tax competition - final
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Unit Name Advanced International Taxation Curtin Student No. 16228681
Unit Code MT 660 Date Submitted 30-08-2013
Assignment No. One (1) Tutor’s Name Dale Pinto
Assignment Title (where applicable) Tax Competition – A two sided coin
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ABSTRACT: TAX COMPETITION – A TWO SIDED COIN
Written by: Katrina Murphy
There is to be sure, an apparent contradiction between, on the one hand, the fact that human activities are
becoming more and more globalized, whereas, on the other hand, tax systems remain strictly national (or
local)…in fact globalization can be defined as competition at a world level.1
Richard Teather’s tenuous statement that ‘Tax competition brings great benefits, to all society
and not just to those who directly take advantage of it,’ is a common belief, albeit, in the current
economic environment, this persuasion provokes great argument. It has been asserted that tax
competition is a key principle of any market economy and has the ability to promote and enhance
good tax policies, by reducing tax rates that can enhance economic performance through
investments, savings and the creation of jobs. ‘It is generally accepted within the international
society that sovereign states will adopt fiscal policies that do not impede or obstruct the
entrepreneurial spirit.’2 Tax competition under this philosophy however, can be seen to be a
vehicle for tax havens and advocates of tax competition do not denounce these practices but
rather see the opportunity for maximizing their own fiscal prospects through tax competition and
harnessing the benefits that it has to offer. Organizations such as the Centre for Freedom and
Prosperity (“CFP”) in America were set up to demobilize the anti-tax competition sentiment that
the Organization for Economic Co-operation and Development (“OECD”) had embarked upon
by suggesting the OECD was a “bully” enforcing its right to restrict domestic tax laws and
eliminate financial privacy. The OECD has been classified as being domineering and powerful
against countries desperate to keep a “competitive” edge in an already very competitive world.
1P Salin, The Case Against “Tax Harmonization”: The OECD EU Initiatives (2007).
2T Butler, “David vs. Goliath : An Analysis of the OECD Harmful Tax Competition Policy” (2001) .
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Divergent to the above rational, it is also argued that tax competition is harmful. Due to the
rapid emergence of electronic commerce and hyper-mobile capital markets accelerated by
globalization, organizations such as the United Nations (“UN”), the European Commission
(“EC”), and the OECD have prompted many discussions on transparency and the requirement for
greater boundaries to be set with regard to tax information exchange with a cross boarder focus.
In 1988, the OECD was enlisted to launch a report on harmful tax competition which was to
“develop measures to counter the distorting effects of harmful tax competition on investment and
financing decisions and the consequences for national tax bases.”3 The report embarked on
identifying preferential tax regimes and havens and thus pressurizing these nations to dismantle
their low tax regimes to restrict the revenue and capital flows to these countries from the high tax
nations, or consequently, face severe financial restrictions. This initiative by the OECD is also
upheld by high tax nations whom are strident in their condemnation of tax competition, as losing
tax revenue and wealth is a major current concern. The OECD’s initiative on information
exchange also became trendy after such events as 9/11, and the financial collapse of Enron.
These events, amongst others, rekindled the already smoldering sentiment that transparency and
information exchange were important issues that were required to be brought to the fore of tax
reform. The OECD’s initiative4 was not a new undertaking, however, the enthusiasm and
participation in tax exchange information agreements (“TIEAs”) gained momentum as rapidly as
tax havens and financial tax scandals started scaffolding the modern economic landscape.
TIEA’s are a high tax nations’ response to substantial tax base erosions and profit shifting
practices by some countries. This is mostly due to the flourishing virtual world, which has now
3OECD, Harmful Tax Competition, An Emerging Global Issue (1998).
4OECD, The Global Forum on Transparency and Exchange of Information for Tax Purpose (2011).
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directed the OECD (which has been requested by the G20 ministers) to develop another initiative
addressing Base Erosion and Profit Shifting (“BEPS”). BEPS is a process that “identifies actions
needed to address BEPS, sets deadlines to implement these actions and identifies the resources
needed and the methodology to implement these actions.”5
5 OECD Action Plan on Base Erosion and Profit Shifting,(2013).
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Introduction
…we see that competitive behavior manifests most frequently and intensely when there is a shortage of some
necessity, like water, food, shelter, sex or, with the animal called Man, money. Competitive behavior
manifests when we are threatened or our survival is at stake... Nature reveals that when there is no shortage
in the necessities of survival, there is less competitive, aggressive behavior.6
It is human nature to compete for survival in all facets of life, and this echoes across the finance
world particularly across many poor, undeveloped, and developing countries. In modern times,
the hunt for food and shelter has been usurped by the pursuit of material gain and higher
standards of living. Economic growth is a necessity to assuage poverty, but the question central
to government policy makers’ agendas and international organizations’ is how to support this
growth through “legitimate” avenues.
Globalization over the last 25 years is arguably the greatest factor that has changed tax
competition and contributed to dramatically transforming the landscape of the economic world.
Capital and labor movements, with the ‘shift of manufacturing bases from high cost to low cost
locations, the gradual removal of trade barriers, technological and telecommunication
developments, and the ever increasing importance of managing risks and of developing,
protecting and exploiting intellectual property, have had an important impact on the way cross-
border activities take place.’7 It has been noted that the developed countries who are the leaders
6<http://evolutionaryeducation.com/sections.pdf> .
7Ibid, above n5.
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of technology are the ones driving the globalization process due to the opportunities that arise,
therefore, in effect promoting growth in economic competition.
Globalization may accelerate the treadmill of technological change and reinforce its bias against the use of
unskilled or low-skilled labor in higher income countries...nevertheless, globalization may reduce social
welfare if it results in considerable inequality of income, as seems to be occurring in more developed
countries.8
Global welfare, as implied by the OECD, is considered directly affected by harmful tax
practices, however, there seems to be very little explanation by the OECD to support this notion.
Equally, the claims to prove that global welfare is enhanced by tax competition, is also
unfounded, and with the ambiguity on this issue it seems both sides are arguing without any real
empirical evidence.
Advocates of tax competition believe in celebrating competitive tax regimes as this promotes
economic stimulation and supports the efficiency and fairness of wealth redistribution. As far
back as 1956, Charles Tiebout (although his assumptions aren’t proven) argued his support for
tax competition by stating, ‘when citizens can choose between many communities where to live,
with each community offering different mixes of public goods and taxes, the resulting
“competition” forces jurisdictions to collect and spend their taxes efficiently.’9 Modern day
activists such as Julie Novak (Senior Fellow at the Institute of Public Affairs), have strong views
on tax competition and how havens have empowered our fiscal society.
