxation treaties and agreements (income, capital gains and corporation tax).
[h=2]Tax information requests in practice[/h] Despite the importance laid on information exchange by the OECD and national governments, information requests under the OECD agreements are relatively rare. For example, as of June 2009, the US has made only one request under its TIEA with the BVI, which was signed on 03 April 2002 (see
Agreement Between the Government of the United States of America And the Government of the United Kingdom of Great Britain and Northern Ireland, Including the Government of the British Virgin Islands, For the Exchange of Information Relating to Taxes).
There are several reasons for this. Firstly, Article 5(5) of the Model Agreement places onerous conditions on a requesting party seeking to demonstrate Foreseeable Relevance. Bermuda's TIEA with the US, signed in 1988 has resulted in 45 requests for information since its adoption. Steven Rees Davies, a lawyer in
Appleby's Bermuda office explains that it is easy to understand how the "information required to satisfy the Foreseeable Relevance benchmark can be too onerous for the requesting party". He also adds that "the high level of financial regulation in sophisticated OFCs means that situations warranting such requests are simply not that frequent".
According to Roger Le Tissier, founding partner of
Ogier's Guernsey office, the low number of requests in Guernsey is attributable to the fact that the island's business landscape is dominated by major corporates and financial institutions whose conduct is already governed by the legal and commercial dictates of corporate governance. "This kind of client," Le Tissier explains, "simply does not have the desire or opportunity to engage in harmful tax practices".
Richard Thomas points to the deterrent effect of TIEAs as an explanation for the scarcity of official requests in Jersey. Article 5(5)(vii) of the Model Agreement makes the exhaustion of proper domestic means to obtain the information a pre-requisite to making a formal information request. Therefore, according to Thomas, "By the time the request is made, the person under investigation is typically aware of the existence of a case against him or her and of an information exchange mechanism, and consequently often willingly discloses the requested information as opposed to prevaricating". The real objective of TIEAs, he asserts, is "to influence behavioural patterns, not produce numerous formal requests".
From a BVI perspective,
Ogier partner Ray Wearmouth adds, "The few requests that are submitted are normally made in good faith, given the Model Agreement's express exclusion of fishing expeditions". He also highlights that the low number of requests may be partly down to the fact that "this is a relatively new mechanism in some countries".
The situation is similar in the Cayman Islands. According to investment funds expert Peter Cockhill, co-head of
Ogier's global Investment Funds team, "Operational efficacy will the next big issue for those OFCs that have recently signed a number of TIEAs in quick succession".
By way of contrast, information requests under Luxembourg's network of DTTs are frequent and virtually always complied with, as confirmed by Thierry Lesage, partner in the tax law practice of
Arendt & Medernach. Between 2006 and 2008 Luxembourg received 1033 demands for legal cooperation from foreign legal authorities, of which 1023 received a favourable response. This is particularly remarkable given that the requests were made under the "old" Article 26 of the Model Convention, which placed less demanding tax information obligations than the current provision (see
above,
Model Tax Convention on Income and Capital).
[h=2]Recent initiatives[/h] Two significant initiatives relating to information exchange were announced in April 2009, namely the:
- OECD Progress Report.
- G20 communiqu?.
[h=3]OECD Progress Report[/h] The OECD April 2009 Progress Report examines jurisdictions in light of the International Standard (see
table,
OECD Progress Report). In particular:
- The black list covers jurisdictions that have not committed to the International Standard. As at 2 April 2009, these were Costa Rica, Malaysia (Labuan), the Philippines and Uruguay. By 7 April 2009, however, all four jurisdictions had committed and were removed from the list. There is no precise guidance on what indicates commitment, but it appears that an official undertaking by the relevant country will suffice, such as the letter sent by Uruguay's Finance Minister on 3 April 2009 (see OECD Press Release, OECD welcomes Uruguay?s commitment to OECD tax information exchange standards).
- The grey list covers jurisdictions that have committed but not yet substantially implemented the International Standard. This list is subdivided into tax havens (as defined by the OECD) and other financial centres (see table, OECD Progress Report).
- The white list names the jurisdictions that have substantially implemented the International Standard (see table, OECD Progress Report).
