The OECD presented to the G20 finance ministers and central bank governors meeting a list of criteria to identify jurisdictions non-cooperative from a tax transparency perspective, but will these criteria deliver on putting pressure on the world’s largest tax havens? Vincent Huck reports

The OECD had been mandated by the G20 finance ministers to come up with such criteria, and Pascal Saint-Amans director of the centre for tax policy and administration at the OECD unveiled them in a webinar in early July ahead of the finance ministers meeting held in Chengdu, China on 23 and 24 July.

To be deemed cooperative a jurisdiction will have to meet the benchmarks of at least two of the following three criteria:

  1. Implementation of the Exchange of Information on Request (EOIR) standard: at least “largely compliant” rating.
  2. Implementation of the Automatic Exchange of Financial Account Information (AEOI) standard: committed to implement common reporting standard (CRS) and begin exchanges by 2018 at the latest.
  3. Exchange network: Participation in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMATM ) or a sufficiently broad exchange network that provides for EOIR and AEOI.

In addition to these criteria and benchmarks, jurisdictions will be immediately considered as non-cooperative if they haven’t completed phase one of the implementation of the EOIR. On the other hand, these criteria will not apply to developing countries which do not have financial centres.

“The obvious comment is that the OECD is tiptoeing around the elephant in the room, the USA,” BEPS monitoring group coordinator at the Tax Justice Network (TJN) Sol Picciotto commented. “They obviously want to avoid the possibility of the USA being designated non-compliant, while keeping up some pressure to try to get some movement from Congress.”

At present, the USA does not strictly comply with Criterion 2, since it has not adopted the CRS, he continued. “They claim that FATCA is equivalent, but there are material differences, including between variants of the FATCA bilateral. Similarly, on Criterion 3, the USA has joined the MCMATM, but not its Competent Authority Agreements, so can’t be said to be providing information under it.”

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Similarly Richard Murphy, a professor of practice in international political economy at City University London and director of Tax Research LLP, said that the criteria were too broad to have any significant impact.

Indeed it seems only small countries would be non-compliant to these criteria, such as: the Federated States of Micronesia, Guatemala, Kazakhstan, Lebanon, Liberia, Nauru, Trinidad and Tobago, and Vanuatu.

The only exception being Israel, Turkey and the USA which are at risk of being found non-cooperative.

“You have to work significantly hard to find any country of any significance which is going to fail here,” Murphy said. “Because other ones, yes they are tax havens, but, you know what, no money goes there, so we’re really not getting near anything that’s going to block down any international financial flow.”

If the USA and Israel are found non-cooperative it will be interesting, he continued, but the need for a more complete and effective list of criteria still exists. “If Panama is likely to get through then there is something wrong.”
Murphy pointed to the TJN’s Financial Secrecy Index (FSI) as a better alternative. “The data is available; a lot that is used for the FSI comes from the OECD,” he argued. “I don’t see why something along those lines which seems to me to be much more useful shouldn’t be used.”

He declared an interest as he helped set up the first version of it, but said he hasn’t been involved with it in the past six years and still continues to use it. “Because it seems to me much more rigorous than anything that the OECD has come up with.”

Looking back he remembered a series of crisis starting in the mid-90s followed by 2001, then 2008, which each prompted a reaction from the OECD announcing a new initiative most probably in the form of some sort of checklist.
But in each cases he argued “within days the black list is empty and the grey list is likewise empty. And places that you would say are obviously tax havens are suddenly on the white list saying ‘nothing wrong with us, we have been approved, no need to take actions because we are on the approved list’”.

He added: “It’s completely useless in terms of having an impact for creating change.”

However change does occur, Murphy conceded, but it’s a behavioural change driven by a perceived risk of increased public scrutiny carried by the leaks scandals such as HSBC and Panama Papers.

Taking the example of the country-by-country reporting initiative to make his point, he said that the standard doesn’t require companies to change their behaviour, but companies do so because they realise that at some point there will either be a leak or it’s going to be required on the public record and therefore they will have to change their behaviour anyway.

“Change in behaviour is happening, but not because of what the OECD is doing,” Murphy said. “The only real issue here is will this new [list of criteria] put pressure on the USA and Israel? If it does that it is going to be quite interesting and create some political pressure because of the unusual sensitivity about those two particular places.”

These things have to be seen as symbolic, but in their symbolism they create real on-the-ground changes because people perceive that there are risks as a consequence, he concluded. “It’s the perception of risk that matters, not the actuality of the information exchange that is going to make the difference.”