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

• Author: David Kerzner, David W. Chodikoff
• Pages: 47-91

47

chapter three

THE OECD’S WAR ON OFFSHORE TAX

EVASION 1996–2014

A INTRODUCTION

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.

B EOI AND THE GOALS OF INTERNATIONAL TAX AND TREATY

LAW

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: http://fw.to/CTnJazR. 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.