• Español
  • English


  • 734074Total visitors:

(English) Deciphering the OECD’s End Game

STEP Caribbean Conference

Jason Sharman, Griffith University

[email protected]


This paper is devoted to answering the question ‘What does the OECD want?’ with regards to international tax regulation. It begins by describing the background for the OECD’s current campaign in the area of international tax regulation, a campaign that began in the mid-1990s. It tracks the move from a confrontational, aggressive approach to achieving co-ordination in tax matters 1998-2001, to a more consensual, gradualist approach until 2008, and back again since the advent of the financial crisis.

The paper then considers the enforcement of the OECD standard, currently defined as at least 12 international agreements to exchange tax information on request. Countries that fail to achieve this standard are vulnerable to severe penalties imposed by the Financial Stability Board as well as individual OECD member states. There is a strong likelihood this minimum standard will change. The OECD is now stressing effectiveness in implementing such agreements as the key criterion, as adjudged by a process of peer review within a new Global Forum including both OECD and non-OECD jurisdictions.

Disappointingly, the OECD has refused to abandon its 2000 ‘tax havens’ list, raising questions about its willingness to treat member and non-member jurisdictions equally according to objective criteria. Because there is little evidence that information exchange agreements will deliver anything like the sums of revenue supposedly lost to international tax evasion, there may be pressure for the OECD to emphasise the automatic exchange of information in the future, rather than the current standard of information on request.

The fact that the OECD is a club of rich states means that it is vulnerable in a world where international clubs are increasingly only legitimate if they include developing states. A future battleground between rich and poor countries in tax matters might be over transfer pricing, where the OECD’s ‘arm’s length’ approach is coming in for serious criticism. Lastly, but perhaps most importantly, the paper concludes that the OECD Global Forum is about the best opportunity small state International Financial Centres (IFCs) will get to be involved in international tax standard-setting, and so both they and the financial sector should thoughtfully engage with this new venue.

The Background of the OECD Tax Campaign

There is a tendency among both policy-makers, observers and especially the media to see every crisis as unprecedented, every proposed solution as path-breaking. The pre-occupation with novelty from these quarters tends to feed on itself. Talk about globalisation has a lot to do with this fixation with novelty, in that it suggests that the world has fundamentally changed, and as result we face challenges unlike any before, which can only be addressed with equally innovative responses.

But there is a pre-history to most of the international tax issues we face today, and the back-story is important. Indeed, looking back at the historical records there are often uncanny parallels between the debates we see today and those that took place many decades ago. 

Ever since the OECD was forced to drop its more ambitious aims for the global regulation of tax policy in 2001, the initiative has been squarely focused on the international exchange of tax information. Conventionally, this has been achieved through clauses of Double Tax Treaties, though at least for IFCs these are increasingly superseded by administrative Tax Information Exchange Agreements. But Double Tax Treaties, and standard-setting with regards to international tax information exchange in multilateral bodies, long pre-dates the era of globalisation.

The first international organisation involved in this field was not the OECD, or even the United Nations, but in fact the League of Nations in the early 1920s. Those working within the League laid the foundations for the Double Tax Treaties, work later taken on by the United Nations tax group, until it succumbed to Cold War rivalries and was supplanted by the OECD from 1963 (Paris 2003).  (For the more recent history of Double Tax Treaties and the Caribbean, see Marshall Langer’s brilliant 2002 article ‘The Outrageous History of Caribbean Tax Treaties with OECD Countries’).

Logically prior to the issue of exchanging information is the idea of being able to get the relevant information in the first place. Establishing the beneficial ownership of corporate vehicles has been widely identified as one of the greatest contemporary regulatory challenges. This is because corporate vehicles that obscure the real owner are conventionally held to be one of the easiest ways to launder money, evade taxes, or give and receive bribes (OECD 2001; FATF 2006; Gordon 2009). The G20 has reinforced this concern.

But once again, is this concern really new? In 1937 letter to President Roosevelt, the Secretary of the Treasury complained of US citizens setting up shell corporations to hide funds in jurisdictions like Newfoundland so as to avoid paying tax:

Their corporation laws make it more difficult to ascertain who the actual stockholders are. Moreover, the stockholders have resorted to all manner of devices to prevent the acquisition of information regarding their companies. The companies are frequently organized through foreign lawyers, with dummy incorporators and dummy directors, so that the names of the real parties in interest do not appear ( accessed 10 November 2009).

