8 International work on tax havens

8.1 Introduction

A number of international organisations work on issues related to the harmful effects of tax havens and similar damaging structures in other countries. None of these organisations have a mandate directed specifically at tax havens, which is one of the reasons why they view such jurisdictions from different perspectives. International collaboration in this area is aimed primarily at money laundering and at establishing tax treaties that include the right to obtain information from other states on specific tax matters.

From the perspective of developing countries, the Commission takes the view that work at the international level suffers from the following fundamental weaknesses:

• Developing countries are excluded from a number of the initiatives. For example, the work of the OECD and FATF.

• None of the initiatives are suited to overcoming the principal problems related to illicit financial flows – the lack of registration, automatic exchange of information on ownership, and insight into transfer pricing within companies.

• Full participation in the various fora and initiatives often calls for a level of expertise and capacity which many developing countries do not possess.

The declaration from the G20 meeting in April 2009 stated that proposals will be developed by the end of 2009 “to make it easier for developing countries to secure the benefits of a new cooperative tax environment”. While it is important per se that account was taken of the requirements that developing country have in this area, practical action to ensure that the goal of information access is met has yet to be seen.

Moreover, work at the international level depends on the voluntary participation of tax havens. By and large, the only pressure from other countries has involved categorising and criticising the tax havens. Such pressure has yielded certain results, including the establishment of rules and systems by the tax havens to regulate financial stability and money laundering and the establishment of treaties which provide for access to tax-related information. Additionally, some jurisdictions have chosen to levy taxes or to provide other countries with information through the work on the EU’s savings directive.

Nevertheless, this does nothing to alter the basic harmful structures in tax havens: the lack of registries where governments and beneficial owners can identify the owners of different forms of assets, and the lack of corporate accounting records which can be automatically accessed by the tax authorities of other countries. One can hardly claim that the progress achieved thus far has made it significantly more difficult to use tax havens to conceal funds or evade tax than has been the case in the past.

8.2 The IMF

The goal of the IMF is to promote monetary and financial stability through, in part, international cooperation. This has been the starting point for the organisation’s work in relation to tax havens.

The IMF uses the term “offshore financial centres” (OFCs). Its current work related to OFCs is primarily a continuation of a programme launched in 2000. At that time, the IMF’s executive board resolved that the organisation would invite the OFCs to an individual assessment of their rules and systems for financial regulation and stability, and for reporting statistics. This initiative was named the Offshore Financial Centre Assessment Programme. All 42 jurisdictions invited to participate accepted. Seventeen were not members of the IMF. A 2001 note to the IMF’s executive board 1 stated that the programme had contributed to many of the jurisdictions launching extensive work to upgrade their rules and systems since they had been invited to join the programme. These were the rules and systems which would be assessed later in the programme. Measures against money laundering were also included in the assessment in 2003. The assessment of systems in the jurisdictions was based on international standards developed by BIS 2 (banking inspection), IOSCO (securities trading), the IAIS (insurance regulation) and FATF (money laundering and financing of terrorism).

The OFC programme was incorporated in 2008 into the Financial Sector Assessment Programme (FSAP), which involves all IMF member countries. In that sense, it can be said that the IMF no longer has a programme directed specifically at tax havens. However, many OFCs are not members of the IMF, and it is unusual for the organisation to have programmes which includes non-members. Evaluations of the countries’ regulatory systems, measures to counter money laundering, etc., will continue to be made through the FSAP.

The IMF recently established the AML/CFT Trust Fund as a project to combat money laundering and the financing of terrorism, which includes reform efforts, training, support for implementation and research.

8.3 The World Bank

The World Bank has no special programme for combating the negative effects of tax havens.

However, it is pursuing the FSAP in partnership with the IMF. This programme is directed at all member countries plus OFCs.

The World Bank conducts the StAR initiative 3 together with the UNODC. See section 8.7 below.

Through the World Bank, Norway finances a research programme which will produce 15-20 special studies on various aspects of illicit financial flight flows.

8.4 The Financial Action Task Force (FATF)

FATF is an international organisation that was established by the G7 countries in 1989 to advise on policies for combating money laundering. It has produced the “40+9” recommendations for such action, which have become an international standard in the area. The recommendations have been revised over time. Nine related to financing terrorism were added to the original 40 in 2001. Thirty-two countries and two organisations (the European Commission and the Gulf Cooperation Council) are members. In addition, two countries have observer status.