8C Tisdell and S Svizzero, “Globalization Social Welfare and labor market inequalities” Working Paper No. 20 (2003)
<http://ageconsearch.umn.edu/bitstream/90525/2/WP%2020.pdf>. 9C Tiebout, A pure theory of local expenditure (1956).
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On balance tax havens have contributed to our global economic prosperity by encouraging tax competition,
enabling footloose capital and labor to move economically hospitable environments and thereby limiting the
worst fiscal excesses in high taxing countries. From the mid-1980s to the late 2000s Australia lowered its
economically inhibitive high corporate and personal income tax rates, encouraging tax competition and
allowing domestic workers and firms to keep more of their own earnings in their pockets. The best way for
Australia to now deal with the tax haven challenge is to join them by returning to the global tax competition
contest.10
This sentiment however, contrasts with members and supporters of the OECD’s policies who see
tax competition as distorting markets by cutting tax rates, approving tax evasion, offering
clandestine tax loopholes for tax breaks and incentives in the form of tax subsidies. The OECD’s
reasons for embarking on the initiative to counteract harmful tax competitive practices, were
based on the effects that globalization is having on the modern financial climate. Mr. Kondo, the
Deputy Secretary-General of the OECD in his press release address on April 18, 2002 stated that
The OECD’s project…is part of a wider initiative to promote good governance in a globalized economy.
Globalization has enormous potential to improve living standards around the world. But is also brings risks,
including the risk of abuses of the free market system. The activities of tax havens distort the free flow of
capital and undermine the ability of governments to finance the legitimate expectations of their citizens for
publicly provided goods and services. By providing a framework…all countries can work together to fight
harmful tax practices, as the OECD seeks to encourage transparent and fair tax competition.11
10
<http://www.abc.net.au/unleashed/4737468.html>. 11
<http://www.nytimes.com/2002/05/10/opinion/10iht-edkondo_ed3_.html>.
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Other advocates against tax competition could see it as a way to ‘redistribute wealth upwards,’
by allowing the rich to get richer and the poorer to become impoverished.
As tax rates on capital fall in response to these ‘competitive pressures, governments make up shortfalls by
levying higher taxes on other, less wealthy sections of society, or by cutting back on essential public services.
So tax competition boosts inequality and deprivation. Tax havens are the sharpest edge of this ‘competitive
axe. Owners of capital shift profits into tax havens, paying zero or very low taxes there, then tell politicians
in the ‘onshore’ countries where the genuine wealth is being created that they will bring the money home into
the tax net only if the politicians cut their home taxes on capital some more. Too often the politicians quail,
and cut some more. Wealth shifts upwards.12
The European Union (“EU”) who has feebly grappled with tax competition is a perfect model of
the intensity tax competition plays between the various countries within the small continent of
the European Union. Mobility of capital, differing tax rates between countries, tax reform in the
way of implementing flat taxes (such as the Baltic countries outside of the EU such as Russia,
Georgia and Serbia where flat rates of 13% has created a wrangle of capital outflows with very
little regulation) and immeasurable debt have major roles to play in the arguments against tax
competition. Germany and France, who are the powerhouses of the EU, play watchdog to many
of the EU countries especially Switzerland and a variety of other tax havens. ‘Nicolas
Sarkozy…proposed that European subsidies not be given to those countries engaging in “harmful
tax competition…” since the countries who adopt low taxation have a better development
strategy that just waiting for subsidies…not giving subsidies was to be considered as a sanction
against governments which do not play by the rules of the game.’13
12
<http://www.taxjustice.net/cms/upload/pdf/TJN_NEF_130418_Tax_competition.pdf>. 13
Ibid, above n1.
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The question of whether tax competition has contributed or been detrimental to tax base erosion
and profit shifting has as many supporters as critics, but from the fragmentary research in the
past and the heatedness of many debates, there isn’t any one simple solution to the multifaceted
topic of tax competition.
Why do countries become tax havens if the OECD is launching an attack on tax
competition?
The OECD in 1998 embarked on eliminating two forms of harmful tax competition. One being
“harmful preferential tax regimes” and the other being tax havens. The OECD has certain criteria
that they defer to when branding a country a tax haven,14 which is similar to the four key criteria
identified as “harmful preferential tax regimes” which are as follows:-
1. No or low effective tax rates15
2. “Ring Fencing” of Regimes 16
3. Lack of transparency17
4. Lack of effective exchange of information18
The OECD belief is that preferential regimes can cause harmful tax practices when certain
jurisdictions tailor their tax regimes to erode the tax bases of other countries. ‘The effects of tax
competition being that it can distort trade and investment patterns; alter the structure of taxation;
14
Ibid above n3, note 57-60. 15
Ibid, note 61. 16
Ibid, note 62. 17
Ibid, note 63. 18
Ibid, note 64.
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undermine taxpayer confidence in the integrity of tax systems; undermine fairness and neutrality;
and hamper the application of progressive tax rates.’19 This erosion can occur when tax regimes
attract investment or savings originating elsewhere and when they facilitate the avoidance of
other countries’ taxes. The OECD also major concerns with the effects of globalization in how
the upsurge of capital from developed countries flows to the less developed countries. ‘The
OECD fear in communications technology, such as Internet, raise a general risk to the forward
estimates of revenue…posing a major challenge for tax system design.’20
There are distinct differences between developed and developing countries and their attitude
toward tax competition, and why some countries evolve to become tax havens. As much as
economic empirical theories do for enabling authorities to design tax systems, it is equally
important to understand human behavior and how a taxpayer makes decisions on their
investments. However, governments and authorities don’t always make decisions based on the
how it affects the people, but rather how their policies rate at the time of elections.
Developed countries with eminent social structures that require a vast amount of government
expenditure to maintain a high standard of living don’t like tax competition for a variety of
reasons. With investments in infrastructure, education and social security, these countries
require continuous volumes of revenue through capital and foreign investments to subsidize the
expenditure to maintain or enhance the living standards of their country, therefore, any revenue
leakage would be seen as detrimental to maintaining the living standards. Terry Dwyer,
however, states, ‘fear that tax competition will lead to a loss of domestic revenue does not
19
Ibid. 20
T Dwyer, ‘Harmful’ tax competition and the future of offshore financial centers such as Vanuatu (2000)
<http://www.vanuatu.usp.ac.fj/sol_adobe_documents/usp%20only/vanuatu/dwyer.pdf>.
