The OECD's War on Offshore Tax Evasion 1996?2014

AuthorDavid Kerzner, David W. Chodikoff
chapter three
EVASION 1996–2014
In the late 1990s, the OECD increasingly took formal notice of a phenom-
enon occurring in select jurisdictions around the world that was causing
serious harm to f‌iscal authorities (of members and non-members alike)
and impeding the organization’s aims to advance global economic growth
and development. This phenomenon or problem manifested itself in places
where f‌inancial institutions from Europe to the Caribbean could of‌fer bank
accounts on which little or no taxes were payable by the account holders.
At the heart of this problem were the jurisdictions’ strict secrecy laws that
forbade, including under threat of criminal penalty, the disclosure of the ac-
count holders’ identities. This combination of low taxes and bank secrecy of-
fered citizens and residents of OECD member countries a unique investment
service that their home country could not provide (or compete with)—a
place to grow their wealth and hide both assets and income from tax author-
ities. These “tropical investment conditions” had serious global f‌inancial,
economic, and political repercussions that the OECD recognized and began
to take aim at. As explained in this chapter, the cannon that the OECD con-
structed in 2002 to destroy tax havens’ bank secrecy laws was a single-pur-
pose bilateral treaty known as the Agreement on Exchange of Information on
Tax Matters.1 Automatic exchange of information (Automatic Exchange) was
not yet the primary focus of the OECD during the period 1996 to 2013, and is
discussed in Chapter 8.
1 OECD, Agreement on Exchange of Information on Tax Matters (Paris: OECD, 2002) [treaty and
commentary together: Model TIEA].
48 InternatIonal tax evasIon In the Global InformatIon aGe
This chapter begins by reviewing the goals of international tax and treaty
law and considering the relationship between these goals and exchange of in-
formation (EOI) and to what extent EOI may be said to support these goals.
After this, the chapter describes the nature of the perceived f‌iscal threat, facing
the OECD member states and other countries, posed by tax havens and cer-
tain developed countries that of‌fer preferential tax regimes. It then examines
the stated policy objectives of the OECD surrounding EOI and of the Global
Forum on Transparency and Exchange of Information for Tax Purposes (Global
Forum), the United States, and Canada. The chapter concludes with an evalua-
tion of the OECD’s war on of‌fshore tax evasion during the period 1998 to 2014.
1) International Tax Policy
A primary goal of international tax policy has been to relieve double taxation
that arises from the claims of residence and source countries so that income
is taxed only once. More recently, a key goal of international tax policy has
been to combat tax evasion.2 The importance of this goal can be seen in re-
cent ef‌forts of the Global Forum and its peer review project, the announce-
ment by the G20 in 2013 of its commitment to Automatic Exchange, and the
promulgation and worldwide implementation by the United States of the
Foreign Account Tax Compliance Act.3 As explained in more detail below, EOI
by request as found in both double tax conventions (DTCs) and tax infor-
mation exchange agreements (TIEAs) supports the goal of combatting inter-
national tax evasion by providing f‌iscal authorities in Canada and the United
States (and elsewhere) with a legal mechanism to obtain foreign information
regarding the of‌fshore income of a tax resident under examination. More-
over, TIEAs f‌ill a gap by allowing Canada and the United States to exchange
tax information on a bilateral basis with foreign countries where economic
and other circumstances may not justify a DTC (which has some thirty arti-
cles, including one on EOI).
a) Concepts of Neutrality and Equity
International tax policy has also been concerned with neutrality—capital
export neutrality (CEN) and capital import neutrality (CIN)—to achieve
2 See Chapter 2, Section C.
3 Enacted by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act, Public
Law 111-147, and signed into law by the president on 18 March 2010 [FATCA].
The OECD’s War on Offshore Tax Evasion 1996–2014 49
greater worldwide economic ef‌f‌iciency. In addition to economic ef‌f‌iciency
goals, international tax policy has also been concerned with principles of
equity—horizontal and vertical equity, and internation equity.
As explained in Chapter 2, where a taxpayer makes an investment deci-
sion as to whether to invest domestically or internationally based on factors
and considerations other than those relating to tax, CEN may be reached.
Under CIN, investment and business activity within a given jurisdiction
is subject to the same overall tax level, without regard to the residence or
nationality of the investor. The goal of CIN may be realized in a world or-
der where each country (including Canada and the United States) agrees
to adopt a pure exemption tax system regarding income earned therein. As
both Canada and the United States adopt a worldwide system of taxation for
individuals rather than a sourced-based system, the question of whether or
not TIEAs support CIN is not considered.
Where CEN is achieved, the incentive to shift mobile capital from a high
cost tax jurisdiction to a low or no cost tax jurisdiction would be reduced.
Non-tax motives such as lifestyle, asset protection, business, criminal activ-
ity–related, and other factors may still drive individuals to transfer capital
abroad and away from their residence state. A major hurdle to achieving CEN
has been the existence of harmful tax practices and tax havens. It is esti-
mated that as of 2010 the money in of‌fshore tax haven accounts totals more
than $21 trillion.4 In a system where weak information exchange mechanisms
and poor transparency rules enable taxpayers who are taxed on a worldwide
basis to hide their of‌fshore income from the view of f‌iscal authorities, tax in-
centives will continue to motivate shifts in income, thereby hindering CEN.
TIEAs can bolster countries’ ability to administer and enforce their tax and
criminal laws by facilitating the exchange of foreign tax information that can
then be used in an examination of a taxpayer. As a result, it can be broad-
ly said that DTCs and TIEAs help advance the goals of CEN by promoting
EOI, which assists f‌iscal authorities in administering a system of worldwide
4 See Janet McFarland & Bill Curry, “Document Leak Reveals Widespread Use of Tax Havens”
Globe and Mail (5 April 2013), online: The estimate is from a report
by James S Henry, a former chief economist with the global consulting f‌irm McKinsey &
Company. According to the article in the Globe, ibid, the top f‌ive tax haven destinations for
Canadian dollars in 2011 were Barbados ($53.3 billion), the Cayman Islands ($25.8 billion),
Ireland ($23.5 billion), Luxembourg ($13.8 billion), and Bermuda ($13.2 billion). These
f‌igures do not specif‌ically break down which amounts may be attributable to funds held of‌f-
shore by multinational enterprises, or directly or indirectly (e.g., through nominee entities)
to undeclared accounts of individuals.

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