The letter then went on to complain about the use of foreign insurance companies, domestic companies, trusts and pension trusts as legal devices to obscure the connection with beneficial owners.

These earlier precedents notwithstanding, the current era of multilateral activism on tax and tax information exchange began in the 1990s. Shortly after the end of the Cold War governments on both sides of the Atlantic began worrying about the globalisation (variously defined), particularly in terms of their ability to raise tax.

In Europe the background conditions were the creation of the single market and worries about high unemployment. The European Commission had for decades cherished ambitions of a role in tax policy, but with very limited exceptions this had been resolutely re-buffed by member states. This situation began to change as some members worried about intra-European tax competition, as well as the ability of capital to flee relatively highly-taxed and strictly-regulated Europe for more amenable jurisdictions elsewhere. Eurocrats coined the term ‘fiscal degradation’, and member governments began to worry about the job implications of being forced to shift the tax burden away from relatively mobile capital to relatively immobile labour and consumption. A nightmare scenario began to seize hold of European policy-makers’ imaginations:

If EU countries do not act together, a political time bomb will bring the disintegration of the welfare state. Capital income taxes will spiral down to zero, corporations will move profits to special tax regimes, and governments will be left with the sole of option of asking for more revenue from low skilled labour. (Radaelli 1999: 670).

These worries later came together in the European Savings Tax Directive and the Code of Conduct. But in the mid-1990s, many in the EU were frustrated by the slow progress, and were worried about the problem of displacement if responses were confined only to Europe, and so they opened discussions with the OECD.

Meanwhile, on the other side of the Atlantic in the Clinton administration, James Carville’s famous quote gives a good sense of a similar anxiety about the limits of government action. He remarked: ‘I used to think if there was reincarnation, I wanted to come back as the president or the pope… But now I want to come back as the bond market. You can intimidate everybody.’ One Larry Summers was also active in warning about the dangers of unfettered international competition between states for mobile investment supposedly leading to a race to the bottom in tax rates and regulatory standards. Like the Europeans, the US government was concerned that any unilateral ratcheting up of standards on its part would put American firms at a competitive disadvantage, and perhaps even reduce the tax take as capital moved elsewhere.

Although the Clinton administration and many others were clearly concerned about what the bond market and others might do to clip their wings, here they were not questioning the legitimacy of the bond market as such. However, overlapping with this concern were fears about ‘the dark side of globalisation’, particularly in terms of tax evasion and money laundering. Thus bringing together many themes he had earlier developed, Senator John Kerry, one of the main architects of American anti-drug laws, stated in his 1997 book The New War: The Web of Crime that Threatens America’s Security, that ‘Crime has been globalised like everything else’ (1997: 20). He goes on to discuss ‘a global criminal axis’ bent on destroying the American way of life.

Following from these anxieties, in the 1990s OECD policy makers were concerned both about how the unfettered flow of legitimate capital might prevent governments from doing things they want to do, but also about flows of illicit funds from criminal activity. These are two very different issues. Many people have reasonable disagreements about whether or not it is or would be a good thing for governments are disciplined by markets in some respects. But no one is in favour of financing terrorism or money laundering.

However, policy-makers in the OECD countries have tended to muddle these two very different issues together. Sometimes this seems to be because of sloppiness, but sometimes it seems a calculated ploy to brand opponents as being soft on crime or terrorism. So for example the various G20 statements lump the issues of money laundering, the financing of terrorism and tax havens together (G20 Pittsburgh 2009: 10). Even going by the OECD’s own very problematic definition of tax haven, this is a very unsubtle and intellectually indefensible effort to cast all those who oppose the G20’s preferred fiscal standards as criminals, or somehow in league with Al Qaeda.

The OECD Campaign Phase 1: Ambition and Aggression

Worries about licit and illicit globalisation have remained the same from the 1990s till today. The OECD tax initiative has tended to go through ‘normal’ periods, when it operated in the quiet consensual way that the vast majority of such international initiatives do. But at other times, most recently since the beginning of 2009, the OECD has operated in an exceptional manner, relying on threats and ultimatums.