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amount to an argument that tax competition is harmful either to one’s own or other countries, no
matter how unpleasant it may be for the treasury concerned.’21
The problem for developed countries from an international perspective is that they generally
have higher tax rates which can be challenging for individual taxpayers seeking to reduce their
own domestic tax debt. Tax havens give them the ability to reduce their taxable income or they
receive tax incentives to subsidize their investments.
High tax rates are more difficult to sustain in this new economic environment. As economic integration
increases, individuals and businesses gain greater freedom to take advantage of foreign economic
opportunities. That increases the sensitivity of decisions about investment and location to taxation. As a
result, high tax rates cause large economic losses when borders are opened up, giving countries strong
incentives to reduce rates. International tax competition is increasing as capital and labor mobility rises.22
Developing countries also have a requirement for revenue, as much or if not more than the
developed nations, due to higher social security and demands that poverty places on a
government. Their attitudes differ as they welcome tax competition to stimulate and enhance the
economy through gaining more revenue than they produce. Most tax havens derive a significant
portion of their GDP from their own financial industry but from a global perspective ‘half of the
world trade appears to pass through tax havens, although they account for only 3% of the world’s
GDP.’23 The OECD has been markedly frank about how the open financial markets have
occasioned an economic stimulus, going so far as to state that tax havens are accountable for the
deregulation of the open markets.
21
Ibid. 22
C Edwards & V De Rugy, <http://www.cato.org/pubs/efw/efw2002/efw02-ch3.pdf>. 23
B Gurtner, Tax Evasion: Hidden Billions for development, Swiss Coalition of development Organizations (2004).
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Tax havens have proven that they are on the increase in the last 25 years24 which would suggest
that vigorous tax competition is seen as operating healthily worldwide. The question of why
countries continue to become tax havens should be broken down to why the havens exist in the
first place. Michael Littlewood believes that ‘tax havens’ are not diminishing (which the OECD
would like to be happening) by suggesting that
The volume of transactions channeled through tax havens seems unlikely to be much reduced, therefore, until
all, or almost all, the havens cease to function as such…It seems likely that those who practice in tax
havens…will prove similarly mobile…and move on to the new haven of choice…as a result the new haven
will be bigger, richer, more sophisticated, and better able to resist the efforts of the OECD.25
Another reason might be that when an individual’s ambition is to evade taxes, then reasonably
they are not going to voluntarily notify the authorities. Also, ‘the OECD’s cooperation pledges
did not require tax havens to take any immediate or decisive action. Instead, these pledges
required only symbolic statements on behalf of the tax havens.’26
In order for a tax haven to compete amongst other tax havens, they require a certain ability to
entertain good governance at the backdrop of their tax system. It then proceeds that a tax haven
should have a risk-free currency, little or no governmental corruption and a fully functioning
financial industry for investors to have confidence in any investment that they make. Tax havens
evolve to attract international mobile capital and to stimulate a healthy financial economy to fund
public services such as welfare. Timothy Addison however is not convinced and announces
24
Dharmmika Dharmapala & James R. Hines, Which Countries become Tax Havens. 25
M Littlewood, Tax Competition: Harmful to whom? 26T V Addison, Shooting Blanks: The War on Tax havens, Indiana Journal of Global Legal Studies(2009).
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“even if a developing state could credibly commit to becoming a tax haven, it would most likely
be unwise and disastrous for its future economic growth. Because of fierce competition among
other tax havens, many tax havens are “profitable” only by the thinnest of margins. Developing
states cannot adequately provide their citizens with necessary public goods.”27 However, other
commentators would see the immeasurable profitability that tax havens can produce with Bruno
Gurtner stating that,
The offshore industry is not an isolated phenomenon occurring only on exotic Caribbean islands. Offshore
centres are very closely linked to major financial centres like New York, London, Tokyo, Zurich, Hong Kong
and Singapore. Most of the world’s tax havens are actually located in the big financial centres. The offshore
industry has become the new and enormous global shadow industry. Companies for offshore purposes are
now being established at the rate of over 150,000 per year. Today there are more than one million offshore
companies worldwide. Enron for example had 881 offshore subsidiaries, 692 only in the Cayman Islands.
The world biggest oil trader companies are located in Switzerland, though Switzerland has no oil!28
Less developed countries don’t necessarily have the infrastructure to support the growth of
capital and technology therefore by reducing tax rates, they can attract foreign investment. ‘One
problem with this strategy is that it might lead to a “race to the bottom,” explained as, if one
country seeks to attract foreign investment by offering preferential tax treatment (that is by
taxing foreign investors less heavily than it taxes resident investors), then others may lower their
rates.’29 The consequence of other countries lowering their rates until there are no taxes, results
in a “zero” benefit, therefore, the competitive purpose is lost. However, Kristian Niemietz, takes
the view that there is no such thing as “harmful” tax competition through the lowering of tax
27
Ibid, above n26. 28Ibid, above n23. 29
Ibid, above n25.
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rates. He states that tax competition ‘is an effective and necessary means of protecting
individuals against the insatiable tax appetites of their own governments.’30 When oppressed
taxpayers have the ability to shift resources from high-tax nations to low-tax jurisdictions,
politicians should begin to realize that it is not smart to abuse the geese that lay the golden
eggs.31
…competition between governments is as good for individuals as competition between firms is for
consumers. It keeps down tax rates, especially on labor and capital, which is good for growth and job
creation; states need to produce better services at the cheapest possible cost. And if governments become too
irritating or incompetent, it allows an exit strategy. It is strange how pundits who claim to want greater
competition in the domestic economy – for example, in banking – are so afraid of competition for people
between states, decrying it as a race to the bottom. Yet monopolies are always bad, in every sphere of human
endeavor, breeding complacency, curtailing innovation and throttling progress. …Globalization is not just
about buying cheap Chinese goods: it also limits the state’s powers to over-tax or over-control its citizens.32
The lowering of tax rates approach is not supported by the OECD, who wants to globally enforce
high taxes and implement tax harmonization. This can stifle innovation and progress and can be
seen to make governments look like quasi-monopolies enforcing high taxes where the by-product
in particularly poorer countries would be crime to pay for these taxes. This approach can be seen
as regressive and have negative impacts particularly in the short term for less developed
countries. Equally for the developed country, it is also a feasible argument that the increase in
taxable rates can lead to superfluous public spending on unnecessary expenditure.
30
K Niemietz, <http://www.iea.org.uk/blog/%E2%80%9Charmful%E2%80%9D-tax-competition-new-actors-same-old-plot>. 31
D Mitchell <http://www.insideronline.org/archives/2002/sept02/tax_harmonization.pdf>. 32
A Heath <Allistar Heath http://danieljmitchell.wordpress.com/2011/03/20>.
