The Future of Offshore Tax Havens

Recently, the Organization for Economic Cooperation and Development ("OECD") issued a report targeting "harmful tax regimes"-preferential, low tax regimes that are primarily tailored to tap into the tax bases of other countries. The report, Towards Global Tax Cooperation: Progress in Identifying and Eliminating Harmful Tax Practices, ("Towards Global Tax Cooperation"),1 identified a list of tax practices the OECD deemed harmful, such as "ring-fencing" (where foreign customers are subject to rules different than those applied to citizens which encourages the establishment of foreign entities with no substantial activities), a lack of transparency, and the absence of information exchange regarding tax practices. The OECD then released a second report, Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practices ("Framework").2 This report listed the OECD's objections to the policies of harmful tax regimes and provided a host of scheduled remedies, which presumably would be backed by the threat of sanctions detailed in Towards Global Tax Cooperation. Not surprisingly, the Commonwealth countries were among those identified as having harmful tax practices. In January 2001, the OECD met with the Commonwealth countries and other tax haven regimes to negotiate a "mutually acceptable" tax policy. What took place both during and after these negotiations is the subject of this Development. After highlighting the issues at stake and addressing the January negotiations, this Development will consider how two Caribbean countries, the Bahamas and Bermuda, have reacted to the OECD's proposals. These countries provide a good illustration of contrasting positions: while the OECD deemed the Bahamas "non-- cooperating," Bermuda gave advance commitment to the OECD proposals. Yet both have essentially adopted the core principles of the OECD proposals that eventually emerged from the January 2001 negotiations. Next, the essay will discuss the role of the Bush administration in shaping the accepted OECD proposals. Finally, in considering the future of tax havens, this Development will conclude that the compromised position advanced by the Bush administration was merely an affirmation of the course of reform already begun by the offshore tax haven regimes themselves. I. THE NEGOTIATIONS Towards Global Tax Cooperation and Framework provide the foundation for solving what the OECD considers to be the problems caused by harmful tax practices. As a result, they also serve as the foundation for ongoing negotiations between the OECD and the countries identified as engaging in such practices. However, the road to the negotiation table has been obstructed by a number of issues, including traditional North-South tensions, the unilateral approach taken by the OECD, and attendant sovereignty concerns (namely, the right to determine internal policies of taxation). As a result, the January 2001 tax policy negotiations between the OECD and tax havens were less than amiable. However, the OECD agreed to forego its rigid implementation schedule by withdrawing its Framework in exchange for proceeding with the reform initiative on the basic principles set forth by the OECDtransparency, non-discrimination, and effective exchange of information. A task force was set up to find a mutually acceptable political process that would transform the OECD principles into commitments and to continue the dialogue begun at the January meeting. The OECD gave the "offending" nations until July 31, 2001 to cooperate with its program or face economic repercussions. Under pressure from the new Bush administration, modifications were made to the original plan at the meeting of G-7 Finance Ministers in July. Specifically, the Finance Ministers agreed that coordinated sanctions or "defensive measures" would become effective for uncooperative tax haven jurisdictions no earlier than they would for similarly situated OECD member countries; the July compliance deadline would be pushed back to November 30, 2001; and the "no substantial activities" criterion would no longer be applied to identify a jurisdiction as "uncooperative. …