Though the OECD had long been active in tax policy, and helping members to counter tax evasion (e.g. OECD 1987), the initiative began in 1996 with a committee commissioned to write what later became the Harmful Tax Competition report, released two years later. The report looked like it had been written by a committee, in that the parts didn’t always fit together. There seemed to be hard-line sections and then more moderate passages. One of the biggest mistakes in the report, however, was the title and term ‘harmful tax competition’. The OECD had been defined by its pro-competition stance, so for a group of economists to talk about bad competition created some cognitive dissonance. The OECD subsequently re-branded the campaign as the Harmful Tax Practices initiative, and indeed has spent a good deal of effort trying to airbrush harmful tax competition from the historical record.

The OECD had previously been known, to the extent it was known at all, as a rather boring organisation in which technocrats from various specialised policy areas in its rich state members got together to compile statistics and compose guides to best practice. The Paris-based organisation worked according to the quiet, dispassionate deliberation of like-minded scientific experts. To the extent that it aspired to change the world, it was by a rather gradualist, Fabian process of reasoned persuasion among member states. By contrast, in its early stages the Harmful Tax Competition initiative adopted a completely different approach.

Here the OECD took an uncompromising line that sought to dictate the tax policies of non-member states, identified as tax havens. The logic employed in the report was that ‘Countries should remain free to design their own tax systems as long as they abide by internationally accepted standards in doing so’ (OECD 1998: 15). Then as now, the second part of this sentence forms the crux of the issue; who determines what the international standards are in this area?  Specifically, the OECD required targeted non-members to agree to remove all ring-fenced provisions from their tax codes, and also provisions that were used to attract business with ‘no substantial activity’. Secondarily, there were also requirements relating to transparency and information exchange. The meaning of the ‘no substantial activity’ was never clear, but certainly some members of the OECD seemed to regard it as a way of putting International Financial Centres out of business.

After something of a slow start, the OECD produced a blacklist of 35 targeted jurisdictions (six others committed to the OECD just before the blacklist was released in June 2000), and a long list of measures that members could use in applying pressure to these jurisdictions (many of these measures have again been brought into consideration by the G20 since 2009). Those in the firing line were simply told to sign on the dotted line and implement the OECD’s demands.

The attitude behind this exceptional approach from the OECD, so much at variance with its normal modus operandi, was given in a very frank article by William Wechsler, former Special Advisor to the US Treasury Department in the Clinton administration. Wechsler gives the familiar globalisation story described above, including the conflation of technical issues like bank regulation with the worst sorts of crime like terrorism and drug cartels (e.g. 2001: 40 and 44). Apparently, the Clinton administration saw the need for a new approach in international financial regulation, including tax. A unilateral approach would only displace the money in question from one place to another. A traditional multilateral approach, through the United Nations for example, was also seen as unsatisfactory because ‘nations with underregulated financial regimes would easily outvote those with a commitment to strong international standards’ (Wechsler 2001: 49). The rather extraordinary admission here was that the goal was to change the majority of states’ domestic policies, against their will. The middle course between unilateralism and an inclusive multilateralism was to work through clubs of like-minded rich states, particularly the OECD, but also the Financial Action Task Force and the Financial Stability Forum. Once again, this same logic is very much in place with the G20’s actions from the London heads of state summit in April 2009, as detailed below.

Opposition to the OECD’s demands began to build in earnest from 2000, much of it spearheaded from the Caribbean, with the help of the Commonwealth. Many others pointed to the coercive nature of the campaign, and the unedifying spectacle of rich, powerful states ganging up on small, predominantly developing states. To make matters worse, Switzerland and Luxembourg, both OECD members, had indicated right from the start that they would not be bound by the OECD’s new, purportedly universal tax standards. After a rare display of unity among small state IFCs in January 2001, and growing suspicions from the newly-elected Bush administration, the OECD was forced into retreat.

The OECD Campaign Phase 2: A Return to Normality

Although the OECD succeeded in convincing all bar seven of the targeted IFCs to commit in principle to its demands by April 2002, the initiative had abandoned its most ambitious aims, as well as its aggressive conduct. The ‘no substantial activity’ clause was dropped, as was the demand about ring-fencing. The initiative was now all about the exchange of tax information, in relation to both criminal and civil matters. Even more importantly, under continuing pressure, the OECD moved back to a ‘normal’ way of conducting business (for greater detail, see Sharman 2006).