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The quaint notion that a tax haven is a small under-developed country in the middle of an ocean
is most likely but also incongruous to reality. Australia in the past was considered a tax haven in
the area of funds management offering tax cuts in the form of withholding taxes whilst
maintaining one of the world’s highest domestic tax rates. America offered a preferential tax
regime in terms of tax incentives on interest on foreigner’s portfolios and government bonds.
Hong Kong is one of the biggest emerging economies of the 21st century and their policies have
been based on the single tier flat system tax to enhance their economy with offshore income from
interest and dividends, dubiously not observed by the OECD as conventions outside their
guidelines. Hong Kong also doesn’t have any Capital Gains Tax, which is bound to fuel vigorous
foreign investment, with variable consequences.
The United Kingdom is another powerhouse that shows signs of preferential tax regimes with
regard to domicile and the taxation of foreign income, which can be seen as similar to some of
the tax havens that are blacklisted by the OECD. There are many more member OECD countries
that practice questionable tax regimes under the guidelines stipulated by the OECD.
One the most interesting nations being Ireland, screams of a modern technological “tax haven.”
There are many countries that have higher tax rates that relish in investing in the Irish tax rate of
12.5%. Apple have utilized this avenue whereby the ‘US senate subcommittee recently heard
claims that about $22 billion, or 64 per cent, or Apple’s pre-tax income were recorded in Ireland
in 2011, saving the company $7.7 billion in US taxes…It is no coincidence that recent political
harassment of successful multinational corporations specialising in information technology and
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communications products and services, such as Apple, Google and Amazon, for more revenue is
closely aligned with the significant fiscal troubles faced by advanced economies.’33
It is then questionable that the OECD was indeed living up to their ideology of a “fair tax
system” as it became apparent they were intensifying their attention on the less sophisticated
regimes by honing in on the smaller more economically vulnerable countries, such as those
countries situated within the pacific Islands and in the Caribbean. Marshall Langer has argued
that “without a doubt the OECD report is not as conclusive nor is it as far reaching in its attack
on so called preferential tax regimes.’34 The OECD targeted numerous countries within the
members of the Caribbean Community and Common Market (“CARICOM”), blacklisting their
economies and attacking their sovereignty.
CARICOM members (15 countries) were part of a group of countries within the Caribbean that
developed a strong banking and financial industry purely to ensure diversity as their other form
of industry being tourism was always marred by the environmental effects of hurricanes and
tornados. ‘Fostered by tax regimes with no or only nominal rates, and strict secrecy rules, the
offshore banking sector flourished in the Caribbean.’35 Likewise in the pacific Islands, with
Vanuatu being a natural tax haven, there is ‘little or no direct taxation’ and ‘enhanced privacy
provision’ where tourism and employment in this tax haven provides both benefits to the people
of Vanuatu36 and contributes to 15% of Vanuatu’s GDP.
33
Ibid, above n10. 34
M J Langer, Harmful Tax Competition: Who are the real tax havens? 35
T M Hoffman, The Future of Offshore havens (2001). 36
Vanuatu was removed from the OECD’s list of uncooperative tax havens in May 2003.
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…Even though tax havens are harmful, it does not follow that it is necessarily desirable for the OECD (or
any other collective of countries) to attempt to eradicate them. The reason is that the cure may be worse than
the ailment. That is, if the matters on which a small group of rich countries can dictate policy to the rest of
the world are extended to taxation, this seems to represent a further erosion of national independence and
diversity.37
However by 2002 through bullying tactics of the OECD and the sheer size of its membership
of industrialized nations, fourteen of the fifteen CARICOM countries had signed the OECD
agreements. The sentiment carried throughout these island nations was that to do otherwise
would to be signing a death certificate in terms of sanctions to their industries. They were
forced into the realization that to survive in the expanding globalized community they had to
conform and ‘toe the line.’ Loaded statements by the powerful OECD have compelled tax
haven countries to yield to the OECD demands. The manipulation of the “all powerful” OECD
can be seen in the following statement that demonstrates how they can turn everything to their
advantage.
If tax havens are free to structure their tax systems however they wish, why not the OECD member states?
That is, if the tax havens are free to structure their tax systems so as to facilitate the avoidance of other
countries’ taxes, it seems to follow that other countries should be free to structure their systems so as to
discourage the use of havens. (e.g. by disallowing deductions to haven entities, levying withholding taxes on
payments to haven residents, and withholding “nonessential” aid.)38
37
Ibid, above n25. 38
D Ring, Backdoor Harmonization? Implications of the new era of tax information exchange.
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Harmonization – is it really the way forward?
The tax competition problem is thus essentially a problem of coordination and trust. Each jurisdiction would
prefer to tax investors from abroad to gain the revenue, but is afraid that by doing so it would drive the
investors to other jurisdictions that do not tax them. If there was a way to coordinate actions among the
relevant jurisdictions, they all could gain added revenues without running the risk of losing the investment.39
Events such as 9/11, the financial recession that began in 2001, and also one of the biggest
financial scandals, Enron (which was one of many tax scandals at that time) became the much
desired trigger the OECD, and indeed the international community required to globally unite on
the issue of tax competition and harmonization.
Economists have however, heatedly debated the argument of tax coordination or harmonization,
but economic models developed by Peter Sorenson of the University of Copenhagen have found
that ‘tax coordination would lead to higher capital taxes, and higher income and wealth
distribution – but lower infrastructure spending, lower capital stocks, lower profits, lower real
wages, lower GDP, and higher real interest rates…It seems tax competition does not have any
downside, while tax coordination has no up-side.’ 40
There have been many proposals by economists such as Sorenson, Mintz, Bucovetsky and
Wilson who have tried to find solutions to overcome the inefficiencies caused by unregulated
economic outcomes, and ensure a unified tax system. One solution was to formulate a unilateral
tax rate on source capital income however source-based taxes would lead to a migration of
39
R.S Avi-Yonah, Globalization and tax competition :Implications for developing countries, cepal review 74 (2001). 40
S Davidson, Here is the truth about tax havens.
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capital to other countries unless there was a global treaty in place (which is not realistic in the
short term). Another suggestion would be to strictly enforce the residency rules, but there are
loopholes that can be found in these areas as well. Ultimately, pure economic theories cannot
totally battle against human will, regardless of the rules and regulations. They can however
surmise what a majority of tax compliant individuals might adhere to.