As the name indicates, FATF is not intended to be a permanent organisation. Its present mandate expires in 2012.

FATF evaluates the implementation of its recommendations through its members. Reports from these assessments are publicly available providing the country concerned does not object. No country has fulfilled all 40+9 recommendations.

An initiative was launched by FATF in 1998 to identify countries which represented problem areas in the fight against money laundering. During 2000-01, 23 countries and jurisdictions were defined as “non-cooperative”. These countries were notified that certain measures would be taken against those which did not begin to cooperate by taking specified actions against money laundering. The proposed punitive measures involved intensified monitoring and reporting of transactions related to countries that continued to be non-cooperative. The countries categorised as non-cooperative have all strengthened their efforts against money laundering, and the last of them was removed from the list in 2006.

A particular problem is that FATF – because of opposition from tax havens and others – does not regard tax evasion as an illicit act which could form the basis for criminal charges of money laundering.

In its declaration after the London meeting in April 2009, the G20 stated that FATF should revise and strengthen its process for evaluating implementation of the recommendations by the jurisdictions, and report back to the G20 whether each country accepts and is implementing the recommendations.

Textbox 8.2 Efforts to combat money laundering – participation by tax havens

International collaboration against money laundering is pursued through a number of different bodies, including FATF, the IMF and The Egmont Group. A number of tax havens participate in some or all of these fora. In many cases, they have also implemented recommendations from FATF and others on regulations and systems to combat money laundering. The Commission takes the view that tax havens nevertheless represent one of the principle obstacles to combating money laundering.

When criminals receive the proceeds of a crime, they will eventually want to use this money for consumption or investment. Perhaps the most crucial stage in the fight against money laundering is the first persons to receive such funds, either as payment for a product, a service or a capital object, or in the form of a management assignment on behalf of the owners. One of the key elements in fighting money laundering is an obligation to report suspicious transactions. This obligation rests in most countries on bank staff as well as on employees in the rest of the financial industry and in a number of other sectors.

In practice, reporting a transaction which proves to involve money laundering means that the reporter loses a customer. Ignoring the reporter’s moral views, the choice between reporting or not will depend on balancing the risk of being caught for failing to report and the penalties that follow against the cost of losing the customer and other possible customers involved in money laundering. If one has systems well suited for concealing funds, they will attract money laundering. At the same time, such systems will often also make it difficult for the country’s own authorities to expose the money laundering and any breaches of the reporting obligation. The business people who manage such systems have, of course, weak economic incentives to report suspicious transactions.

Data on the number of reports concerning suspicious transactions submitted to the relevant authorities have been published in a number of jurisdictions. The number of these reports correlates to the number of inhabitants, but it should also reflect whether the country is a financial centre which manages substantial funds from abroad. In addition, it seems reasonable to assume that general attitudes towards and the quality of law enforcement should be significant in respect of the number of reports.

The figure below shows the number of reports per USD 1 billion in assets under management in the banking system. Such assets are intended to provide an indicator of the scale of financing activity registered in the jurisdiction. It might perhaps have been more appropriate to compare the number of reports with the number of customers and include the whole financial sector (including trusts and the like), but such data are not available.

The figure shows very substantial differences in reporting frequency between the various jurisdictions. There is a tendency for this frequency to be low in tax havens. Of the jurisdictions in the figure, the Commission regards the Cayman Islands, Switzerland, the Bahamas, Malta, Liechtenstein, Jersey, Guernsey, Mauritius, Bermuda and Panama as secrecy jurisdictions. The first eight of these have the lowest reporting frequency. Bermuda and Panama have reporting frequencies on a par with or higher than some of the open jurisdictions (India and Norway). A number of tax havens have fairly extensive inward direct investment, international insurance business, and/or trusts and the like (see chapter 6). Had it been possible to take the size of the whole financial industry into account, the differences between the secrecy and open jurisdictions would probably have been even more striking.

Jurisdictions included in the figure have been selected from the participants in the Egmont Group, which is the international organisation for national institutions responsible for efforts to combat money laundering.