"Substantial implementation" is measured by a single factor: the number of OECD-compliant TIEAs or DTTs signed. To be white-listed, a jurisdiction must sign at least 12 such agreements , irrespective of who the counterparties are. Paul Gully-Hart questions the effectiveness of this approach given that many TIEAs will be of little genuine commercial significance. For example, a number of OFCs have recently signed agreements with the seven Nordic economies, including Greenland and the Faroe Islands.
Other lawyers are quick to highlight the practicality of a single, quantifiable test. As Steven Rees Davies notes "The OECD would not have made as much progress if it had imposed a broader and less defined set of requirements. The 12 TIEA threshold gives this process a sense of certainty and clarity."
[h=3]G20 communiqu?[/h] The OECD Progress Report coincided with the G20 communiqu? of April 2009, in which the G20 undertook to take action against jurisdictions that do not meet international standards in relation to tax transparency. The G20's proposed "toolbox of effective counter measures" to deal with non-cooperative jurisdictions includes:
- Requiring taxpayers to disclose transactions involving these jurisdictions.
- Denying tax relief for expenses paid to residents of these jurisdictions.
- Additional withholding taxes on payments to these jurisdictions.
- Restrictions on investment by international institutions in, and on aid to, these jurisdictions.
Although the communiqu? acknowledged the OECD Progress Report (
see above), it did not formally endorse it. However, it is likely that the Progress Report will be used for benchmarking progress in the field of tax information exchange and identifying jurisdictions that may ultimately face the punitive measures envisaged by the G20.
[h=2]Reactions to recent initiatives[/h] Recent initiatives, particularly the OECD Progress Report, have provoked strong reactions in all affected countries (see
above,
Recent initiatives). For example, while many white-listed jurisdictions have been using the OECD's endorsement to market beyond their traditional financial products and services, a number of grey-listed OFCs have engaged in an all-out campaign of TIEA-signing ahead of the G20 meeting scheduled for 24 to 25 September 2009.
This section considers the likely legal and commercial impact of recent developments on some key OFCs, notably Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey and Jersey, as well as on Luxembourg and Switzerland.
[h=3]Bermuda[/h] Bermuda holds a leading position as a domicile for insurance businesses, investment funds and foreign, mostly US, corporations, partly due to the popularity of the Bermudan Exempted Company structure (see
PLC Cross-border Directors' Duties and Liabilities Handbook 2009/10: Bermuda). Bermuda Special Purpose Vehicles (SPVs) are also popular in aircraft financing transactions.
Bermuda was originally classified as a grey jurisdiction, having only concluded three TIEAs as of April 2009. However, it quickly managed to sign the requisite and became one of the first jurisdictions to move up to white-listing on 8 June 2009. At the time of going to press, it had signed 13 TIEAs, most recently with Germany and has concluded negotiations for a further three.
Despite its current white-listing, a number of Bermuda-domiciled American companies have recently been considering relocating to Ireland or Switzerland. Prominent examples include Tyco, Noble and Accenture, the latter's board unanimously voting to relocate to Ireland earlier this year. Accenture's shareholders ratified the decision on 5 August 2009 and the company completed the change in its place of incorporation on 1 September 2009 (see
Accenture Press Release, 05 August 2009: Accenture Shareholders Approve Change in Place of Incorporation).
These recent moves have so far been restricted to US corporates, probably in response to a possible legislative clampdown in the US. Accenture's proxy notice cites the "continued criticism and negative publicity regarding companies that are incorporated in countries that do not have tax treaties with the United States" and identifies legislative proposals currently before the US Congress as a specific risk factor (see
Accenture: Official notification to shareholders of matters to be brought to a vote ("Proxy") DEF 14A 06/24/09).
[h=3]British Virgin Islands[/h] With over 800,000 businesses (predominantly SPVs) incorporated in the BVI and company legislation widely praised for its flexibility, this OFC is used in a wide range of cross-border corporate transactions including:
- Multi-jurisdictional joint ventures.
- Listings on a number of the world's key stock exchanges.
- Transactions effected through Special Purpose Acquisition Companies (SPACs).
- Cross-border M&A.
