Currently, six Pacific Island nations are listed on the OECD 'grey' list. This means that whilst the OECD considers them 'tax havens', they have substantially committed to implementing the OECD International Tax Standard.
These countries are:
a) the Cook Islands;
b) the Independent State of Samoa;
c) the Republic of Vanuatu;
d) the Republic of Nauru;
e) Niue; and
f) the Republic of the Marshall Islands, (together, the
Grey List Jurisdictions).
Prior to being placed on the grey list, the Marshall Islands, Nauru and Vanuatu were on the OECD black list. This was due to their failure to give requisite commitments to the implementation of international tax standards by the OECD deadline of early 2002. The Cook Islands, Niue and Samoa made their commitments ahead of the deadline, resulting in their inclusion on the grey list. Once Nauru and Vanuatu made their commitments in 2003 and the Marshall Islands in 2007, they were removed from the black list and positioned onto the grey list.
The Cook Islands, Samoa and Vanuatu currently have active
offshore financial centres, allowing various entities to be
established in these jurisdictions, which are prohibited from
carrying on business in the jurisdiction and do not pay any taxes
in the jurisdiction. The legislation governing these entities,
however, contains strict secrecy provisions meaning that details of
the beneficial owners, the transactions engaged in and the general
affairs of the entity cannot be identified. Information regarding
the ownership of these entities is not publicly available and
consent must be obtained from a director or member of such an
entity to conduct a search of such an entity. It is generally these
secrecy provisions that the OECD and the Major Players wish to
circumvent through the implementation of mechanisms for
transparency and exchange of information, for example through Tax
Information Exchange Agreements (TIEAs).
Niue, Nauru and the Marshall Islands have all largely closed down
their offshore financial centres. The demise of these offshore
financial centres tangibly highlights the impact the tightening of
regulations, the associated "stigma" of being labelled a
tax haven and the effect that increased commitments required of
jurisdictions considered to be tax havens is having on some of the
Pacific Island jurisdictions.
Implications for the Pacific Islands
The difficulty that the Pacific Island Grey List Jurisdictions
currently face is that in order to move to the white list and
beyond the tax haven label, they must begin entering into TIEAs. To
date, neither Vanuatu, Samoa, Nauru or Niue has entered into any
TIEA. The Cook Islands and the Marshall Islands have entered into
one TIEA each (1).
Unlike other former tax haven nations such as the Isle of Man,
Jersey, the Cayman Islands and the British Virgin Islands (2), the
Pacific Island jurisdictions do not have long-established economic
centres, nor do they necessarily have the political backing that
the aforementioned countries do. It remains to be seen whether the
Pacific Island jurisdictions will have the diplomatic force and
clout to engage with enough white list nations in order to meet the
required number of TIEAs and be relieved of their tax haven tag. It
is also arguable that some jurisdictions may wish to hang onto the
"perceived" economic benefits that their offshore
financial industry in its current form affords them. (3)
The Pacific Islands have in the past stepped up to the plate when
required by the international community. As an example, most
Pacific Island jurisdictions now have anti-money laundering and
counter-terrorist financing regimes in place. These laws apply to
both local and offshore entities and to the extent provided for,
override any secrecy provisions that exist in the
jurisdiction.
Additionally, the Cook Islands, Samoa and Vanuatu have all
successfully cleaned up their international banking industries
through the amendment of legislation to require international banks
to maintain a physical presence in the jurisdiction.
An avenue that may be more accessible for the Pacific Island Grey
List Jurisdictions is the example set by the Cayman Islands in
adopting unilateral legislation permitting the exchange of
information. This may be a more time and cost effective way for the
Pacific Island Grey List Jurisdictions to meet the OECD
International Tax Standard.
As mentioned previously, the OECD has stated that a good indication
of progress for the purposes of being included on the white list,
is the entering into of 12 TIEAs. Notably, all white list countries
have thus far entered into the requisite 12 TIEAs. The OECD,
however, has also stated that the entry into 12 TIEAs is not the
"exclusive" indicator of progress.
