Stigmatization as a ‘tax haven’ or an ‘un-cooperative’ jurisdiction these days requires the presence of two legislative and regulatory deficiencies:
(1) lack of effective exchange of information, and
(ii) lack of transparency.
The European Commission (EC) has now revisited the discredited work of the OECD on Harmful Tax Competition and added two other ‘confirming’ features of ‘un-cooperative’ jurisdictions or ‘tax havens:
(3) no requirement for substantial activities.
(4) the existence of preferential tax treatment to non-residents in order to attract investment from other countries.
According to the Communication from the EC to the European Parliament and Council (the Communiqué) released yesterday ‘tax havens’
“therefore compete unfairly and make it difficult for ‘non’ tax havens to collect a fair amount of taxation from their residents.”
It should, because it is the precisely the same rhetoric the OECD used in an attempt to apply disciplines reinforced by collective sanction to countries who use taxation as a means of competitive advantage.
Recognising that some of their own members also use tax to as a tool of economic development, initially the OECD sought to distinguish EU-based tax friendly countries from so-called ‘tax havens’ by referring to them rather benignly as ‘preferential countries.’
This was promptly abandoned when the underlying hypocrisy of the double standard was exposed.
This latest iteration of the OECD’s work argues that ‘un-cooperative’ jurisdictions “are able to finance their pubic services with no or nominal income taxes and offer themselves as places to be used by non-residents to escape taxation in their country of residence”
The EC then draws the conclusion that these countries “therefore compete unfairly and make it difficult for ‘non’ tax havens to collect a fair amount of taxation from their residents.”
The EC is an observer at the OECD Global Forum on Transparency and Tax Information Exchange (the Forum) where 108 countries are working towards the practical application of norms to improve bilateral cooperation in the exchange of taxpayer information, including data held by banks and also to remove ‘secrecy’ as a means of competitive advantage in the cross-border supply of financial services.
As an observer whose members are also represented in the Forum, that the Commission should have determined that an internal rule found in its Code of Conduct regulating the internal affairs of the regional economic bloc, namely, fair tax competition, should find equal application to a group of sovereign states, absent a multinational agreement on the matter, is incredible.
That the Commission believes that such a principle should be promoted to Third States is equally astounding given that the principle of ‘fair tax competition’ operates in the context where there are significantly relaxed barriers to the import and export of goods and services across the 27 members of the European Union.
This not only demonstrates the ‘quid pro quo’ that is associated with the adherence to so-called ‘fair tax competition’ but it demonstrates the insular, self-serving needs of the Commission that it would seek to divorce matters of trade from tax and brand countries with whom they have no preferential trading relation or no shared institutional bodies as ‘tax havens’; worthy of censure.
Lest we forget, taxation is an incident of sovereignty and it remains the exclusive purview of independent states to organise their taxation systems in a manner of their own design. If such a system is more conducive to efficiencies and economies of scale for international enterprise it certainly does not warrant condemnation as ‘unfair’ by countries whose interest is only in their own collective development.
If this sounds familiar that is because it is. The OECD tried this approach a decade earlier and abandoned it when ‘tax competition’ was removed from the list of ‘tax haven’ characteristics largely because it found no support from the United States.
Fairness Not a Barometer
Have times so changed that the EC thinks that ‘fairness’ can act as an international barometer in matters of taxation system design especially given the inherent inequalities of the tax systems within the EU grouping and its institutional bias towards its own constituents – an expected and legitimate feature of an economic union?
The EC further asserts that tax competition damages the interest of EU taxpayers because of additional compliance costs due to the uncoorindated actions of members states to protect their tax bases; and tax increases required to make up for short-falls in eroded tax bases .
EC Recommended Policy Responses
In response the EC urges member states to adopt a set of policy responses which could include a mixture of defensive measures or sanctions against countries which practice unfair tax competition and incentives for those countries to cease such practices. The focus will be on coordinated measures in order to create a fair and sound tax environment in the EU for its Member States, tax payers and investors.
For those countries who initially questioned how the revised mandate of the Forum would differ from the one that was created out of the 1998 OECD Harmful Taxation Report, this Communiqué from the EC whose members are also members of the OECD, the Forum and the G-20, suggests that their initial scepticism was well-founded.