So how does the OECD guarantee that tax harmonization will benefit those tax havens that are
incidental and don’t function with tax evasion as their intention? Is it even plausible that the
OECD can differentiate between havens based on intention? There are obvious tax havens that
embark on functioning purely with foreign profit as the intention and avoidance of taxes at the
epicenter of their structure. The other problem the OECD has with tax havens is that some
governments operate from an illegal vantage point by laundering money from guns and drugs,
and terrorist activists which presupposes that these countries “intentions” are not factored around
the tax system. The OECD has little control over these jurisdictions and drawing a line in the
sand with rigid criteria shows a firm stance, but trying to stamp out countries firmly entrenched
in illegal rackets is considered an uphill battle with regard to tax reform. Considering the
classification of a tax haven has proven difficult for the OECD as well as their attempts to
sanction countries involved in high crime with little effect, it demonstrates the highly ineffective
nature of tax harmonization. Furthermore, the OECD’s stance has contenders of tax
harmonization struggling to view this standpoint as anything other than a modern form of
intimidation and oppression.
An OECD-instigated cartel will lead to higher tax rates and more punitive treatment of capital. The OECD’s
tax harmonization campaign also could mean the death of tax reform. All proposals to simplify the tax code —
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such as the flat tax—are based on common sense principles such as taxing income only one time and taxing
only income earned inside national borders. The OECD effort, by contrast, is designed to help governments
impose discriminatory taxes on capital income, even if the income is earned in other jurisdictio ns.41
What impact will TIEA’s and transparency have on the face of tax competition?
Although the original launching point for debate was the OECD work in tax competition, developing
concerns about OECD policy direction and power – often framed in the language of sovereignty and concern
for forced harmonization – helped shift the focus of the conversation and the action plan toward exchange of
information.42
After the many harmful global events that unveiled from 2001, the OECD was forced to change
its purpose of trying to establish a harmonized tax system. Their refocus no longer required tax
havens to substantiate domestic activity or to modify their tax systems to eliminate their “no
substantial activity” criteria. This change was brought about by a variety of factors, but largely
because there were so many global variables that became so overwhelmingly challenging and
just plainly unachievable in an international sense. How can you apply similar principles to every
country without having to deal with the differences that each country exhibits?
The tipping point for change was when some of the tax havens on the OECD’s black list, who
objected to these guidelines and for a variety of reasons the committee, took action and
downgraded the significance of the rule of “no substantial activity.” The OECD began to look
outside the square of taxation and into the area of transparency and exchange of information
41
Ibid, above n31. 42
Ibid, above n38.
21
because of the precipitous effects of many political, economic and climatic fluctuations that
transpired.
By refocusing on transparency, the OECD no longer pursued what tax rates a country should
adopt, or how any tax system should be structured. From a global perspective they attempted to
foster economic growth and efficiency, and the equitable flow of capital between countries by
closing any loopholes in the profit shifting game through multilateral means.
Transparency became a hot topic, with committee members explaining the requirements of
transparency in its 2001 report,43 ‘…by committing to transparency, a jurisdiction agrees that
there will be no non-transparent features of its tax system.’ With regard to Exchange of
Information agreements and the lack of signed agreements the OECD was compelled to reform
their prior objectives to overhaul the policies surrounding the accuracy and credibility of
information exchange.
At the dawn of information exchange revolution, Adrian Sawyer amongst other commentators
also rained on the OECD’s TIEA initiative parade, by stating that from the empirical evidence
‘there is an emerging critical literature on the potential effectiveness of the OECD’s TIEA
initiative from both practitioners and various monitoring organizations.’44 ‘The common theme is
the unexpected ineffectual nature of TIEA’s along with their failure to deal with the real issues
surrounding tax havens, such as bank secrecy and highly protective domestic legislation.’45 The
Tax Justice Network also proclaimed that the OECD’s philosophy toward information exchange
43
The OECD’s Project on Harmful Tax Practices: The 2001 Progress report. 44
A Sawyer, Tax Havens “Coming in from the Cold.” A sign of changing times? 2010. 45
A Sawyer, The OECD’S Tax Information exchange Agreements: An Example of (In)Effective Global Governance?
22
was entrenched in black, white and a variety of shades of grey guidelines that were not realistic
or forward thinking.
The issue surrounding transparency and exchange of information were the protagonists that gave
birth to The Model Agreement on Exchange of Information on Tax matters (“Model TIEA”).
The model TIEA is based upon Article 26 of the OECD’s Model of Tax Convention on Income
and on Capital,46 which came into effect April 2002 and was created with a view to a long term
commitment from the OECD to persuade tax havens to embrace the information exchange
agreements and cease cross border tax evasion and avoidance. TIEAs were put in place to
streamline relevant information such as bank accounts, and company shareholders with
registered companies, investigations in tax matters and any ensuing prosecutions that might
result.
The aim of the OECD’s Model TIEA is to establish effective exchange of information in a manner that is not
binding. Supplementary purposes include an intention to reduce evasion and treaty shopping. The Model
TIEA contains multilateral and bilateral formats, together with Commentary, the interpretation of which is to
be determined by principles of international law.47
Hence, from this time onwards the TIEA Model was labeled the “internationally agreed tax
standard,”48 but there were concerns regarding its effectiveness and the lack of transparency the
TIEAs actually upheld. The drawback came with the fact that the TIEAs were only used “upon
request,” therefore there was no obligation to make documentation municipal. This assumption
that all OECD membership countries voluntarily complied with the OECDs requirement is
46
OECD, Model Tax Convention on Income and on Capital 2008 (updated July 2010). 47
Ibid, above n45. 48
M. Meinzer, TJN; Tax Justice Briefing, The Creeping Futility of the Global Forum’s Peer Reviews, March 2012.
23
farcical, and only undermined the essence of what the OECD was trying to achieve –
transparency and exchange of information. Timothy Addison asserts that TIEAs are of limited
benefit.49 This is because the TIEAs won’t disable the domestic bank secrecy laws of the tax
haven and also that they have to identify the actual taxpayer involved, which will prove to be just
another “needle in a haystack” quest or a “fishing expedition,” as quoted by the OECD.
The OECD’s work on double taxation and tax treaties is instructive…there are currently about 1,500 tax
treaties in the world…almost all of them are based on a model devised by the OECD. The Organization’s
aim, in devising this model, and in revising it from time to time, was to meet the needs of its members.
Consequently, the model treaty, although representing some sort of optimal satisfaction of the OECD’s
members, is widely perceived as biased in favor of the developed countries and against the less-developed.50
The Global Forum on Transparency and Exchange of Information for Tax purposes ‘was created
in the early 2000s in the context of the OECD’s work to address the risks to tax compliance
posed by tax havens. The original members of the Global Forum consisted of OECD countries
and jurisdictions that had agreed to implement transparency and exchange of information for tax
purposes.’51It consisted of a multilateral framework with a two phase peer review that monitored
transparency and exchange of information standards, and the strengths and weaknesses that some
countries were facing with regard to the exchange of information systems. ‘Among developed
economies, perhaps the most significant of the three areas of concern in tax information
exchange is the requested country’s de facto capacity to collect and release the information
sought.’52 The major obstacle touted here though, has been the domestic bank secrecy rules.
