When is a tax haven not a tax haven? That rather depends on whether the location is described by the Secretariat of the OECD or a thinking person! To most people a tax haven is readily discernible but the OECD Secretariat in its recent report on "Towards Global Tax Co-Operation " 1 has decided to play fast and loose with analytical logic.

The stated objective of the report was to demonstrate taxation practices that cause undesired shifts of the world’s tax burden to less mobile economic bases such as labour, property and consumption. In other words, the report was to address a perceived abuse produced in the world’s economy by "mobile" financial service activities being seduced to inappropriate locations. I choose the word "inappropriate" with great care because we should always return to the purported definition of the purpose of the report and that was to look on a world wide basis to ensure the so called fair distribution of the tax burden to all sectors of the economy.

Do how does the OECD set out to do this. (Remembering it is a completely unbiased and scientific organisation!) It does this by not looking a major trends in the whole of the world’s economy but by focusing only on "harmful tax" practices. In identifying these harmful tax practices, it specifies five factors to be taken into account when assessing where most of these harmful practices are located:

1 The regime imposes low or no tax on the taxable income

2 The regime is ring fenced from the domestic economy

3 The regime lacks transparency

4 There is no effective exchange of information and the jurisdiction has a significant untaxed offshore financial/other services sector relative to its overall economy

Voilà, we have a technical definition, which with pinpoint accuracy will exclude OECD members, whilst nicely snapping up all the pesky offshore jurisdictions. The sheer idea that a world wide economic organisation interested in global trends can achieve more by concentrating on the activities in, say, 40 small islands, whilst at the same time ignoring exactly the same type of activity in major counties such as Switzerland, UK and USA, is mind boggling to anybody who has an ounce of logic in their body.

Of course, anybody analysing the OECD’s definition of the locations to be pursued because of their unfair activities will see that it is easy to escape the net. All we have to do is have a political union with, say, Saudi Arabia, which has a very high non-financial services element to its economy and, voilà the crucial element which defines tax havens vanishes.

In other words, it is not the activities themselves the OECD say are harmful but merely where they are located, as defined by an analysis of the local GDP. This is a startling new departure in the world of economics, which perhaps someone could foolishly describe as politically motivated science!

I also read with some amusement, the OECD’s Business and Industry Advisory Committee’s report2 on the original "Harmful Tax Competition" Report3. The Business and Industry Advisory Committee made powerful criticisms of the Harmful Tax Competition Report and basically stated that taxation is a cost to any multi-national business organisation, which they should not only be entitled but indeed are also under a duty to their shareholders to seek to mitigate. The Business and Industry Advisory Committee went ton to argue that tax competition is healthy and reduces waste, and that it forces government to forcible examine the ways they are spending public funds, and to efficiently allocate scare resources.

The most stinging criticism of the Business and Industry Advisory Committee was that the entire theme of the Harmful Tax Competition Report was that it ran counter to all notions of free and unrestricted cross border business activities, and if any, or all, of the recommendations made by the authors of the Harmful Tax Competition Report were implemented there would be a clear conflict with the concept of free trade and investment across national frontiers.

Suffice it to say that the Secretariat blithely ignored the cogent points made by the Business and Industry Advisory Committee, presumably at the whim of their political masters. Some scurrilous people have actually argued that the OECD Secretariat has ventured in where angels fear to tread because the organisation itself was rapidly running out of raison d’être. Due to the fact that such organisations as the World Trade Organisation ("WTO"), which of course operates on a worldwide basis, were taking away the OECD’s prime function.

The distinction, of course, between the WTO and the OECD is that the WTO is genuinely representative of al jurisdictions in the world, while the OECD is a rich man’s club, clearly politically motivated to "bash" small jurisdictions. However, all is not lost. In my view the market will always win. Owners of capital will inevitably seek to place their wealth where it yields the highest return. If the OECD Secretariat manage to carry out these threats all that would happen is that there will be a massive capital flow from the targeted jurisdictions to less developed and regulated jurisdictions in Central Europe, Latin America and the Middle East.

The really breath-taking part about the proposals is the sheer lack of business acumen possessed by its authors. If they knew anything about international trade and business they would see that it is positively not to the advantage of any of the OECD’s members to drive out large capital flows from the relatively well developed tax havens, where most of it resides, to jurisdictions that have no cultural, economic or political affinity with Europe or North America.

All the report can do, if implemented, is severely damage some small states that would look to the OECD to compensate them, whilst greatly benefiting some emergent countries on the peripheral of the world stage. This will and must happen because market forces will ensure that it does, if these proposals by the OECD were ever implemented in force.

As an informed observer – I await developments with interest.


1 Report to the 2000 Ministerial Council Meeting and Recommendations by the Committee of Fiscal Affairs - OECD Secretariat

2 A Business View on Tax Competition – OECD Business and Industry Advisory Committee

3 Harmful Tax Competion – An Emerging Golbal Issue – OECD Secretariat

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