- The establishment of insolvency-remote holding companies and structured finance vehicles (see Offshore SPVs in international transactions: British Virgin Islands).
The BVI is another example of an initially grey-listed country that has made remarkable progress since April 2009. It has concluded nine agreements in recent months, taking its overall tally to the required 12.
As a result, BVI-based practitioners are confident that the country will continue to meet and exceed the OECD's ongoing requirements. Ray Wearmouth is already looking ahead to how "the better regulated and more open jurisdictions, such as the BVI, will not just settle for the minimum criteria for inclusion on the white list but, will go beyond black letter expectations in order to draw attention to the ?clear water' that exists between themselves and less sophisticated OFCs".
Peter Tarn adds that, while the BVI is keen to meet the OECD's white listing criteria, it is also aiming to further strengthen its exchange of information arrangements with its main trading partners, irrespective of whether the means by which it does so are OECD-compliant. "The commercial reality is that a tax agreement with the Peoples' Republic of China (PRC) will be of greater significance to the BVI than an agreement with a continental European jurisdiction" Tarn explains, given that the BVI is reportedly the second largest investor in the PRC, partly due to the popularity of BVI structures among Asian investors (see
Offshore SPVs in international transactions: British Virgin Islands).
[h=3]Cayman Islands[/h] The Cayman Islands' sophisticated regulatory landscape is often cited as one of the reasons behind its status as a pre-eminent hedge funds hub and domicile for issuing vehicles in complex structured finance transactions, such as:
- Securitisations.
- Credit linked transactions, such as Collateralised Loan Obligations (CLOs) and credit linked notes.
- Repackagings.
- Investment fund financing.
- Structured and derivative products, including Constant Proportion Portfolio Insurance (CPPI) structures.
- Catastrophe bonds and other alternative risk transfer products (see Offshore SPVs in international transactions: Cayman Islands).
Despite its regulatory probity, the Cayman Islands had signed only one TIEA at the time of the Progress Report, and was therefore placed on the OECD's grey list. However, like Bermuda and the BVI, it embarked on a TIEA drive that enabled it to be white-listed after concluding a transformational 12th treaty with New Zealand on 13 August 2009.
According to Matthew Feargrieve, head of the Cayman Islands practice at
Mourant du Feu & Jeune, it is unfortunate that the OECD's initial assessment overlooked Cayman's broader regulatory framework. In addition to the existing 12 TIEAs, this includes:
- A network of mutual legal assistance treaties and memoranda of understanding (MOU) between the Cayman Islands Monetary Authority (CIMA), whose mandate includes regulation and supervision of financial services in the country, and other major financial regulators including the FSA in the UK (see Memorandum of Understanding Between Cayman Islands Monetary Authority (CIMA) and Financial Services Authority (FSA)). Although not OECD-compliant, the purpose of the MOUs is "to establish a formal basis for co-operation, including the exchange of information and investigative assistance". These MOUs seek to achieve an arguably stronger practical effect than TIEAs in that they allow for the provision of unsolicited information. Reportedly, since the Mutual Legal Assistance Treaty with the US was signed in 1986, both governments have cooperated in 243 requests for assistance, resulting in successful law enforcement actions.
- Cayman has also implemented a groundbreaking mechanism for tax information assistance through the reform of its Tax Information Authority Law(see Tax Information Authority Law (2009 Revision). This allows 12 countries to access information through a unilateral mechanism without the need for a treaty. Under this system, the regulatory authorities of a relevant country can submit information requests, provided that:
they conform to the law and administrative practice of the requesting country; and
- the requesting country has laws in place that would make the information obtainable in similar circumstances in its own jurisdiction.
[h=3]Guernsey[/h] A favourable tax regime and the popularity of the Protected Cell Company (PCC) structure, which was spearheaded here, make Guernsey highly popular with a number of foreign investors, including:
- Investment funds. The possibility of segregating assets and liabilities within a single legal entity makes Guernsey PCCs particularly attractive for umbrella or multi-class fund sponsors.
- Captive insurers. PCCs enable insurance managers to have a single company vehicle and write the various businesses into separate cells within that vehicle, bringing down costs.
- Other stakeholders involved in structured finance transactions. Following legislative amendments, PCC structures can now be used in securitisations and other structured finance transactions.
