Why BREXIT is Bad News for OFCs

brexit

Tax diplomacy just got more complicated for Offshore Financial Centres (OFCs) following the success of the BREXIT campaign. Coupled with the prospect of another election after Prime Minister Cameron’s decision to step down in October, there hasn’t been much by way of ‘good news’ for OFCs in the last few hours.

Here’s why BREXIT threatens the orderly conduct of tax diplomacy.

The City of London is based on an economic model not far removed from that of a number of OFCs in how they promote fairness; support trade and investment; and facilitate access to the global financial system by ordinary people though various financial products such as those associated with the pensions and retirement plans.

As such, while the the EU’s  tone in matters of international tax reform, transparency and exchange of information tends towards being excessive, unfair, unreasonable and sometimes not well thought out, with Britain ‘in’ there is a well-regarded, effective voice of reasonableness that sometimes is lacking in the utterances of the European Commission. In fact, one colleague mentioned to me that one should never jump to the conclusion that the edicts of the EC necessarily reflect the view of the British government, although, understandably, such commentary is not front page news.

As a country heavily reliant on the ‘onshore/offshore’ model, Britain’s response to various EC directives must be measured. On one hand, it must be seen as acting according to the perceived ‘common good’ of the Union; while at the same time,  it must be cognisant of the reality that some of the rules developed through the EC undermine the threats to the competitiveness of the City of London, and by extension, OFCs.

While this has in some aspects created an uneasy alliance between Britain and the EU,  achieving  a balance between seemingly competing views,  is an imperative for non-EU members who are OFCs, to have Britain remain part of the decision-making process set out in EU tax diplomacy. This is especially important in cases where Europe’s purported law-making goes beyond the work being developed by a larger, more representative cross section of countries, as is the case with respect to the work of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (OECD Global Forum) .

While it is hard to argue that the present norms developed by the OECD havebe conceptualised as a result of a regional, and  not international consensus, the fact remains that, unlike the EU process, as evidenced by the OECD Global Forum, and the widening BEPS dialogue; international tax law making and implementation is becoming more inclusive. So far, there is no indication that the EC has  an interest in working on the basis of ‘a level playing’ field in the area of tax. This is in spite of the EC’s insistence on pronouncing edicts on matters that are understood to be within the exclusive competence of non-EU jurisdictions.

While the inclusive framework of the OECD Global Forum is still a work in progress and has not met the mark in a number of areas, in its practice there is now a recognition that the legitimacy of the organisation and its work demands greater inclusiveness. Not yet bearing all of the attributes and the ‘ checks and balances’ associated with other areas of state action, the fact that 134 countries are part of the OECD Global Forum does point to some effort on the part of the OECD to improve its own transparency in standard-setting .

EC Blacklist

OFCs  who are not part of the EU or the OECD do well to wonder why the EC thought it useful to develop its own modalities for reforming the international tax system, particularly the external aspects thereof which affect international trade and investment. It would seem curious that although part of the ‘inclusive’ framework of the OECD Global Forum F of which its members are a part, and the EU is an observer, this regional body would  step out of the ‘rule-making ‘consensus by crafting more ambitious arrangements without referring the 134 members of the global body. It has been suggested that it is hard to dismiss that this is a power battle between the OECD and the EC for primacy in this area of diplomacy , especially when such matters affect the Union.

To illustrate the point certain EC ‘missteps’ in this area were seized upon by the OECD Global Forum Secretariat and the OECD  last year when the EC published a tax haven blacklist ignoring the competence of the OECD GF in this area. In two letters which were widely circulated , the EC was reminded that the authouritative voice in these matters; and the body specifically created to define, apply and monitor the implementation of the rules is the Global Forum. That the information and methodology of the EC provided some insight into the lack of its experience in dealing with tax matters on a global scale illustrates further the danger in stepping outside the ‘inclusive’ model of international tax diplomacy. With its lack of interest in the EC project and its policy of eschewing blacklisting as an anti-competitive tool, or as a means of compelling compliance , Britain has repeated distanced itself from such measures as a member of the EU. Rightly so I would suggest, as the information used by the EC last year did not meet the test of accuracy  needed when ‘defensive measures’ by one group of states  against another are contemplated.