As at August 14 2009, the Cayman Islands had entered into the
requisite number of TIEAs and became a white list jurisdiction. In
addition to the TIEAs, however, the Cayman Islands has enacted
legislation that allows it to exchange information unilaterally,
identifying 12 countries with which it is prepared to exchange such
information. (4) The OECD is currently reviewing this legislation
and whether this method of information exchange adequately
addresses the OECD International Tax Standard. (5)
If this unilateral legislation is deemed effective by the OECD, it
would almost certainly be a more desirable method, in terms of time
and cost, for smaller and less politically heavy nations such as
the Pacific Island Grey List jurisdictions, to satisfy the OECD of
their commitment to information transparency. This in turn may
allow such nations to establish themselves as
"legitimate" nations offering tax incentives to
non-residents without being associated with the stigma of being a
tax haven.
The Grey List Jurisdictions in detail
We examine each of the Grey List Jurisdictions more closely
below.
Cook Islands
The following entities are permitted to be established in the Cook
Islands: international companies, international partnerships,
international banks and limited liability companies. (6) Strict
secrecy provisions contained in the legislation governing these
entities prohibit any person from disclosing information about an
entity including the beneficial owners, management, account and
transaction information, assets held and the general affairs of the
entity unless the disclosure falls within an exception. Disclosure
is an offence under the legislation.
Judicial Consideration of the Secrecy
Provisions
In 1995, the High Court of the Cook Islands upheld and enforced the
secrecy provisions contained in the International Companies Act
1981-1982 in the case of European Pacific Group Limited,
European Pacific Banking Corporation and European Pacific Trust
Company (Cook Islands) Ltd v KPMG Peat Marwick and Ors. (7)
This case arose during a New Zealand Commission of Inquiry
(Commission), commonly referred to as the
"Winebox Inquiry", during which certain transactions
undertaken by prominent New Zealand businesses in the Cook Islands
were investigated to determine whether a breach of New
Zealand's tax laws had occurred.
The Commission issued notices to produce documents on the New
Zealand office of KPMG in respect of documents located in the Cook
Islands office of KPMG. KPMG considered itself bound to comply with
the notice, however felt placed in an impossible situation due to
the secrecy provisions and the threat of prosecution if these
provisions were breached. The Plaintiffs therefore sought an
injunction to restrain KMPG from disclosing the information.
The High Court of the Cook Islands granted the injunction as the
disclosure of information would amount to a breach of Cook Islands
law and the disclosure did not fall within any of the permitted
exceptions to the secrecy provisions. Quilliam CJ also relied on
the following observation by Sir Allan Huggins in F.D.C. Co.
Ltd and others v Chase Manhattan Bank NA:
"...we ought not to issue an injunction which would place
the Bank in the appalling situation that, if it obeyed the
injunction, it would be in breach of orders of the courts of its
own country..."
In relation to the offshore industry, Quilliam CJ said
"the legislation, which has enabled the industry to
operate in the Cook Islands is clear and indeed, uncompromising in
its terms, and is legislation which Parliament was competent to
pass. "
Recent Developments
TIEA with New Zealand
In July 2009, the Cook Islands entered into its first TIEA with New
Zealand, setting a precedent for the Pacific Islands and providing
evidence of its commitment to meet the OECD International Tax
Standard.
The TIEA provides for full exchange of information in both criminal
and civil tax matters and builds on legislation in both
jurisdictions which already provides for mutual assistance in
criminal matters.
In particular, the Cook Islands and New Zealand Governments have
agreed to provide assistance through the exchange of information
including information held by financial institutions, information
regarding the ownership of companies, partnerships, trusts and
foundations and ownership information in relation to persons in the
ownership chain including settlors, beneficiaries and
trustees.
The Cook Islands and New Zealand governments have also signed an
agreement on the allocation of taxing rights with respect to
certain income of individuals and to establish a mutual agreement
procedure in respect of transfer pricing adjustments.
The Cook Islands Offshore Financial Services
Industry
The Cook Islands has also recently enacted the Financial Services
Development Act 2009. This legislation provides for the
establishment of a board which includes representation from
Government, trust companies and international banking and insurance
representatives ("Board"). The primary
objective of the Board is to encourage, promote and develop the
Cook Islands offshore financial services industry so as to achieve
sustained growth in a manner which is economically beneficial,
socially responsible and reputable. It is also expected that the
Board will assist in improving regulatory standards of the Cook
Islands, for example through the entry into TIEAs.