Guernsey was included in the OECD white list at the outset as a result of its extensive network of TIEAs (see
PLC Tax, PLC Private Client, Legal Update, UK signs Tax Information Exchange Agreement with Guernsey ). It recently signed a further TIEA with New Zealand.
For Roger Le Tissier, the main impact of recent developments will be to accelerate the polarisation of the global offshore market for financial and legal services. Over the past few decades Guernsey has emerged as one of a number of standout OFCs for major institutional, blue-chip clients as a result of commercial evolution, not political pressure. In his opinion, these initiatives will most likely widen the gap.
[h=3]Jersey[/h] The existence of two advantageous, insolvency-remote cell company structures (Protected Cell Companies (PCCs) and Incorporated Cell Companies (ICCs)) is also one of the reasons behind Jersey's reputation as a popular offshore domicile. According to Nicholas Crocker and Robin Smith, partners at
Carey Olsen's Jersey office, ICCs in particular have been singled out for their potential to "gain international recognition in jurisdictions where cell companies do not exist". Jersey has strong ties with the alternative investment management industry and is widely recognised as an epicentre of trusts and fiduciary services activity (see
PLC Tax, Legal Update, UK signs Tax Information Exchange Agreement with Jersey).
Like Guernsey, Jersey was white-listed in the April 2009 Progress Report having signed the required 12 TIEAs (see
PLC Tax, UK signs Tax Information Exchange Agreement with Jersey). According to Richard Thomas, Jersey regards this initial endorsement as merely part of "a work in progress" and is appreciative of the benefits of broadening its TIEA treaty network as evidenced by the recent signing of its 15th agreement with New Zealand on 27 July 2009 (
see
Agreement between the Government of Jersey and the Government of New Zealand for the Exchange of Information with Respect to Taxes).
[h=3]Luxembourg[/h] Luxembourg combines its position as the world's second largest hub for domiciled funds, with an active captive reinsurance market and the most active private banking industry in the EU. Its sophisticated and often customised legal structures appeal to a myriad of foreign investors: from private equity sponsors using the
Soci?t? d'investissement en Capital ? Risque (SICAR) to high net-worth individuals (HNWIs) managing their assets through the recently created
Soci?t? de gestion de patrimoine familial (SPFT). (For further information, see
PLC Cross-border Private Equity Handbook 2008/2009; Luxembourg and
PLC Cross-border Private Client Handbook:, Luxembourg).
Luxembourg's chosen means of implementing the International Standard has traditionally been to avoid TIEAs in favour of an extensive network of more than 50 DTTs, based on the OECD Model Convention. The reason for its initial grey-listing was the reservations it submitted to the revised Article 26.
On 13 March 2009, it announced the withdrawal of its reservations to Article 26 and proceeded to update its DTT network through the adoption of protocols designed to bring it in line with the revised article. This enabled it to become one of the first grey-listed jurisdictions to be upgraded.
According to Thierry Lesage the next stage is to achieve "a practical implementation of Luxembourg's DTTs that can reconcile the new information exchange obligations with the jurisdiction's longstanding tradition of banking confidentiality". A number of domestic tax provisions may have to be amended to achieve effective implementation, such as article 178bis of the General Tax Law, which forbids the tax authorities from requesting information from a range of financial institutions.
[h=3]Switzerland[/h] Switzerland's success as a global financial centre has long been associated with its entrenched bank secrecy laws, political neutrality and favourable tax regime. It is currently considered the world's leading jurisdiction for cross-border asset management and boasts the third-highest volume of foreign exchange trading. The insurance industry also plays a pivotal role, both domestically and internationally, and Swiss insurance products, such as annuities, enjoy widespread international popularity.
Given the longstanding sanctity of banking secrecy, the Federal Council's decision to fully implement the International Standard was of historical significance (see
Swiss Federal Department of Finance, Press Release, Switzerland to adopt OECD standard on administrative assistance in fiscal matters). Like Luxembourg, the approach to implementation is based on the withdrawal of reservations to the revised Article 26 of the Model Convention and the updating of its DTT network.