49
Ibid, above n26. 50
Ibid, above n25. 51
<http://www.oecd.org/tax/transparency/>. 52
Ibid, above n38.
24
Some countries ‘impose legal obligations of financial secrecy on certain fiduciaries or other third
parties, but then lift those restrictions if information is being requested pursuant to an exchange
of information agreement.’53
Exchange of tax information in its “fullness” can be obstructed by a countries willingness to
comply or simply how a definition is tacit to the exchange agreement. Words and phrases such as
“tax fraud” or “crime” can be lost in translation or confused through concepts not clearly
explained. Most OECD countries, except Switzerland with regard to the meaning of “tax fraud”,
have agreements on the common understanding of words. Switzerland had exempted themselves
as well by enshrouding their tax systems in bank secrecy laws and limiting information sharing.
Other problems that some of these exchange agreements have presented is how they are
perceived by the taxpayers themselves and the uncertainty of “shared” information and whether
the authorities are using this information confidentially. “Upon request” exchange and
subsequently, “automatic” exchange is still fraught with loopholes, and whether this information
is being used in the correct format required by the OECD guidelines. Understanding how to use
the extensive amount of information is challenging for some countries whose tax systems are
parochial at best and are unable to successfully accommodate the intensity of information desired
in the exchange of information requests.
On the other hand, exchange of information has positively contributed to areas of Controlled
Foreign Companies (“CFC”), Transfer Pricing, and reducing international conflicts that arise due
to lack of knowledge. A CFC could become more efficiently implemented with more accurate
and reliable information, and hence promote a healthier tax system. International conflict is
53
Ibid, above n4.
25
always heightened when there is in inherit ignorance and information sharing could help
overcome some of these barriers.
Regardless of their drawbacks, TIEAs were being signed in abundance.
A series of banking scandals beginning in 2006 shifted the tenor of the discussion and by 2007 and then again
in 2008 and 2009, the number of TIEAs being signed dramatically increases (between 9 and 11 TIES had
been signed annually from 2003-2006, then the number rose to 23 by 200, in 2008 to 50 in 2009 to 250 and
2010 to 404 signed TIEAs).54
By 2009, the OECD with renewed vigor brought out another report, Tax Co-operation 2009:
Towards a Level Playing Field,55 which highlights the standards of the OECD and the relevance
that transparency and exchange of information agreements play in revenue collection.
International banking has become commonplace and it is no longer extraordinary for taxpayers to reside in
one country, hold assets in another and have them managed from a third location…but regardless of why
taxpayers situate their assets beyond the boundaries of their own residence country, the result is that tax
administrations around the world face more and greater challenges to the proper enforcement of their tax
laws than ever before. To meet these challenges, tax authorities must increasingly rely on international co -
operation based on the implementation of international standards of transparency and effective exchange of
information.56
This renewed energy together with increased commitments from various countries, lead the
Global Forum in 2012 to again reform its process by initiating a program that consisted more in-
54
OECD, Global Forum on Transparency and Exchange of Information for Tax purposes, “A background Information brief “ (2010). 55
OECD, Tax Co-operation 2009: Towards a Level Playing Field, (2009). 56
Ibid, above n55.
26
depth peer review. ‘This 2012 Report on Progress publication describes the progress made since
the Global Forum launched its peer review mechanism in 2010… and reported the findings of
the peer review reports to the G20 Leaders in June 2012, showing a high level of cooperation
among members and a good level of compliance with the international standard, while also
identifying a number of unresolved deficiencies. …’57
In an article posted on August 2, 2013 Hong Kong Now Allowed to Sign Standalone Tax
Information Exchange Agreements, the following except is addressed to demonstrate that Hong
Kong (a notoriously developed tax haven) is attempting to conform to international standards.
Further, the latest international exchange of information standards set by the Global Forum requires that all of
its members – in addition to various other jurisdictions identified by the Global Forum – pass a review based
on the quality and practical implementation of their respective legal and regulatory frameworks regarding
information exchange. To pass the reviews, a jurisdiction must have both a CDTA and a TIEA in effect as
instruments for information exchange…. Only through [passing this Bill] will Hong Kong be able to continue
with its efforts in negotiating CDTAs with existing as well as potential partners, whilst providing in place a
legal framework for TIEAs for Hong Kong to meet its international obligations,” noted Professor K.C. Chan,
Hong Kong’s Financial Services and Treasury Bureau Secretary58
Recently, Australia has been forced to revise its tax treaty in the area of income tax with
Switzerland the only tax haven that Australia has a Double taxation agreements (“DTA”) with.
In the case of tax havens, Australia usually uses exchange of information agreements. The
assistant Treasurer, The Honorable David Bradbury MP stated that ‘The revised treaty will
strengthen administrative assistance between Australian and Swiss revenue authorities, in
57
H J Ault, Some reflections on the OECD and the Sources of International Tax Principles. 58
<http://www.china-briefing.com/news/2013/08/02/hong-kong-now-allowed-to-sign-standalone-tax-information-exchange-agreements.html>/.
27
particular by permitting them to exchange taxpayer information, including information held by
banks and other financial institutions, in order to address tax evasion.’59 This new DTA contains
provisions on the exchange of information in accordance with international standards and ‘would
contribute to the further positive development of bilateral economic relations between them.’60
Australia has a strong commitment to ensure that their national tax system is upheld with
integrity and not frivolously eroded away. On 13 February 2013, Australian government
introduced The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit
Shifting) Bill 2013 contains amendments to the general anti avoidance rule Part IVA, and also to
the Transfer Pricing regime. The honorable David Bradbury MP stated that
The amendments will protect revenue of over $1 billion per year. The amendments also modernize
Australia's transfer pricing rules and provide a comprehensive and robust transfer pricing regime that is
aligned with internationally accepted principles, as set out by the OECD. Tran sfer pricing rules are critical to
the integrity of the tax system. They seek to ensure that an appropriate return for the contribution of
Australian operations of a multinational group is taxable in Australia for the benefit of the broader
community.61
Regardless of most OECD member countries trying hard to uphold their own fiscal proficiency
there are always uncertainties in the area of transparency and exchange of information, but it
seems Australian practices are in line with the OECD current philosophies.