There was a growing commitment to dialogue, rather than ultimatums and deadlines, based on a premise of equality between OECD and non-OECD jurisdictions.  A Global Forum on Taxation was set up to bring together delegates from each side. Those that had been referred to as ‘tax havens’ were now ‘participating partners’. In 2003 the OECD admitted the ‘level playing field’ principle, stating that until countries like Switzerland and Luxembourg agreed to common standards, no other countries would be bound to do so. In 2005 the OECD backed away from, but never quite repudiated, its 2000 blacklist, and discouraged its member states from using such measures.  Indeed, relations seemed so cordial that at the November 2005 meeting of the Global Forum a senior OECD official joked to me that there was a password for entry into the reception that changed hourly. For the first hour it was ‘dialogue’, for the second, ‘partnership’, and thereafter ‘peace, love and harmony’.

Until the end of 2008, therefore, the OECD campaign, now focused around transparency and information exchange, defaulted to the gradualist, consensual mode that is typical of the organisation’s other activities. Normally, if differences between OECD members cannot be resolved by reasoned persuasion, then those differences simply persist. The number of hold-out jurisdictions refusing to commit even in principle to the OECD’s standards dwindled, and there were a few Tax Information Exchange Agreements (TIEAs) signed between ‘participating partners’ and OECD members.  But because Switzerland and Luxembourg refused to budge in their opposition to information sharing, and because most other jurisdictions had made their commitments conditional on the ‘level playing field’ condition, the matter had essentially reached a stalemate. This was a fairly satisfactory result for many in IFCs, though much less so for the OECD secretariat, and for its member state officials. What changed this, of course, was the financial crisis.

OECD Campaign Phase 3: Every Crisis an Opportunity

As noted above, the OECD tax initiative was largely ‘domesticated’ from 2001-2008, being increasingly conducted according to standard OECD procedures. With the advent of financial crisis, and the rather panicked atmosphere, this all changed. The G20 heads of state summit in November 2008 called member states ‘to protect the global financial system from uncooperative and non-transparent jurisdictions’, defining non-transparency as the failure to exchange tax information according to OECD standards (p.4; for an extensive coverage of G20 remarks on ‘tax havens’, see OECD 2010: 10-11). Suddenly, all the jurisdictions that had been adjudged to be compliant because they had committed to but not yet implemented OECD standards became non-compliant, and apparently in the firing line.

In contrast, the G20 were very keen to gloss over the fact that it was G20 members, especially the United States, that were actually responsible for the crisis. Thus along with the tough language about protecting the global financial system from outsiders, and the subsequent willingness to publicly single out non-members, there was the following anodyne statement:

‘Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions’ p.1).

In early 2009 it became increasingly clear that, at the behest of the G20, the OECD was moving back to a much more aggressive, confrontational approach. In early March Gordon Brown called for the world to come together and ‘outlaw offshore tax havens’, and rumours of a new blacklist began circulating.  Rushing to avoid a negative listing, Andorra, Liechtenstein and Monaco reversed their previously rock-solid opposition to exchanging civil tax information.

On 2 April 2009, reputedly on the instruction of Gordon Brown, the OECD released a three-tiered white/grey/blacklisting. The whitelist predictably included the G20 members, but also those IFCs that had concluded 12 or more information exchange agreements (either TIEAs or DTAs with the standard information exchange provision). The figure of 12 such agreements had earlier come from the OECD Level Playing Field Subcommittee, a body combining OECD countries and IFCs in equal measure. At the other end of the spectrum, Costa Rica, Malaysia, the Philippines and Uruguay were caught flat-footed in not yet having committed to OECD standards, and were thus blacklisted.

In the largest middle band, the greylist, were those that had committed to OECD standards, but had not reached the magic number of 12 agreements. Despite the OECD’s commitment to avoid the use of the term ‘tax haven’, the small IFCs in the greylist were once again labelled in this fashion, while OECD members and other centres who had substantively identical levels of compliance were listed as ‘other financial centres’. This violates earlier commitments from senior OECD officials that distinctions between jurisdictions would be made only in terms of the objective degree of compliance or non-compliance with generally-agreed upon standards.