Switzerland's DTTs have traditionally restricted exchange of information to activities amounting to "tax fraud or the like". As Peter Reinarz, who leads
B?r & Karrer's tax practice explains, this wording reflects the position under Swiss law, which has traditionally distinguished between tax fraud (which is a criminal offence) and tax evasion (which is only sanctioned with fines (penalty taxes)). The revised, Article 26-compliant agreements recognise that "banking secrecy may not be able to be fully safeguarded when dealing with foreign tax authorities when there is a claim that there is tax evasion". Reinarz further notes that, at the time of going to press, Switzerland had initialled 13 amended DTTs (and signed one with Denmark).
According to Eric Stupp, head of
B?r & Karrer's financial services group, "Remaining on the grey list is simply not an option. Given the flurry of legislative proposals currently under discussion, OFCs regarded as non-cooperative will shortly face extensive hurdles and documentation requirements". Against this background he continues, "A negative OECD endorsement would make cross-border commercial relationships with a Swiss counterparty, not just banks but indeed any regular company, near impossible".
Daniel Daeniker, head of
Homburger's Corporate/M&A Practice Group is also of the opinion that this seismic shift in the Swiss approach to tax information is certainly here to stay. However, he notes that the incorporation of the International Standard into Switzerland's DTT network could still face a facultative referendum under Swiss law if at least 50,000 people or eight cantons file a petition within a 100-day period.
Paul Gully-Hart notes that Switzerland's renegotiation strategy has, where possible, focused on countries with which it enjoys a significant commercial relationship such as the UK, Germany and the US (see
PLC Tax, Legal Update, UK/Switzerland double tax treaty: protocol reduces dividend withholding and strengthens anti-avoidance measures).
Another notable feature of the renegotiation of these DTTs has been the attempt to add grandfathering provisions banning retrospective information requests in order to protect longstanding customers. These attempts have been mostly unsuccessful.
The future of OFCs OFCs should not think themselves immune from further international political pressure merely because they have signed 12 TIEAs. A July 2009 Anglo-French summit concluded that this threshold should be viewed as a "starting point in the move towards greater tax transparency" and suggests that the threshold may rise above 12 if progress stalls (see
Primer Minister's Office Press Release, UK-French Summit: Declaration on global governance and development).
On 1-2 September, OECD Global Forum members met to discuss progress made over the past few months and outlined the next steps in the process to strengthen the system. These include:
- Strengthening and restructuring the Global Forum's membership, mandate and decision making-powers.
- Establishing a Peer Review Group (PRG) tasked with developing the methodology and detailed terms of reference for in-depth monitoring and peer review of the implementation of the standards of transparency and exchange of information for tax purposes. This review process, which will take place in two phases will look at the regulatory and legal environment in each jurisdiction (phase 1) and its practical implementation (phase 2) as well as monitoring the legal instruments on exchange of information.
- Speeding up the process for concluding TIEAs through, among other methods, multilateral negotiations leading to simultaneous signature of bilateral agreements.
- Enhancing the capacities of developing countries.
(see OECD, Summary of Outcomes of the Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes Held in Mexico on 1-2 September 2009).
It therefore looks as if this shifting of the OECD's goalposts will be accompanied by an in-depth examination of the regulatory and transparency regimes of OFCs. As Peter Cockhill highlights, "The white and grey categorisation is a crude but easily understood demarcation. By the time of the next G20 summit, several grey-listed jurisdictions, including the Cayman Islands, will be white-listed. After this, we may begin to see a wider range of differentiators that will supersede TIEAs as a means of assessing the transparency of OFCs". Paul Gully-Hart identifies an appraisal of the different rules for identifying beneficial ownership as one of the future areas that the OECD may wish to focus on. Daniel Daeniker believes that the OECD ought to factor in accessibility to a country's court system and regulators in its future assessments.
The importance of an effective tax information exchange mechanism could also impact on other areas where supranational regulation is currently being considered. Among its many controversial provisions, the EU's draft Directive on Alternative Investment Fund Managers (AIFM Directive) establishes that an Alternative Investment Fund Manager (AIFM) wishing to market a non-EU fund in the EU may only do so if the country of origin has signed an agreement with the relevant EU member state(s) agreeing to an effective exchange of information in tax matters. Also, in its current form, the Draft Directive establishes that a non-EU AIFM wanting to market within the EU must apply for authorisation by a member state, which could be rejected in the absence of tax and co-operation agreements in place with the relevant member state's regulators (see
Martha McQuay, PLC Magazine, Legal Update, AIFM Directive: alternative reality for alternative investment).