The great majority of the reports on suspicious transactions are shelved without investigation. Only a small number lead to charges and a court judgement. Numerous tax havens conduct exceptionally many international transactions relative to the size of their populations and economies. In a number of instances, it is virtually inconceivable that these jurisdictions have the capacity to control money laundering, and not least to pursue cases through investigation and trial. No systematic studies are available which compare the number of cases related to money laundering which are investigated and brought before the courts in different countries. Where data do exist, they suggest that the tax havens conduct little investigation hold few trials regarding such cases. The National Audit Office (2007) report shows that only two judgements were delivered with regard to money laundering during 2006 in the British Overseas Territories. Both were in the Cayman Islands. No judgements were recorded for money laundering in the other territories (Bermuda, the Virgin Islands, Gibraltar, the Turks and Caicos Islands, Anguilla and Montserrat), but four cases were awaiting trial. Almost 800 reports in all were submitted on suspicious transactions. A number of the jurisdictions have been criticised by the IMF and FATF for poor capacity to deal with economic crime, but these jurisdictions have a total of 57 employees working in this area. Viewed in relation to that, two judgements might seem to be a low number. However, investigators working on economic crime are not only concerned with money laundering.

8.5 The Financial Stability Forum (FSF)

The FSF was established by the G7 countries in 1999 to strengthen financial stability through international collaboration on information exchange and the regulation of financial markets. Australia, Hong Kong, the Netherlands, Singapore and Switzerland are also members. FSF meetings are attended by the finance ministries, central banks and regulators in the member countries. In addition, a number of international institutions and organisations working on financial stability participate.

The FSF uses the same OFC term as the IMF. Its attention has focused on weak information exchange and regulatory functions in the OFCs. In this context, the FSF has concentrated largely on work performed by the OECD, the IMF and IOSCO. At its meeting of September 2007, the FSF described the status of international collaboration related to OFCs and financial stability. It noted that big strides had been made, but that problems related to information exchange remained.

A meeting was held by the FSF in November 2008 on the international financial crisis. The declaration from this meeting emphasized the lack of transparency in the markets as one cause of the crisis, and an increase in transparency as a countermeasure. In that context, the declaration also contained formulations which can be interpreted as a demand that the tax havens must become more transparent. 4 The declaration from the G20 meeting in London during April 2009 stated that the FSF is to be replaced by a new institution, the FSB (see section 8.9).

8.6 The OECD

The OECD has worked since 1996 to improve transparency in tax havens and to prevent harmful tax practices. It published a report in 1998 entitled Harmful Tax Competition: an Emerging Global Issue . This defined the problem and what was regarded as harmful tax competition. The Towards Global Tax Cooperation report in 2000 included a longer list of possibly harmful tax regulations in member countries, as well as a list of 35 jurisdictions characterised as tax havens. A number of tax rules in certain OECD member countries were amended after the report appeared. Moreover, a number of countries that were characterised and listed as tax havens made changes that resulted in their removal from the list.

This list shortened rapidly in subsequent years. However, this reduction is unlikely to have solely reflected changes to national regulations. It was also a consequence of reduced support for this work in the OECD following the US election in 2000. 5

The 2000 list has not been updated and is no longer used by the OECD. A list of non-cooperative jurisdictions existed for a time, but jurisdictions which showed a willingness to enter into agreements on tax-related information exchange were regarded as cooperative. None of the jurisdictions are now regarded as non-cooperative. In connection with the G20 meeting in April 2009, the OECD drew up a list which categorised countries and jurisdictions on the basis of their progress in implementing international tax standards. The principal criterion for this categorisation was whether the country had actually concluded agreements on tax-related information exchange or declared its willingness to enter into such agreements. Four of the countries (Costa Rica, Malaysia, the Philippines and Uruguay) had not declared their willingness to do so, but quickly reversed their positions. By the end of April, the OECD declared that all the countries initially on the list had now expressed their willingness to conclude such agreements.

In 1998, the OECD identified a number of potentially harmful tax rules in member countries. However, after closer investigation, a number of these were declared to be not harmful. Other countries changed their rules. Only one rule relating to the taxation of holding companies in Luxembourg was characterised as harmful by the OECD in 2006. The European Commission had also concluded that this rule involved illegal state aid. Luxembourg decided to amend the rule in 2007.

The OECD plays a central roll in the effort to establish tax treaties (partly in order to avoid double taxation) and agreements on exchanging information relevant to the tax authorities. Recommendations from the OECD on the formulation of agreements in this area have been used as models for treaties and agreements not only between members of the organisation, but also between non-member states. Furthermore, OECD collaboration with the UN means that its recommendations have also strongly influenced the UN’s recommendations, and thereby agreements between countries outside the OECD. The tax treaties are intended to contribute to correct taxation. This means avoiding both double taxation and tax evasion. The treaties contain provisions on the way the tax base should be delineated between countries and on the exchange of information intended to help ensure that countries can achieve an overview both of taxable income and assets held in other countries and of tax paid in other countries.