Curiously, this division reflects the unwillingness to part with the OECD’s June 2000 list of tax havens. The OECD secretariat’s defence that the list is now of historical interest only, and that it should be seen ‘in its proper historical context’ is perverse. There were strong doubts about the accuracy and fairness of this list even when it was first issued, and ten years later it is clearly outdated and misleading. There was no reason to revive this list last year, and no reason for the OECD not to formally repudiate it now. It creates worries about an unwillingness or inability of the OECD to treat non-members and members in a consistent and objective fashion. This is more than just a matter of principle. Each time the OECD characterises a jurisdiction as a ‘tax haven’ this leads to that jurisdiction being entered in national tax blacklists, as well as private anti-money laundering software, both of which create real economic costs (Sharman and Rawlings 2005). It is inconceivable that the OECD does not know the effects of its designations and classifications.

Spurred by such consequences, in the year after the April 2009 summit, 25 countries graduated from the grey to the whitelist, and 300 new exchange agreements were concluded (OECD 2010). These included both IFCs and OECD members. Of the latter Austria, Belgium, Luxembourg and Switzerland have dropped their earlier objections to the standard information exchange clauses in the Model Convention. Even beyond the OECD, third countries as diverse as Chile, Thailand and Serbia have made the same move.

Interestingly, the OECD documents are also keen to snipe at their rivals in the UN Tax Committee of Experts, in saying that the UN has committed to the OECD standard of information exchange. In fact, however, the G20 statements refer to the UN Model Convention, not the OECD one (G20 London 2009: 4). This may reflect the reluctance of developing country G20 members to endorse the standards of an organisation from which they are excluded. More broadly, the idea that international organisations which set global standards are now only credible if they include representation from both developed and developing countries is potentially a major problem for the OECD, if not the new Global Forum as such. A central goal for the OECD is maintaining its institutional primacy in setting international tax standards.

The Future: Enforcing the New Standards

What happens to those jurisdictions that have either been incapable or unwilling to meet the threshold of 12 information exchange agreements? In October 2009 the OECD supplied to the G20 a list of measures being taken or under consideration within member states. So far the most stringent G20 member is France, which ensured that its banks withdrew from those ‘tax havens’ on the 2 April greylist. But the main enforcer seems to be the Financial Stability Board (FSB), which has a more general responsibility of identifying Non-Co-operative Jurisdictions in areas including, but by no means limited to, tax matters.

Those that fail to accommodate FSB demands will be publicly blacklisted as ‘Non-Co-operative Jurisdictions’, and ‘additional negative incentives could be applied to promote compliance’ (FSB 2010: 7). These include attempts to shape private actors’ calculations as to whether to invest in or transact with particular countries. These include measures such as increased reporting requirements, denial of deductions, withholding taxes. The London Declaration also threatens to make bilateral aid conditional on tax information exchange. And in a move that seems a very poor fit with the spirit and the letter of the IMF and World Bank’s mission, there is also a threat to block conditional lending to poor countries that do not toe the FSB’s line.

The most draconian threat is one seemingly composed by France and the United States:

In extreme cases of continued non-adherence to international standards, governments or supervisory authorities, as appropriate and according to the legal framework of each country and in a manner consistent with international law and international obligations, including those under the Articles of Agreement of the IMF, could restrict or even prohibit financial transactions with counterparties located in non-cooperative jurisdictions. Measures could include restrictions on home financial institutions from entering into correspondent banking relationships with counterparties located in non-cooperative jurisdictions (FSB 2010: 21).

Here the FSB has created a multilateral equivalent of the section 311 of the USA Patriot Act, aiming to enforce a complete blockade which would destroy the financial sector of a targeted country.

These measures in combination, but particularly the last measure, are an extraordinary sign of how confident a relatively small group of 20-30 powerful countries feel in dictating to the rest of the world. It is a very open threat that countries must write their internal, domestic legislation in such a way as to satisfy the G20, or else the G20 will destroy their economies. The G20’s self-legtimation that it represents 85 per cent of the world’s economy of course completely fails to justify its overweening ambitions, either in legal terms or in moral terms.  The OECD can benefit from taking a relatively soft line, secure in the knowledge that countries that are really difficult will be strong-armed by the FSB (a ‘good cop/bad cop’ situation, as Hollywood might put it). It also tends to hide behind the rather disingenuous line that it cannot impose sanctions, as only its member states have this power.