Even in the absence of specific international or domestic measures, the adverse reputational impact of exclusion from the white list could be severe for some jurisdictions. As Steven Rees Davies points out, "The real problem with being included on a grey list is that people, including clients, may potentially misinterpret the implications of this categorisation". Matthew Feargrieve adds, "Fund managers are facing increasing pressure from their target investor base to ensure that their funds are domiciled in what is perceived to be a reputable offshore jurisdiction. This makes some managers very sensitive to adverse political statements or negative media coverage of OFCs".
In any event, it is clear that one of the by-products of the current economic crisis is going to be an unprecedented monitoring of tax-efficient OFCs. As Peter Tarn points out, pre-global crisis initiatives involving OFCs focused on discrete, marginal practices such as tax evasion, money laundering and terrorist financing, none of which are present in reputable OFCs. By way of contrast, the current crisis has resulted in substantial budget deficits in the world's leading economies, which have in turn caused a gold rush to collect tax revenues wherever they may be located. Against this background, some policymakers have shifted to a position that views any attempts to lower tax liabilities as dishonest and that is the most worrying aspect of these recent regulatory developments; the politicised depiction of tax avoidance as an inherently illegitimate activity.
[h=2]Unfair use of the term "tax havens"?[/h] It is widely accepted that the group of jurisdictions commonly referred to as "tax havens" is so diverse that the term lacks a clear, universally-accepted definition. As
Ogier's Roger Le Tissier points out, "The absence of a globally accepted definition is compounded by policymakers' pejorative use of the [term] when referring to certain tax-efficient locations".
Also, the issue is further complicated by the fact that several jurisdictions, such as the US States of Nevada and Delaware, whose tax and regulatory landscapes are more lenient and often more opaque than those of sophisticated OFCs, are regularly excluded from official lists of tax-havens.
As a result, this article only uses the term "tax haven" when citing external sources.
[h=2]OECD Internationally Agreed Tax Standard[/h] The Organisation for Economic Co-operation and Development (OECD) in co-operation with major non-OECD offshore jurisdictions developed the Internationally Agreed Tax Standard (International Standard), which provides for:
- The exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.
- Extensive safeguards to protect the confidentiality of the information exchanged.
The G20 Finance Ministers endorsed the International Standard at their Berlin Meeting in 2004, as did the UN Committee of Experts on International Cooperation in Tax Matters in October 2008.
[h=2]Box: The EU-Savings Directive[/h] The multilateral, automatic system of information exchange established by Council Directive 2003/48/EC (Savings Directive) is often cited as a more effective mechanism than the one provided by OECD instruments.
The Savings Directive establishes that a person (such as an issuer or paying agent) paying interest to an individual resident in another member state must either:
- Give details as to the identity of the recipient to the tax authorities of its own member state (which must then share that information with the tax authorities of the recipient's state of residence) or;
- Operate a transitional withholding tax system due to expire on 1 July 2011 (see PLC Tax, Legal Update, Proposed changes to the EU Savings Directive).
In addition to EU member states, Andorra, Liechtenstein, San Marino, Monaco and Switzerland have signed multilateral taxation agreements with the EU. Anguilla, Aruba, the BVI, the Cayman Islands, Guernsey, Jersey, the Isle of Man, Montserrat, Netherlands Antilles and the Turks and Caicos have also signed similar bilateral agreements with EU members.
Belgium, Luxembourg and Austria and several OFCs covered by the Directive have so far chosen the withholding tax option. Richard Thomas underscores Jersey's commitment to moving in line with developments in the marketplace. "If automatic exchange becomes the norm, we will implement it," he claims. "Our current exercise of the withholding tax option mirrors the approach taken by some EU member states. When such an option expires, we will review our position".
