A Level Playing Field

As the financial storm that has gripped the world weakens, we are all waking up to a new dawn with hope that economic stability can soon be restored. There are many countries in the developed world licking their wounds and counting their losses. All has resulted in allowing profligacy to be the order of the day, be it by giving “carte blanche” to the banking industry to indulge in dubious practices and governments’ lack of restraint on public debt.

There is a pot of gold at the end of the rainbow however, and this takes the form of International Finance Centres (“IFCs“). We have witnessed the knee jerk reaction by the G20, under unbearable pressure to be seen to be addressing the financial crisis, to browbeat IFCs and force them into line by imposing a regime of transparency. Paradoxically, there are countries like the U.S.A. which still resist the same or a similar regime to be imposed on them.

The G20, through the Organisation for Economic Co-Operation and Development, compiled a list which distinctly segregated the “good boys” from the “bad boys“. Those jurisdictions/countries with at least twelve Tax Information Exchange Agreements (“TIEAs”) were the good boys and they would find themselves in the “white list“. The remainder would be in the “shame list”. A TIEA is a bilateral agreement that has been negotiated and signed between two countries to establish a formal regime for the exchange of information relating to taxes.

The G20 took a “carrot and stick” approach, urged by countries such as France and German, which have a particularly dislike for IFCs. In other words, you either sign up to twelve TIEAs by early spring next year, or you will contemplate the possibility of being marginalised by the global financial community and face swingeing penalties, the details of which are unknown to this date.

Countries or jurisdictions such as Switzerland and Luxembourg faced with the grim prospect and the consequences of not joining the white list made quick progress in signing up to the twelve TIEAs and are now in the said list.

Gibraltar in 2002 agreed to improving transparency and exchange of information in tax matters with the OECD, but it did not sign up to any TIEA. The Gibraltar Government’s contention with the OECD was that it was not a level playing field, that is, jurisdictions like Gibraltar were asked to become transparent when other countries/jurisdictions resisted any change. The G20’s recent initiative has forced many countries and jurisdictions to change their ways in the transparency in which they conduct their business. This has created a more equitable playing field. Gibraltar is now, also, in the white list.

TIEAs have a two prong objective, that is, to stamp out tax evasion and at the same time dissuade taxpayers to leave for foreign shores which offer a more attractive tax mitigation proposition. However, TIEAs cannot be used willy-nilly and therefore the party requesting information should have grounds that tax evasion or tax fraud is taking place. Therefore “fishing expeditions” are discouraged.

Many governments at the moment are “plugging holes” and “putting out fires” as the power to generate capital by the business sector has dwindled and this has a direct impact on public revenues. Therefore public spending has to be prioritised as money is scarce. Countries like the United Kingdom and Spain face drastic cutbacks in public spending and taxes will have to be raised. But IFCs should not bear the brunt for these unfortunate circumstances and it would be a reassuring signal by the OECD if it actively encouraged and expanded the level playing field. A recent report was published by Michael Foot on the opportunities and challenges facing the British Crown Dependencies (Guernsey, Isle of Man, Jersey) and six Overseas Territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Turks and Caicos Islands). The report revealed that the UK was a net recipient of funds from the nine jurisdictions of $257 billion at end-June 2009. This is no mean feat, by any standard and highlights the significance and importance of the mentioned IFCs to the British economy.

TIEAs are a means to an end with a firm purpose as discussed earlier. However, it remains to be seen whether tax evasion or tax fraud will decrease by the widespread implementation of TIEAs. The countries that comprise the G20 should consider how IFC's could contribute to their ailing economies and recognise IFC's as a source of capital generation which can benefit all.