The vulnerable jurisdictions in terms of the 12 information exchange agreement threshold are currently Nauru, Niue, Panama, Vanuatu, Montserrat, Liberia and the Marshall Islands, Philippines, Guatemala, and Costa Rica. Let’s take a closer look at a couple of these countries. Most other international organisations have decided, sensibly, that if a jurisdiction is very small, it will not be subject to surveillance. Thus the FATF, FSB and IMF have all committed in principle (if not always in practice) to the idea that a jurisdiction has to be of a certain economic size before posing a significant threat to the integrity of the financial system. The OECD has not, which is at odds with the fashion for ‘risk-based assessment’.

Montserrat is known to people in the Caribbean, and the terrible circumstances of the volcanic eruptions, but Niue and Nauru in the South Pacific might not be. Niue has a population of 1200 (the OECD’s permanent staff is bigger) and is a state in free association with New Zealand. Niue receives more than 100 per cent of its GDP in aid. Under pressure from the OECD and FATF it closed down its offshore sector in 2005.  The financial sector of Niue comprises one branch of one Australian bank.

Nauru is in some ways an even more extreme case. Nauru is a fully sovereign state since 1968 and member of the United Nations, with a population of 9000 on an island 4km by 5km. Ninety per cent of the island is barren and uninhabitable because of earlier phosphate mining, while the government debt of Nauru is 1700 per cent of GDP, and unemployment is over 90 per cent. Again under heavy pressure from the FATF, Nauru abolished its offshore sector in 2003. In fact Nauru has no financial sector of any kind: no banks, no credit unions, no loans, no mortgages, no insurance, no credit cards and no ATMs. The government gets its payroll physically flown over from Brisbane $400,000 at a time.

Why on Earth is the OECD bothering with jurisdictions like Nauru and Niue? These countries make no difference to anyone else, but the OECD listing will only further impoverish their already poor populations. It is also powerful evidence that the OECD is stubbornly holding on to its 2000 list of tax havens, despite admitting in November 2005 that this list was out of date.

Beyond 12: Peer Review and the Global Forum

That about the majority of countries that have or will make the cut off of 12 agreements? OECD officials have repeatedly stated that reaching 12 agreements was by no means the end of the matter. Rather than picking some new, equally arbitrary but higher number, the OECD is switching to a focus on the implementation of agreements, rather than just totalling up the number. The mechanism for doing so is one that largely originated within the OECD, peer review. The growing fashion for peer review (by the FSB as well as the Global Forum) is about the best, or least-bad, news for IFCs lately.

Peer review has been defined by one OECD Secretariat member as follows:

Peer review can be described as the systematic examination and assessment of the performance of a State by other States, with the ultimate goal of helping the reviewed State improve its policy making, adopt best practices, and comply with established standards and principles. The examination is conducted on a non-adversarial basis, and it relies heavily on mutual trust among the States involved in the review, as well as their shared confidence in the process (Pagani 2002: 4).

There are commitments to transparency, consistently and equality that characterise ‘normal’ OECD business. No doubt cynics might question the extent to which these will always be honoured, and there are reasons for skepticism. Compared to the alternatives on offer, however, like FATF blacklisting, or worse from the FSB, this is about as good a deal as IFCs are likely to get.

A newly-renamed Global Forum on Transparency and Exchange of Information on Tax Purposes was established to make sure that members have the necessary legislation in place, and were effectively implementing it. The 91-member Forum is to subject each member to peer-review in two phases by 2014, as well as any non-members that are nominated by members (those that fail to co-operate will presumably be referred to the FSB). So far the non-members to be reviewed include Jamaica, Trinidad and Tobago, Botswana and Ghana. Here small IFCs are at least as keen as OECD members to spread the coverage of the review process to as wide a range of countries as possible. Peer review will occur in two waves, the first scrutinising the legislation and rules in place, the second, the degree to which these laws and regulations are actually implemented.

In adopting this two phase peer review approach, the OECD has mirrored the assessment technique of the Working Group on Bribery as part of the OECD Convention on the Prevention of Bribery in International Business Transactions. Although this is generally a rather quiet, consensual affair, there are moments of controversy. An example would be the OECD reprimand of the UK after the Blair government caved in to Saudi pressure and quashed the investigation in to the Al-Yamamah BAE arms scandal. This public rebuke sparked a feud between the UK and the chair of the Working Group, Mark Pieth.