The Isle of Man announced its intention to move towards full automatic exchange of information from 1 July 2011 (see
PLC Private Client, Legal Update, Isle of Man and Jersey progress on tax transparency welcomed by UK).
Despite some loopholes, the Directive's effectiveness "within the limits set by its scope" has been recognised. However, Peter Tarn maintains that the Directive has had a fairly limited impact in offshore corporate domicile hubs, [such as the BVI], given its focus on individual savings income and that "the burdens of compliance may outweigh the revenues raised" in some jurisdictions.
Bermuda is not covered by the Savings Directive and has even created a new investment vehicle, the Bermuda Exempted Scheme, which provides for a category of mutual fund exempt from the Savings Directive requirements, even when the paying agents are located in a country subject to it. According to Steven Rees Davies, while automatic information exchange may be convenient within the EU's ambit, "It would be impractical and unduly burdensome to implement this system on a global level. The Directive raises a raft of complications ranging from implementation costs to constitutionally-protected right to privacy considerations".
[h=2]Table: OECD Progress Report[/h] [TABLE=class: Table colgroupTable, border: 1, cellpadding: 5, cellspacing: 0]
[TR]
[TD]
[/TD]
[TD]
2 April 2009
[/TD]
[TD]
16 September 2009
[/TD]
[/TR]
[TR]
[TD]
White list
[/TD]
[TD]
Argentina
Australia
Barbados
Canada
China
Cyprus
Czech Republic
Denmark
Finland
France
Germany
Greece
Guernsey
Hungary
Iceland
Ireland
Isle of Man
Italy
Japan
Jersey
Korea
Malta
Mauritius
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Russian Federation
Seychelles
Slovak Republic
South Africa
Spain
Sweden
Turkey
United Arab Emirates
United Kingdom
United States
US Virgin Islands
[/TD]
[TD]
Argentina
Aruba
Australia
Bahrain
Barbados
Belgium
Bermuda
British Virgin Islands
Canada
Cayman Islands
China
Cyprus
Czech Republic
Denmark
Finland
France
Germany
Greece
Guernsey
Hungary
Iceland
Ireland
Isle of Man
Italy
Japan
Jersey
Korea
Luxembourg
Malta
Mauritius
Mexico
Netherlands
Neth. Antilles
New Zealand
Norway
Poland
Portugal
Russian Federation Seychelles
Slovak Republic
South Africa
Spain
Sweden
Turkey
United Arab Emirates
United Kingdom
United States
US Virgin Islands
[/TD]
[/TR]
[TR]
[TD]
Grey list (Tax Havens)
[/TD]
[TD]
Andorra
Anguilla
Antigua and Barbuda
Aruba
Bahamas
Bahrain
Belize
Bermuda
British Virgin Islands
Cayman Islands
Cook Islands
Dominica
Gibraltar
Grenada
Liberia
Liechtenstein
Marshall Islands
Monaco
Montserrat
Nauru
Neth. Antilles
Niue
Panama
St Kitts and Nevis
St Lucia
St Vincent & Grenadines
Samoa
San Marino
Turks and Caicos Islands
Vanuatu
[/TD]
[TD]
Andorra
Anguilla
Antigua and Barbuda
Bahamas
Belize
Cook Islands
Dominica
Gibraltar
Grenada
Liberia
Liechtenstein
Marshall Islands
Monaco
Montserrat
Nauru
Niue
Panama
St Kitts and Nevis
St Lucia
St Vincent and the Grenadines
Samoa
San Marino
Turks and Caicos Islands
Vanuatu
[/TD]
[/TR]
[TR]
[TD]
Grey list (Other Financial Centres)
[/TD]
[TD]
Austria
Belgium
Brunei
Chile
Guatemala
Luxembourg
Singapore
Switzerland
[/TD]
[TD]
Austria
Brunei
Chile
Costa Rica
Guatemala
Malaysia
Philippines
Singapore
Switzerland
Uruguay
[/TD]
[/TR]
[TR]
[TD]
Black list
[/TD]
[TD]
Costa Rica
Malaysia (Labuan)
Philippines
Uruguay
[/TD]
[TD]
[/TD]
[/TR]
[/TABLE]
Source: http://www.oecd.org/dataoecd/38/14/42497950.pdf
