Federal Triangle: Mealy Mouthed Mendacity
The OECD report states that governments must intensify cooperation to manage global issues; "taxation is no exception" including "spread of harmful tax competition" and "mobile activities that unfairly erode the tax base of other countries and distort the location of capital and services." The wording of the report then turns defensive stating that the "project is not primarily about collecting taxes°°not intended to promote harmonization of income taxes°°not about dictating appropriate level of tax rate" but (the key) "ensuring that tax is not a dominant factor in making capital allocation decisions." OECD will "support the effective fiscal sovereignty of countries over the design of their tax system." (The use of the word "effective" is telling.) Further, "To counter harmful preferential tax regimes°°Guidelines will eliminate the harmful features." The report wording in the discussion sections then gets squishy describing how the OECD Committee "endorsed an ap-proach to extend and take forward cooperatively the dialog with jurisdictions that meet the tax haven criteria." The United States is considered by much of the world as a tax haven.
OECD intends to coerce the 47 world jurisdictions with tax haven status into some manner of cooperation; this includes places such as Andorra, Bahamas, Liberia, Maldives, Monaco, Seychelles, and both Virgin Islands. The criteria OECD uses to describe a "tax haven" locale is that 1) they impose no or low tax on income, 2) the tax regime is fenced from the domestic economy, 3) the regime lacks transparency, and 4) there is no effective information exchange. Can you believe it! These little rogue countries do not impose tax, encourage people to invest money in local banks and industry, and tell OECD to take a hike when they ask questions about other peoples' business. The OECD Committee cannot abide untaxed assets and has established a "List of Uncooperative Tax Havens."
OECD will also address the "harmful features of preferential regimes" among the member nations, conditions that must be removed within five years, by April 2003 for some and by December 2005 for others. For American businesses, the Foreign Sales Corporation is a targeted activity to remove. All OECD members have some areas being reviewed covering insurance, banking, financing and leasing, distribution and service centers, and shipping as primary examples. So, it is highly likely that all multinational corporations will be affected.
The OECD Committee acknowledges that its intent "must be vigilant against adverse developments" so the report sections that should be titled "Threats" mentions "bilateral assistance programmes" and "encouraging international organizations to take into account the special needs of jurisdictions" who fail to address tax practices in ways approved by OECD. Specific "defensive measures" (retributions is the correct word) listed are to a) disallow deductions, exemptions or credits in host nation tax, b) deny cost recovery and availability of foreign tax credits, c) impose (high) transaction charges involving listed tax havens, d) "enhance audits," and e) impose withholding taxes, as examples.
Ramifications are severe in what is underway by the OECD. With cooperation and blessing of the same Administration, who thinks social security reform to allow self-directed investment for retirement or repeal of the death tax that entitles government to take your savings from your heirs because you were so selfish to die, the OECD plan is "a risky scheme." With the change after elections, American industry management will do themselves and their country a favor to tell the new President to opt out of the OECD intent. It is bad policy and bad economics for America. IH