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.


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


(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, .
(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,
(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.
(18) Pacnews, 17 August 2004,
(19) US Department of the Treasury Financial Crimes Enforcement Network, July 2000, Advisory: Issue 22
(20) ibid
(21) Government of Niue Crown Law Office, Niue Country Report, December 2008$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.