As Pagani remarks in his coverage of peer review:

The peer review process can give rise to peer pressure through, for example: (i) a mix of formal recommendations and informal dialogue by the peer countries, (ii) public scrutiny, comparisons, and in some cases, even ranking among countries; and (iii) the impact of all the above on domestic public opinion, national administration and policy makers. The impact will be greatest when the outcome of the peer review is made available to the public, as is usually the case at the OECD. When the press is actively engaged with the story, peer pressure is most effective (2002: 5-6).

It is more likely that big countries will be held to the same standards as small ones using a peer review process than something like the G20 or FATF, in which non-members are treated more harshly than members.

Shifting the Goal Posts?

A more far-reaching issue is the question of whether the ‘international standard’, or at least the OECD standard, will remain with information exchange on request, or the more demanding automatic information exchange. The latter, of course, has underpinned the EU Savings Tax Directive, though with an opt-out in terms of a withholding tax for some EU members and third parties. Up until early this year, OECD officials have consistently maintained that information on request is sufficient, and there is no need to go to automatic exchange on the EU model.

Surprisingly for an institution defined by its scientific expertise, there is very little evidence that TIEAs will actually solve the problems that OECD countries think they have with IFCs in terms of tax revenue. In the absence of such evidence it is unlikely that all the exchange agreements in the world will conjure up the tens of billions of dollars in tax revenue spoken of in OECD publications (e.g. OECD 2010). Those from the secretariat and politicians from the member states are either going to have to admit that tax losses were always overstated, or try something more ambitious. We have seen this sort of dynamic with the recent expansion of the EU Savings Tax Directive.

One such alternative is automatic exchange of information. It is notable that the OECD Model Tax Convention calls for information to be exchanged either on request, or automatically, or spontaneously, so clearly the OECD is not opposed on principle to automatic information exchange. In the Frequently Asked Questions sections of the OECD’s website on tax transparency it is noted that ‘Most OECD countries do engage in automatic exchange of information on a range of different types of income’ (,3343, en_21571361_43854757_44234930_1_1_1_1,00.html#theprogressreportdistinguish).

Consider some examples. As mentioned already, the European Union is supposedly unanimous in its support of automatic information exchange as part of the Savings Tax Directive, with some temporary opt-outs using withholding tax. This brings in 19 OECD members. The Nordic area uses automatic exchange, adding non-EU OECD members Norway and Iceland. Canada and United States automatically exchange some tax information, as do Canada and Mexico (though conspicuously, the US has refused to exchange bank information with Mexico, preferring to act as a tax haven for Mexican money). Australia and New Zealand automatically exchange a good deal of tax information. Thus at least 26 of 30 OECD members have committed to exchanging tax information automatically. Given this total, how hard would it be for the OECD to decree that automatic exchange is the new ‘international standard’, and that those who oppose this new standard are ‘non-co-operative jurisdictions’?

The main obstacle to such a move towards automatic exchange is the opposition of some existing OECD members. Not surprisingly, these include Austria, Belgium, Luxembourg and Switzerland, but also the United States. While the first four could conceivably be bullied into compliance, especially those within the EU, obviously the United States could not. US objections rest on two grounds, one public and the other private. The first is that automatic exchange would create excessive administrative expense. Given the experience of EU members and many associated territories in the Caribbean (Anguilla, Aruba, Caymans, Montserrat), there are reasons to doubt this is an insuperable obstacle.

The more important, but also much less publicly acceptable, reason is that the US fears losing non-resident savings being hidden in the United States from foreign tax authorities, especially those in Latin America. The various American bankers’ associations have been very forthright in arguing this point, though not surprisingly US policy makers are more coy here. So if the OECD were to move to automatic exchange, it would need to arrange some combination of sticks and carrots for its less enthusiastic European members, and a deal whereby the US would receive information automatically from everyone else, but only provide information on request. Then it would be relatively easy to force everyone else into line, drawing on the coercive ability of the FSB.