BEPS+++

Concerning the  deliberations within the EC about their hugely ambitious tax reform agenda which goes beyond the increasingly multilateralised  Base Erosion and Profits Shifting (BEPS)  agenda, it is prudent to be aware of some recent developments in the EC agenda set out in the in the European Anti-Tax Avoidance Directive of the European Union (EU) Finance Ministers. Much to the ire of OXFAM, who complained that   European Union finance ministers have watered down proposals to tackle tax avoidance by multinationals who use ‘sweetheart deals’ and ‘tax havens’ to avoid paying taxes in member states, together these changes are regarded as a welcomed more workable compromise. This is one example of  a re-thinking of the EC good tax governance agenda which includes amendments to the administrative cooperation directive to implement country-by-country (CbC) reporting; 2) A draft anti-tax avoidance directive; 3) Recommendations to EU member states on how to reinforce their tax treaties in an EU-law compliant manner; and 4) A communication on an external strategy for effective taxation that presents a stronger and more coherent EU approach to working with third countries on tax good governance matters.

In a recent announcement by the International Chamber of Commerce, who lauded the removal of one of the EC’s BEPS+++ initiatives commonly refereed to as the ‘switch-over’clause which in promoting double taxation has been viewed as both unnecessary and unfair to tax payers. This EC ‘value added’ harps back to the notion of harmful tax competition in  that it proposed a formula  which would determine the tax treatment of dividends and capital gains on the sale of a qualifying shareholding.

The compromise reached means that this measure is no longer part of the EU package that every member EU state is expected to adopt whereby dividends and capital gains from low-taxed companies should not be exempt, instead should be taxable, with a tax credit granted for any overseas tax actually paid. The proposal sets the definition of ‘low tax’ as a statutory tax rate that is lower than 40% of the tax rate in the relevant member state. This is an important outcome against the measures which serve to characterise tax competition as ‘harmful’ based on tax rate thresholds set by entities other than national legislators.

The NGO response

Europe’s retreat from its ambitious and duplicitous architecture for international tax reform has rightly challenged  the pace and content  of  certain NGO promoted tax-reform /development initiatives which have influenced EC action. In fact, the response by OXFAM to the abandonment of the ‘switch-over’ rule illustrates the point that the presence of Britain in the EU tax reform work has supported non-EU members who have no direct access to EU decision-making and which affects the sustainable development of their OFCs and their countries as a whole. The source of the NGO lament is that because of the self interest of some EU members, like Britain, whose IFC benefits from trade in  financial and business services that promote tax fairness  at the tax payer level, the EU tax avoidance programme has been watered down to the detriment of the global financial system. To further illustrate the need for tax reform OXFAM and others continue to promote the unsubstantiated link between tax avoidance and persistent under-development in Africa.

Tax Fairness

Britain has not always gotten its international tax reform agenda right ,as in the case of its ‘public registers of beneficial owners ‘ which does not sit on all fours with the right to privacy where there is no evidence of illegal activity; and the basis for such an assumption is grounded in flawed information because the collection of this data is not now subject to the verification exercises that are indispensable to defend against arguments of unfairness.

One thing is clear.

Putting that aside for the moment, it is still the case tht Britain outside of the EU leaves non-EU, OFC  jurisdictions  vulnerable to the often myopic, unsophisticated view of the world that seems to inform elements of the EU’s  BEPS+++ tax agenda. While the input of the EC in this area of diplomacy must be valued to the extent that the EU is an important trading partner and source of investment, OFCs might tend to favour that Britain ‘remain’ because its presence at the rule-making table in Europe is the closest non-EU OFCs could expect tot have in promoting ‘a level playing field’ in the EU tax reform agenda.

 

 

 

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