Pascal Saint-Amans (new head of OECD tax department) does not concede that transparency and
exchange of information is of central importance, rather ‘transparency is of course key, and we
59
<http://www.swissinfo.ch/eng/culture/Taxation_agreement_signed_with_Australia.html?cid=36573476>. 60
Ibid. 61
<http://ministers.treasury.gov.au/DisplayDocs.aspx?pageID=003&doc=../content/pressreleases/2013/010.htm&min=djba>.
28
do have an agenda there…but for me, the core business of the OECD is tax treaties, transfer
pricing, and the elimination of double taxation. We should be back to our core business, I’m not
sure we’ve left it, but we could strengthen that to make sure.’62
Base Erosion Profit Shifting - going forward
We are entering an exciting and challenging time for multinationals. The OECD has made it very clear that it
wants to drive a fundamental re-write of the principles of international taxation that were laid down almost a
century ago. The challenge for multinationals will be to ensure that their existing structures evolve in
parallel and are fit for purpose for the next century. The challenge for each of the sovereign states involved
will be putting the stated principles into practice in a way that balances tax revenue an d political
considerations with each country’s presumed desire to remain competitive as both a source country and
residence country with respect to multinational direct investment.63
Part of the subsequent plan that originated from the 1998 report was the OECD’s base erosion
and profit shifting project, with the BEPS report being expounded at the G20 summit in Moscow
in February 2013. Due to the topic of BEPS being high on the international agenda, it was noted
by the communique in Moscow that, ‘in the tax area, we welcome the OECD report on
addressing base erosion and profit shifting and acknowledge that an important part of fiscal
sustainability is securing our revenue bases. We are determined to develop measures…take
necessary collective actions and look forward to the comprehensive action plan the OECD will
present to us in July.’
62
Ibid, above n48. 63
<http://www.lexology.com/library/detail.aspx?g=374cd3e4-4a3b-403c-943c-e54b1bca4ab0>.
29
The BEPS report, which has been driven by the G20, pinpoints a variety of issues whereby
‘fundamental changes are needed to effectively prevent double taxation, as well as cases of no or
low taxation associated with practices that artificially segregate taxable income from the
activities that generate it.’64 The report looks at a ‘realignment of taxation and relevant
substance…to restore intended effects and benefits of international standards,’65 to modernize
alongside of the globalization of technology. As Pascal Saint-Amans stated on 17th August 2013
‘the action plan ‘represents a unique opportunity that comes along once in a century to rewrite
the principles of international taxation…that will last for the next 100 years.’66
It is also an initiative by the OECD/G20 for the major purpose of ‘an inclusive and effective
process: launching the OECD/G20 BEPS project and involving developing countries…this
action plan requires an effective and comprehensive process that involves all relevant
stakeholders.’67
The BEPS project came into effect because of the political force that transpired from many
countries concerns because some multinationals were paying little or no effective tax, due to the
loopholes in the current international tax regulations. Multinationals such as Google, Apple,
Starbucks have all been under recent media scrutiny because ‘some multinationals are exploiting
the transfer pricing or treaty rules to shift profits to places with no or low taxation, allowing them
to pay as little as 5 percent in corporate taxes while smaller businesses are paying up to 30
percent. This distorts competition, giving larger companies an advantage over smaller, more
64
Ibid, above n5. 65
Ibid, above n5. 66
Ibid, above n63. 67
Ibid, above n5.
30
domestic companies. In this difficult economic climate, it cannot be right that larger companies
can avoid paying tax, with families and small businesses ending up paying more.’68
In a highly globalized environment, with tax arbitrage, tax havens, and developments in information
technology making transactions on the internet increasingly popular, tax revenues from corporate income tax
are dwindling even without the various allowances introduced by politicians favoring particular industries
and particular activities. Raising revenues from the profits tax is posing an increasingly daunting task; and tax
evasion is distorting activities and causing deadweight loss for society.69
Tim Cook, CEO of Apple openly defends Apples offshore tax policy by stating that they have
paid the US government 6 billion dollars of profits tax, and ‘subsidiaries in Ireland had funded
much of Apple’s R&D. He claims that the company has done nothing wrong, because the tax
avoidance was lawful and was necessary because the American tax system was outdated. This is
prime case of a massive multinational exploiting (and in their words) a “lawful” tax system.
Digital Companies such as Google and Amazon, two of the fastest internet based growing
multinationals are currently exploiting loopholes in the area of “permanent establishments.”
Companies pay corporation tax on their profits, not their sales. But the current debate revolves around the
apparent ability of multinationals to move their profits from country to country with little obvious relationship
to where the sales are generated.70 In an era where non-resident [corporate] taxpayers can derive substantial
profits from transactions with customers located in another country, questions are being raised as to whether
68
H Lok Sang, Tax Reform : Toward a simpler, more progrowth tax regime (2013). 69
Ibid, above n68. 70
<http://www.bbc.co.uk/news/business-22878460>.
31
the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from
such transactions go untaxed anywhere.71
Tensions have appeared in the ‘OECD working party looking at how to address the permanent
establishment rules in the light of the burgeoning internet economy. This working party is being
jointly led by US and French teams – representing the extremes of opinion among G20
nations…France has been among the most aggressive in responding to online businesses that
target French customers but pay little or no French tax… In the case of Google, in 2011 French
tax officials demanded €1.7bn in back taxes. In February this year Google settled the case,
agreeing to pay €60m to help France with digital innovation and other issues.’72
The OECD has fifteen proposed actions to address BEPS and has strong visions in regard to the
aggressive tax planning required to combat internet multinationals by largely targeting its sights
on “six key pressure areas" some of which are summarized as follows.
Action 1 - Addresses the challenges of the digital economy. This is aimed at identifying ‘the
significant challenges posed by the digital economy in relation to the current application of
international tax rules and develop detailed options to address these problems.’ Permanent
establishments will be under scrutiny because of the risks they are exposed to, and because the
way global business has significantly changed with the emergence of the digital economy.
Companies whose business models involve no physical presence but heavy interaction with local customers -
- who’s freely uploaded information they sell to advertisers -- have been in the sights of tax administrators in
71
<http://www.theguardian.com/business/2013/jul/14/us-tax-avoidance-google-amazon>. 72
Ibid.
32
France and other countries. None of them pay much tax to customer countries. The actio n plan promises to
take a holistic approach that will consider both direct and indirect taxation. 73
The crackdown on changing the loopholes with regard to permanent establishments has
already started (such as the tax audit of Microsoft in France) but stringent rules are required to
ensure that any ambiguity with regard to associated subsidiaries is covered. The Dell Case in
Spain has become a precedent for the first “online permanent establishment,” but these cases
may be more than the OECD can deal with at the moment as the action plans will not be
“actioned” for a few more months if not years.