The OECD has also formulated standard agreements particularly on information exchange. In addition, it has carried out extensive work related to tax evasion through the use of manipulated transfer pricing. Outcomes of these efforts include recommended formulations for prohibiting the manipulation of transfer prices as well as measures against such forms of tax evasion.

Relatively few treaties on double taxation have been signed between a tax haven and a developing country. Viewed in relation to the Commission’s mandate, the failure to secure access to data for developing countries represents a weakness of these agreements.

8.7 The UN

The UN has no programmes that focus specifically on tax havens or their misuse, but does have programmes aimed at various forms of economic crime and at strengthening tax administration and cooperation on tax matters.

The UN operates the International Money Laundering Information Network (IMOLIN) to support collaboration in this area. Its Office on Drugs and Crime (UNODC) works primarily to combat international crime, including terrorism.

In cooperation with the World Bank, the UN runs the StAR initiative to identify and recover funds acquired through large-scale corruption in developing countries. Norway provides financial support for the StAR initiative.

The UN has developed and negotiated a convention against corruption, which was adopted in 2003 and came into force in 2005.

Furthermore, the UN has developed a model tax treaty intended to be suitable for developing countries. This model has much in common with, and is tailored to, the OECD model for such treaties. The Committee of Experts on International Cooperation in Tax Matters is mandated to provide advice on tax treaties (see the point above), strengthen international cooperation on tax, and advise on international efforts to promote the interests of developing countries on tax matters. The committee is also working on alternative standards for transfer pricing, without so far having arrived at a better system than today’s arms-length principle 6 which can command sufficient support.

8.8 The EU

Cooperation within the EU provides a number of points where the work touches on tax havens. These include collaboration on fighting crime. Moreover, the EU places great emphasis on strengthening competition by ensuring a level playing field for all players offering the same product or service.

The EU has adopted a savings directive. 7 This specifies that countries and other jurisdictions in the European Economic Area (EEA) must automatically exchange data on interest income received by individuals. The goal is primarily to reduce tax evasion, but the directive also contributes to reducing differences in competitive terms between institutions offering savings products. Each country will be able to receive data on the income of its own taxpayers. Unlike the provisions of normal tax treaties, the exchange of information under the directive is automatic – in other words, it does not require a specific request from the country where the taxpayer concerned is domiciled.

Several countries have refused to implement the duty to provide information pursuant to the savings directive. Foreign recipients of interest payments in these jurisdictions face the choice of paying a modest withholding tax or allowing data about their interest income to be sent to the tax authorities in their country of domicile. The following countries have adopted this approach:

• Austria

• Belgium

• Luxembourg.

Similar rules also apply in the following jurisdictions outside the EU:

• Guernsey

• Jersey

• Isle of Man.

Receipts from the withholding tax are divided between the country collecting it and the taxpayer’s country of domicile.

The EU has also reached agreement with a number of countries and jurisdictions on similar information exchange or withholding tax arrangements. Switzerland, Liechtenstein, Andorra and a number of Caribbean tax havens are among the countries covered by such agreements.

The savings directive covers deposits in and interest income from interest-bearing securities. Interest income earned by trusts and the like, as well as capital income earned in investment funds, are among the many exceptions from the fundamental rule that interest income must be reported.

The savings directive applies only to interest income earned by individuals. Capital income from sources other than interest are excluded. So are interest payments to companies, trusts and a number of other legal entities. This means that a taxpayer with assets concealed in a country with an automatic reporting obligation pursuant to the savings directive could avoid such reporting by taking such steps as:

• transferring interest-bearing assets to a jurisdiction not covered by the directive

• establishing a legal entity (company, trust, etc.,) to own the interest-bearing assets.

The European Commission has reviewed the savings directive (see European Commission, 2008) and concluded, in part, that it cannot be demonstrated that the directive has led to changes in the pattern of savings. However, amendments to the directive have been proposed to reduce opportunities for avoiding its provisions.

The amounts received in income from jurisdictions which have opted to offer depositors the opportunity to pay withholding tax rather than being reported to the authorities in their country of domicile seem modest compared with estimates of deposits and other assets in these jurisdictions. 8

The European Commission has called for reporting under the savings directive to be extended to other forms of placement (trusts and the like) as well as to financial income other than pure interest payments.