The Act demonstrates that the Cook Islands remains committed to
maintaining its offshore financial centre, whilst ensuring that it
meets international standards and is used legitimately.
Independent State of Samoa
The following entities are permitted to be established in Samoa:
international companies, international partnerships, international
trusts, international insurance companies and international banks.
(8)
Strict secrecy provisions contained in the legislation governing
these entities generally prohibit any person from disclosing
information about an entity (and, in the case of international
companies, "threatening" to disclose) information about
an entity including the beneficial ownership, management, assets
held and the general business affairs of the entity. Disclosure is
an offence under the legislation. Some exceptions to the secrecy
provisions, including the International Companies Act,
permit disclosure, for example:
a) by consent;
b) in the course of carrying on the business of the company;
and
c) to ensure compliance with the Money Laundering Prevention
Act 2007 and the Prevention and Suppression of Terrorism
Act 2002.
However the International Companies Act and the
International Partnership and Limited Partnership Act
expressly prohibit the divulging of information in relation to a
foreign tax matter. For example, one exception in the
International Companies Act states:
"... provided that the phrase "carrying on the
business of the company" shall not include the compliance with
any demand or request for information by any foreign government or
any court or tribunal of any country other than Samoa where the
divulging of the information will, or is likely to, result in the
payment of any tax, other penalty or any fine by the
company;..."
Recent Developments
Samoa is yet to enter into any TIEAs.
Recent relevant changes to legislation governing the offshore
financial industry include introducing stricter controls on bearer
shares, which will assist in ensuring that the owners of shares in
international companies are identifiable. Under the
International Companies Amendment Act 2008 all holders of
bearer shares in international companies must lodge their bearer
shares with the trustee company whose office provides the
registered office for the said international company and the bearer
shares must not be released by the trustee company except for the
purpose of cancelling it or converting it into an ordinary
debenture or registered share.
The Republic of Vanuatu
The following entities are permitted to be established in Vanuatu:
international companies, exempted companies, international banks
and insurance companies. (9) Again one key feature of the offshore
finance legislation is the strict secrecy provisions. The secrecy
provisions generally prohibit any person from disclosing (and, in
the case of International Companies, "threatening" to
divulge) information about an entity including the beneficial
owners, management, assets held and the general affairs of the
entity unless an exception applies. Disclosure is an offence under
the legislation.
Another feature of the International Companies Act which
reduces transparency is the ability of companies to issue of bearer
shares (the beneficial ownership of which is notoriously difficult
to trace), although an international company may
choose to appoint a custodian to hold and register any bearer
shares issued in the company. (10)
Further, there is no income tax payable in Vanuatu, with the
Government relying on value added tax, stamp duty and other
indirect taxes for its revenue.
Current Developments
The ATO issued a Taxpayer Alert in May 2008 warning Australian
taxpayers that it is closely scrutinising high risk arrangements
initiated by Vanuatu promoters under Project Wickenby. (11)
Despite Vanuatu's commitment to the OECD to negotiate
agreements for civil tax matters (to become effective from 1
January 2006) (12) and comments from VFSC in May 2008 that it wants
to change its tax haven status and move away from "financial
secrecy business" (13) by the end of 2008, Vanuatu has yet to
implement any TIEAs or legislative changes to the secrecy
provisions.
Nevertheless the Australian Government has recently circumvented
Vanuatu's secrecy provisions through the use of the mutual
assistance legislation and this may be a tactic increasingly used
by taxation authorities.
In the case of Partners of PKF Chartered Accountants v Supreme
Court of the Republic of Vanuatu; Batty v Supreme Court of the
Republic of Vanuatu; Moores Rowland (a Firm) v Attorney
General (14), the applicants alleged that search warrants
issued by the Supreme Court of Vanuatu were invalid because (among
other things) they failed to consider the secrecy requirements of
the International Companies Act and the Trust
Companies Act. The Supreme Court of Vanuatu rejected this
argument on the basis that neither of the secrecy provisions relied
upon were intended to prevent the divulging of information
required by a court order of Vanuatu or to fetter
the obtaining of information about serious offences under the
Mutual Assistance in Criminal Matters Act [Cap
285].