Action 2 – Neutralize the effects of hybrid mismatch arrangements. Under this banner the focus
on hybrids is based on the apparent gaps between some domestic laws. The use of double non-
taxation, double deduction and long term deferral will be scrutinized. ‘Considered by some
observers as the most challenging aspect of this action plan, this action may require changes to
the OECD Model Tax convention and domestic law and substantial cooperation among
countries,’74 particularly in the area of deductibility. The challenge lies with those countries that
might find that the benefits outweigh the losses that emanate from tax breaks associated with
Multinational-enterprises (“MNEs”).
Action 3 – Strengthen CFC Rules so that taxpayers incentives to shift profits to low jurisdictions
are reduced.
The OECD wishes to see uniform CFC rules to counter BEPS in a more comprehensive manner, with the aim
that tax payers would have a much reduced incentive to shift profits into a low tax jurisdiction. The action
73
< http://www.taxanalysts.com/www/features.nsf/Articles/686B11ADF362660985257BB9004C216E?OpenDocument>. 74
<http://www.lexology.com/library/detail.aspx?g=956cccd4-0978-4b69-8025-02e31e66e0d3>
33
point is to develop recommendations regarding the uniform design of CFC rules which could then be
considered by the sovereign states. 75
CFC legislation is exceptionally significant to the claw back rules, and its presumptuous nature is
what makes this challenging for the OECD with particular regard to interest payments that are
excessive as compared the debt levels.
The action plan merely says that the OECD will develop model CFC rules, without indicating any direction
for them. The sense of direction is that we want effective CFC rules. Issues of compatibility with European
Union law will be taken into account. There are already some EU member states with pretty tight CFC rules,
Saint-Amans told Tax Analysts.76
Action 4 – Limit base erosion via interest deductions and other financial payments. This action
plan indicates that a “model domestic law” which the OECD proposes, will disallow deductions
for related party interest that is not being taxed in the hands of the receiver. This is associated
with inbound and outbound circumstances. With regard to inbound, the concern lies with how
excessive the interest deduction is for debtor as compared to the taxed interest for the financier.
The outbound scenario is viewed from the debt to finance perspective.
The action point is to develop best practice recommendations for the design of rules to prevent BEPS through
the use of interest deductions and other financial payments. Transfer pricing guidance will also be developed
in relation to the pricing of related party financial transactions.77
There’s eleven other action plans not listed here, but they are equally just as important and
requiring attention and action. It has been noted by cynics that the BEPS plan ‘reflects nothing
75
<http://www.pwc.com/en_SG/sg/tax-bulletin/assets/taxbulletin20130730.pdf> 76
Ibid, above n73. 77
Ibid, above n75.
34
more than a political response to several high profile international cases involving MNEs such as
Google, Apple and Starbucks having minimal tax liabilities in jurisdictions where these
companies had significant operations. In other words, there was a public outcry the MNEs were
not paying their fair share of tax and the politicians had to act now.’78
Conclusion
‘Globalization has boosted trade and increased foreign direct investments in many countries. Hence it supports
growth, creates jobs, fosters innovation, and has lifted millions out of poverty.’79
The OECD’s crusade to rid the world of tax havens and harmful preferential tax regimes is
endorsed by the primary motivation of the members of the OECD. The OECD has debated
against tax competition and the reasons tax havens should be dismantled for many years with
heatedness and a desire to improve or world economically. The dubiety with regard to some of
their opinions such as the reduction in global welfare and the distortion of markets due to
harmful tax competition has seen the OECD’s credibility under scrutiny with empirical data
proving that these facts are not always proven. The idea that every country has to abide by
similar if not the same rules is at best theoretically sound, however, realistically impractical.
‘Naturally most countries try to protect their tax basis. But only the successful way to counter
harmful tax practices and international tax competition is through global initiatives.’80 The
initiatives put in place by the OECD such as the Model TIEA’s and more currently BEPS have
78
Ibid, above n74. 79
Ibid, above n5. 80
Ibid, above n23.
35
their fair share of criticisms and limitations. But the question is and will continue to be, how far
does the OECD have to go in terms of initiatives before the economic world merges into one,
and is this what everyone wants? Michael Littlewood has noted that
diversity among nations may be an inherently desirable phenomenon – and worth preserving and fostering,
even at a cost. The homogenizing of the world’s legal systems and tax systems is therefore, not necessarily a
good thing, especially if it is effectively imposed by some countries on o thers….The OECD project has an
uncomfortable but pervasive fell of Big Brother to it.81
One of the many problems that the OECD have had difficulty with initially was The harmful tax
competition report in 1998 which was perceived to be nothing more than a tax cartel disguised,
for the benefit of the richer more powerful countries, and to the detriment of the developing
poorer nations. This report is at least an attempt to harness the illegalities of money laundering
and fraudulent behavior, however, there are many limitations with this report and a rethink is a
necessity to ensure tax competition isn’t impeding other potentially suitable economic outcomes.
The OECD has also had their fair share of success with regard to the number of TIEA’s
emerging onto the international tax arena which suggests that there is a momentum for a global
change. Whether this momentum continues is a focus the OECD will have to promote, however,
the new head of the tax department for the OECD has challenged all the previous workings of
the OECD and stated that exchange of information is not key but rather that his focus lies with
‘tax treaties, transfer pricing, and the elimination of double taxation.’ This does not bid well for
81
Ibid, above n25.
36
their aim in reducing tax competition, as altering perceptions on tax competition is generally in
alignment with the trajectory of information exchange and transparency.
Regardless of the success or failure of the OECD to date, they have had at least the fortitude to
attempt many economic pilgrimages through initiatives to find global harmony and to reduce
preferential tax regimes. To achieve this requires strength and determination (which they have)
and an unbridled passion to at least in their minds, try to make the economic world a better place
for ALL mankind.
In concluding, the following statement by Michael Littlewood is a reflection on how the OECD
should maybe take its direction in terms of tax competition,
Maximizing global welfare seems a noble objective, but it also does not seem to be a principle upon which
international relations are usually based. Perhaps it would be a good thing if they were. If so, however,
foisting tax reform on unenthusiastic developing countries seems an oblique way to go about it. It would
seem more effective for the OECD and its members to address the goal more directly – for example, by
reducing the restrictions they put on immigration from less -developed countries, or by simply increasing the
aid they make available to them.
…Tax Competition can be as good for the goose as it is for the Gander…because there are many
ways to skin a cat…