The EU formulated a code of conduct in 1997 for constructing tax regimes. Furthermore, the European Commission investigated the tax systems of member companies and identified breaches of the norm. These largely concerned tax rules which primarily had their effect in other states. The member countries were given a transitional period until 2006 to eliminate departures from the norm, but some exceptions were granted with longer transitional periods.

8.9 The G20

The G20 is a forum for discussing issues of international economic policy. Participants are governments and central banks from the world’s largest economies, plus the EU, the IMF and the World Bank. It was established in 1999.

At the G20 meeting in London during April 2009, issues related to tax havens and OFCs were raised. The declaration from the meeting noted that such jurisdictions create problems for both financial stability and government finances.

The G20 meeting yielded little that was specific to combating the harmful effects of tax havens. Much of the media coverage focused on a list compiled by the OECD of various jurisdictions and their willingness to be open on international tax matters. This list was largely based on whether the jurisdictions in question had concluded agreements on tax-related information exchange. The declaration states in part that sanctions could be imposed on countries which fail to comply with international standards for transparency over tax matters. “International standards” probably mean the recommended UN and OECD agreements on information exchange in tax treaties. The Commission has pointed out in chapters 1 and 9 that such agreements on access to tax-relevant information do not affect the harmful structures in tax havens.

The appendix to the declaration states that developing countries will share the benefits offered by greater access to information. Proposals on how this is to be achieved are due to be presented during 2009.

The G20 simultaneously appointed the Financial Stability Board (FSB) to serve as an important forum for developing a common policy on tax matters, transparency and financial stability. The FSB will be an expansion of the FSF (see section 8.5). The appendix also emphasises evaluations of compliance by different countries with international standards. Assessments by both the IMF and FATF are mentioned in this context.

8.10 Other organisations, collaborations and initiatives

A number of other international initiatives organisations are working in various arenas on topics relevant both to combating crime and to taxation.

Germany has taken the initiative on the International Tax Compact. The Tax Compact aims to establish a common platform among like-minded countries towards international tax issues that are relevant to developing countries. A stronger effort to deal with tax havens forms part of the initiative. It also includes strengthening tax administration in developing countries through assistance and sharing best practices.

A G8 meeting took place in Germany during February 2009. In this context, German chancellor Angela Merkel and the heads of the OECD, the ILO, the IMF and the World Bank issued a joint press release which stated that they wanted basic principles for a cleaner world economy. 9 This work has so far produced a catalogue of existing international agreements in the area.

A forum called the International Tax Dialogue has been established, with the OECD, the World Bank and the IMF among its participants. The goal is to exchange views, transfer knowledge and strengthen collaboration between these institutions and between states. The forum is purely technical and takes no decisions which are binding on the participating institutions.

Greater attention has been focused in recent years on corruption in connection with the exploitation of non-renewable natural resources, particularly petroleum. The transparency of money flows between companies and governments was identified as a problem, and formed the background for establishing the Extractive Industries Transparency Initiative (EITI). This includes standards for openness over money flows related to the exploitation of natural resources, and procedures for evaluating whether these standards are observed by those states which have declared that they will comply with this norm.

The Kimberley process is a forum for states, the mining industry and non-governmental organisations which aims to prevent the use of diamond mining to finance armed conflict. Its instruments include a form of certification for diamonds by their place of origin to prevent sales from areas controlled by groups using violence against legitimate regimes.

Many voluntary organisations contribute to focusing attention on conditions related to developing countries and illicit financial flows. Many of these bodies see raising awareness of such issues as their principal task. Global Witness, Transparency International, Global Financial Integrity and the Tax Justice Network can be mentioned as particularly important organisations in this area.

A number of initiatives in the US could lead to American citizens and companies making less use of tax havens than before. These include a set of proposals from President Obama which will limit opportunities for US companies to make legal use of tax protection through tax havens. These opportunities have been broader under the American tax system than in the Norwegian, for example. In addition, the proposals embrace measures to ensure that a bank wishing to operate in the US submits reports to the US tax authorities about accounts which it holds for American citizens. In addition, there are several proposals from members of Congress. One of these, the Stop Tax Havens Abuse Act, includes provisions to permit the US to adopt sanctions against jurisdictions with regimes which make it unreasonably difficult for the US to enforce its tax regulations. These measures will not have a direct impact on third countries, but could have substantial indirect effects both by making it less attractive to maintain harmful structures like those found in tax havens and by strengthening the arguments for adopting similar measures in other countries.