Interestingly in this case, the validity of a warrant to obtain
account information in relation to an Australian tax offence was
upheld because, amongst other things, the conduct was deemed to be
a "serious offence" (15) in Vanuatu under the mutual
assistance legislation. The applicant argued that the definition of
serious offence also invokes the double criminality rule (and since
Vanuatu has no income tax legislation) the double criminality rule
could not be satisfied. However the court rejected this
submission:
"It may have had substance if the alleged offences to
which the Australian investigation relates had been offences
created by tax legislation relating to the technical requirements
of the tax legislation. But that is not the case. Rather, the
offences under investigation are general offences involving the
obtaining of a pecuniary benefit from the Government of Australia
by fraudulent conduct, conspiracy to perpetrate such fraud, or
money laundering. These are offences under the general criminal
statutes of the Commonwealth of Australia, which
are in substance the same as the equivalent offences
under the Penal Code Act 1981 [CAP 135] of
Vanuatu. (16)
However, we understand that the scope of the documents obtained
pursuant to the warrant is currently being contested by a recipient
of the warrant.
The Republic of Nauru
Throughout the late 1990s, Nauru sought to establish itself as an
offshore financial centre focusing on offshore banking. Cheap
banking licences meant that at its peak, Nauru boasted some 400
offshore banks. Unfortunately, this activity attracted large-scale
money-laundering activity and Nauru has stood accused of
facilitating the laundering of up to US$ 70 billion for the Russian
mafia during this time (17).
As a result, the FATF blacklisted Nauru in 2000, whilst the OECD
placed Nauru on its black list in 2002. These sanctions led Nauru
to revoke virtually all of its banking licences and to make further
commitments to providing greater transparency in respect of the
beneficial ownership of companies, partnerships and other legal
entities. Nauru was removed from the OECD black list in 2003 (and
placed on the grey list) and from the FATF black list in
2005.
Since then, Nauru has virtually ended all of its offshore financial
activities. International companies, banks or trusts are no longer
able to be established and the incorporation process for companies
is much more regulated.
Nauru still does not impose any personal or corporate income tax,
capital gains or withholding tax.
Nauru has not entered into any TIEA. Given that its offshore
financial activities have largely ended, the need for Nauru to
engage with other nations with respect to information sharing may
be somewhat diminished.
Niue
The Government of Niue enacted a series of laws in 1994 aimed at
establishing itself as an offshore financial centre. The
legislation permitted the licensing of offshore banks,
international business companies, development bonds, offshore
insurance, partnership and trustee companies (18). During this
time, approximately 3000 international business companies were
registered (19) as well as a small number of offshore banks.
Although Niue was never blacklisted by the OECD, it nonetheless
received international scrutiny for its activities. For example,
the US Department of the Treasury issued an advisory, warning
United States financial institutions to enhance their scrutiny of
transactions routed through Niue. (20)
As a result of this heightened international pressure, Niue shut
down its offshore financial industry. In 2006, it repealed the
International Business Companies Act 1994 and closed the
Niue International Business Companies Registry. All international
business companies registered in Niue were effectively dissolved.
(21) Further, Niue's offshore insurance and financial
legislation was also repealed in 2006. (22)
As with Nauru, Niue has not entered into any TIEA, but given that Niue has ended its offshore financial activities, the need for Niue to engage with other nations with respect to information sharing may somewhat be diminished.
The Republic of the Marshall Islands
The Republic of the Marshall Islands (RMI) is a
nation that might be said to have lost both coming and going at the
tax haven game.
Although the RMI for some years did indeed offer itself as a tax
haven jurisdiction, it never really got proficient at the game nor
did it particularly profit from it. The RMI's economy,
chronically small and weak, did not enjoy any boons that typically
benefit tax havens countries, such as thriving offshore banking and
lucrative employment for local accountants and lawyers. Indeed,
notwithstanding its tax haven status, the RMI developed no offshore
banking industry at all.
But unfortunately, the RMI dabbled at the game enough to earn an
unwanted reputation as an unsavoury tax haven.
Indeed, the RMI probably was never destined for success as a tax
haven, since it cannot stray far from the watchful eye of the US.
