In recent years the increase of technology and mobility of both data and persons has created an interdependent global economy. As such it has been necessary to create international organizations that regulate the domestic fiscal, political, social and economic activities of individual countries. These organizations establish standards based on internationally set rules and as such maintain coherency when conducting business throughout the world.
In the offshore and financial world, the creation of such institutions is aimed at regulating and supervising corporate transactions, examining financial legislations globally, and introducing principles for the performance of financial activities. The decisions and measures implemented by these organizations have sometimes been criticized as being an attack on an important source of income earned through financial services in many countries. Nonetheless they have resulted in assuaging and combating financial crimes and terrorism and their value exceeds their shortcomings. In this article, we shall focus on two major institutions that exercise a lot of influence on offshore financial centers globally and have been a significant force in shaping offshore industries and activities; the Financial Action Task Force and the Organization for Economic Co-operation and Development.
The Financial Action Task Force (FATF), is an inter-governmental organisation consisting of 32 countries including Argentina, Australia, Belgium Brazil, Canada, China, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, The Netherlands, Luxembourg, Mexico, New Zealand, Norway, Portugal, Russian Federation, Singapore, South Africa, Spain, Switzerland, Turkey, United Kingdom and the United States; as well as 2 regional organizations, namely, the European Commission and the Gulf Co-operation Council. Associate members of the Financial Action Task Force are the Caribbean Financial Action Task Force (CFATF), Financial Action Task Force on Money Laundering in South America (GAFISU), Asia/Pacific Group on Money Laundering (APG), Middle East and North Africa Financial Action Task Force (MENAFATF) and the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures.
The FATF was established in 1989 with the main objective of “promoting national and international policies to combat money laundering and terrorist financing”. Recommendations were published by the organisation in an effort to encourage the political desire of countries to implement legislative and regulatory changes within their respective financial services industries. The FATF describes the fight against money laundering as a dynamic process due to the fact that money launders constantly find innovative ways to conduct their activities.
The FATF commenced its tasks in 1998 when it was convinced that several countries were lacking the appropriate measures for preventing illegal financial activities. In 2000, of the 47 jurisdictions evaluated, 23 were considered Non-Cooperative Countries and Territories (NCCTs) and blacklisted based on the parameters set by the FATF for identifying non complying countries. This severe action was viewed by some as unjust and inappropriate since the economies of those countries were severely affected, causing loss of jobs and social instability in countries which heavily depended on the income gained through offshore financial activity. The inability of several jurisdictions to meet the FATF standards was also a consequence of the lack of infrastructure and resources for implementing the necessary frameworks required by the FATF for clawing back on illegal financial activities. In 2001, with the exception of one NCCT, all other jurisdictions were de-listed from the FATF’s blacklist.
The Organization for Economic Co-operation and Development (OECD) is an organization founded in 1961 and comprises 30 member countries. The principle objective of the OECD is to “bring together the governments of countries that are dedicated to democracy and the market economy” for the improvement of standards of living, development of international trade, maintenance of financial stability, creation of jobs, development of sustainable growth and the advancement of global economies.
The OECD has been actively involved in the developmental process of offshore financial centers and has published diverse literature on the offshore industry. The OECD’s work encompasses a full range of areas such as social and welfare matters, education, health, biotechnology, fisheries, energy, environment, public governance and management, insurance and pensions. With regard to the offshore industry, the OECD’s definition of tax haven has been crucial in identifying tax havens and their characteristics. In this light, a jurisdiction is considered a tax haven according to the OECD’s standards depending on its fiscal regime which include having no or only nominal taxes, protection of personal financial information and secrecy (very strict rules on exchange of information).
The OECD has sought to establish multilateral regulations that would erect a framework and provide guidelines to all world governments about international taxation. Although, in essence, ‘international taxation’ does not exist based on the fact that there in no international tax authority or regime that imposes taxes on physical and juridical persons, the concept of international taxation was developed by the OECD due to the fact that the tax regimes or fiscal policies of a particular country is capable of affecting investment and financial status of another. This is due to the fact that corporations and people generally tend to invest in countries with friendly business environment, low operation costs and very importantly, preferential taxes for foreign investors. Preferential tax regimes also enable persons and corporations that keep their assets offshore to accumulate their wealth in a tax free environment.
In 1996, a report presented by the OECD’s Committee on Fiscal Affairs addressed “harmful tax practice in the form of tax havens and preferential regimes in the OECD Member countries and non-Member countries and their dependencies.” This Report introduced principles and guidelines for preventing and eliminating such practices, established a new Forum mandated to ensure that these guidelines and principles were implemented accordingly and deadlines were established for putting those measures into effect.
Many of the regulatory measures taken by the OECD have been aimed at preventing the outflow of capital from its member countries to the shores of offshore tax havens. Consequently, in a response to what the OECD regards as “harmful taxation”, guidelines and regulations were established in order to create an environment of “tax harmonization”. The notion of harmonizing taxes has often been criticized as impossible and unjust since every country has its own distinct economic base and financial dynamics, particularly when the countries being negatively affected by the OECD’s decisions are countries with small and fragile economies that are unable to compete with large first world countries. This situation, however, manifested a new wave of global economic activity identified as international tax competition.
There are many commentators who express that some harmful effects of international tax competition might be mitigated through the consolidation of bilateral international tax treaties through stronger multilateral organizations. In short, their wish is to resolve the issue of international tax competition through the standardization of fiscal regimes by creating bodies with similar roles and functions as GATT and WTO, which deal with trade and trade policy. This is seen as the only manner in which uniformity can be achieved in the taxation of international activities without infringing upon the sovereignty of any country.
Although not explored in this article it is worth mentioning that other institutions which operate similarly as the OECD and FATF include the Financial Stability Forum (FSF), International Association of Insurance Supervisors (IAIS) and the Basel Committee on Banking Supervision.
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(c) Caribbean Land and Property December 2008