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GUEST COMMENTARY: Europe Eyeing Tax Havens Again

Posted by kinchendavid on September 10, 2006

By Sir Ronald Sanders

Governments and financial sector authorities in the Caribbean should keep a close eye on the latest initiative by European Union (EU) tax officials to cast their tax net beyond their own shores.

On Sept. 4, 2006, the European Commission is reported to have said that it wants to extend the European Union Savings Directive (EUSD) to Hong Kong, Singapore, Japan, Macao, Bahrain, Dubai, Canada and the Bahamas.

The EUSD requires countries either to provide information on interest paid into the bank accounts of EU citizens to the tax collectors in their country of origin, or to apply a withholding tax on the interest payments that is then remitted to the revenue departments of the relevant EU countries.

The inclusion of the Bahamas on the EU list is ominous.

For when the Organisation for Economic Cooperation and Development (OECD) launched its so-called “harmful tax competition initiative” in 2000, it identified the smallest and weakest nations in the world to name and shame; many of them were in the Caribbean.

There followed an unrelenting three-year campaign against these countries, describing them as “non-cooperative countries and territories” (NCCTs) and demanding that their Head of Government sign a letter committing to the removal of “harmful tax practices” which included information exchange. Almost every Head of Government of a small country signed a letter which was promptly displayed trophy-like on the OECD website.

Fortunately, the Republican administration, which came to power in the United States under President George W Bush, disagreed with the high-tax stance implicit in the OECD initiative, and this helped to weaken the OECD resolve.

In the end, the OECD juggernaut was brought to halt by the resistance of some of its other members – Switzerland, Luxembourg and Liechtenstein in particular – who refused to go along with the demands of their more strident sister states in the OECD for fear of the harmful effect on their vital financial services sector.

The so-called NCTTs demanded an equal playing field with OECD members, particularly Switzerland. Reluctantly, in the face of division within their own camp and a hostile group of small countries, the OECD agreed.

But the naming and shaming campaign did great harm to several Caribbean countries which lost both earnings and employment as many financial institutions closed their doors. They suffered the further cost of establishing expensive regulatory and enforcement machinery.

It was EU members of the OECD – especially France and Germany – that had originally initiated the “harmful tax competition” project in the OECD. It was not surprising, therefore, that the EU introduced the EUSD in July 2005 within their member states and dependent territories. They also entered into separate but more limited arrangements with Switzerland and Liechtenstein to apply the savings directive.

After the first nine months of the operation, EU tax officials were clearly dissatisfied with their haul from the traditional tax havens in the EU and dependent territories in the Caribbean such as Anguilla, the British Virgin Islands (BVI) and the Cayman Islands. Figures bandied about are a high of US$100 million from Switzerland through US$4 million from Guernsey to less than fifty thousand United States dollars from the BVI.

The theory now seems to be that the monies have left Europe and its dependencies, where the EUSD has been enforced, and wandered off to Hong Kong and Singapore in particular.

The Bahamas is named because, apart from Cayman and the BVI, which are already captured in the EUSD, it has the most financial institutions in the region.

Pressure will, undoubtedly, be put on the Bahamas, and if the authorities in Nassau succumb, whatever arrangements are agreed will, undoubtedly, be presented to Caribbean countries to do likewise.

But, the Bahamas authorities should not talk to the EU alone. Indeed, it is not too early for the Bahamas to reach out to Hong Kong and Singapore to establish an alliance and to agree how to deal with any approaches from the EU.

Undoubtedly Singapore and Hong Kong will point out that, through mutual legal assistance treaties and tax information agreements, they, and many other countries, including the entire Caribbean region, already cooperate in providing information on tax evasion. But, tax avoidance remains a legitimate tool of financial planning.

In any event, Caribbean countries should be alert to the need to guard their financial services sector against further unnecessary erosion at a time when many of their economies are reeling from the loss of preferential access to the EU market for their exports such as bananas and sugar.

* * *

Sir Ronald Sanders is a business executive and former Caribbean Ambassador to the World Trade Organisation who publishes widely on Small States in the global community. Responses to: ronaldsanders29@hotmail.com

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