The RMI is a sovereign nation, but its sovereignty in international
matters is circumscribed under its Compact of Free Association with
the US. Pursuant to the Compact, the US has provided hundreds of
millions of dollars to the RMI, payments that fund the RMI
government and economy. That dependent relationship puts a natural
brake on RMI deviating too far afield with policies that negatively
impact the US.
But the RMI at least did start down the tax haven road. The RMI was
among 35 countries on the OECD's 2000 list of tax havens that
would be subject to sanctions if they failed to show definite signs
of improving their implementation of internationally approved tax
standards. The Marshall Islands failed to meet the 2001 OECD
deadline and accordingly was blacklisted by the OECD for being an
uncooperative tax haven. The RMI also made the 2000 FATF blacklist
of countries that FATF regarded as uncooperative with FATF's
anti-money laundering efforts.
The RMI seemed to get the message. The RMI was dropped from the
FATF list in 2001. In 2007, the OECD removed the RMI from its
uncooperative tax havens list, following the RMI's pledge to
implement programs to improve transparency and to cooperate in
exchanges of information in tax cases.
Since 2007, the RMI has been on the OECD grey list. It has to date
signed one TIEA with the US.
25 August 2009
Footnotes
(1)The Cook Islands with New Zealand, the Marshall
Islands with the USA.
(2) The Cayman Islands and the British Virgin Islands were included
on the white list in August 2009 after entering into the requisite
12 TIEAs.
(3) Jason Sharman in "South Pacific tax havens: From leaders
in the race to the bottom to laggards in the race to the top?"
(2005), Accounting Forum 29 page 317.
(4) St Kitts and Nevis have enacted similar legislation identifying
16 countries with which they are prepared to unilaterally exchange
information.
(5) "Overview of the OECD's Work on Countering
International Tax Evasion", OECD, 19 August 2009, page 8,
footnote 2, http://www.oecd.org/dataoecd/32/45/42356522.pdf
.
(6) These entities are primarily regulated by the Banking Act
2003, Trustee Companies Act 1981-1982,
International Companies Act 1981-1982, International
Trusts Act 1984, International Partnerships Act 1984
and Limited Liability Companies Act 2008.
(7) Quilliam CJ, Plaint No 86/95
(8) These entities are primarily regulated by the International
Companies Act 1988, Trustee Companies Act 1988,
International Partnership and Limited Partnership Act
1998, International Trusts Act 1988,
International Insurance Act 1988, International
Banking Act 2005 and International Mutual Funds Act
2008.
(9) These entities are primarily regulated by the International
Companies Act [Cap 222], International Banking Act [Cap
134], Insurance Act 2005 and Trust Companies Act
[Cap 69].
(10) Ibid, section 26 A.
(11) Taxpayer Alert 2008/8.
(12) S Molisa, Letter entitled, OECD Harmful Tax Initiative, dated
7 May 2003, http://www.oecd.org/dataoecd/61/28/2634587.pdf
(13) "Vanuatu to ditch Tax Haven", The
Australian, Anthony Klan, 6 May 2008.
(14) Partners of PKF Chartered Accountants v Supreme Court of
the Republic of Vanuatu; Batty v Supreme Court of the Republic of
Vanuatu; Moores Rowland (a Firm) v Attorney General [2008]
VUCA 15; Civil Appeal Case 15, 16 and 17 of 2008 (25 July
2008)
(15) An act or omission that, had it occurred in Vanuatu, would
have constituted an offence under the Mutual Assistance in
Criminal Matters Act for which the maximum penalty is
imprisonment for at least 12 months.
(16) See note 14 at paragraph 19.
(17) http://www.nytimes.com/2001/12/06/world/tiny-pacific-island-is-facing-money-laundering-sanctions.html
(18) Pacnews, 17 August 2004, http://www.accessmylibrary.com/coms2/summary_0286-4769086_ITM
(19) US Department of the Treasury Financial Crimes Enforcement
Network, July 2000, Advisory: Issue 22 http://www.fincen.gov/news_room/rp/advisory/html/advis22.html
(20) ibid
(21) Government of Niue Crown Law Office, Niue Country Report,
December 2008 http://www.pilonsec.org/www/pilon/rwpattach.nsf/PublicbySrc/PILON+Niue+country+report+-+December+2008.PDF/$file/PILON+Niue+country+report+-+December+2008.PDF
(22) ibid
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