Such a deal would be difficult, but not impossible. In some ways, the Savings Tax Directive is a close precedent. Here there was a large majority in favour, and a few hold-outs within the club, a larger number of small external jurisdictions, and the big problem of the United States. The solution was pressure on the internal hold-outs and a policy fudge, and coercion to bring the weaker external jurisdictions (dependent territories) into line. The problem of the United States was solved by interpreting the American ‘no’ to mean ‘yes’ in terms of participating in the program. Specifically, those working in the Commission said to me that unless the US had done something very far-fetched, like revoke all its tax treaties with EU members, it was always going to be classified as having ‘equivalent measures’ in place, and thus being compliant with the Directive.

Certainly, there is a good deal of speculation here, but given the direction events are moving, and the hints being dropped by those in and close to the OECD from early 2010, at the very least the possibility deserves some consideration.

The Developing World and Transfer Pricing

Another issue relates to transfer pricing, and the OECD’s relations with the developing world more generally. Since late 2008 we have seen the G7 give way to the G20, and the rich-country-only FSF give way to the FSB, which includes the developing country members of the G20. At the same time there is the more gradual shift in voting shares within the IMF and World Bank to favour developing countries. This comes from a broad sense that international institutions that ignore the rising power of developing countries, especially China but also others like India and Brazil, are no longer legitimate or effective. This trend poses acute difficulties for the OECD, which is defined by being a club of rich democracies. If the OECD were to let in developing countries there would be very little reason for it to exist at all. The Global Forum may ameliorate this problem, but it does not solve it.

The Chinese veto on the G20 endorsing the OECD’s 2 April 2009 white/grey/blacklist (instead it was merely ‘noted’) might be an interesting foretaste of things to come. The flip-side of the advantage of broadening representation in clubs like the G20 and FSB is that it may be much harder to reach agreement. Certainly the international trade agenda has been largely paralysed over the last decade precisely because the previously clubby atmosphere whereby rich countries could strike deals between themselves and enforce them on everyone else has fallen victim to assertive developing states. Could similar disputes break out over tax standards?

If there were to be a major falling out between rich and poorer countries over tax matters the most likely trigger may be transfer pricing. A very interesting series of articles by Michael Durst (e.g. Durst 2010) argues that the transfer pricing system has ‘failed utterly’, that it has never and will never work even for developed states, and that developing ones are now being pressured to adopt the same failed standard. The idea that intra-firm trade should be taxed as if it were inter-firm trade according to the arm’s length principle simply does not work. He argues that the only thing holding the existing system together is the vested interest of the very few officials who have the specialised technical knowledge to understand it (Durst is an apostate from this select club).

Durst is highly critical of the OECD Committee on Fiscal Affairs, and the Committee’s claim that ‘The arm’s length principle has…been found to work effectively in the vast majority of cases.’ He maintains ‘While in political environments such as the OECD, people sometimes find themselves saying things they later find they cannot support, it is inconceivable to me that any fair observer of transfer pricing practice over the past 20 years could believe this statement to be correct.’ (See

The OECD is most committed to the existing arm’s length system, but developing countries do worst under the transfer pricing status quo, because they have few if any of the very skilled officials conversant with the system. The totals for transfer pricing are very large headline-grabbing figures in the hundreds of billions of dollars; very rubbery numbers, but politically effective nonetheless. Durst, other tax experts, but also NGOs like the Tax Justice Network, are agitating for a move away from arm’s length to the fomulary apportionment method.

There are early and very tentative signs that developing countries may be picking up on this critique of the arm’s length method, which is also a critique of the OECD. Developing country G20 members are now for the first time talking to each other directly about tax issues. Once again, there is a good deal of speculation here, but the OECD has a structural vulnerability regarding its exclusion of all developing countries. With regards to international tax questions, this tension may surface first in transfer pricing. It is important to say, however, that Durst also targets tax havens as one of the reasons the arm’s length model does not work, so the implications for any change here for IFCs are mixed.

Conclusions: What do IFCs Want?

This paper has been devoted to forecasting some possible scenarios for the OECD’s preferred end-game, given the history of its efforts to enforce global tax standards since the mid-1990s. But aside from asking ‘What does the OECD want?’ there is the question of what those on the other side of the table want. IFCs have many reasons to be wary of the new trend of global standard-setting in tax and many other areas initiated by the G20. It is built on a deep conspiracy of silence about who is really responsible for the financial crisis and the ensuing recession, adopts an extraordinary coercive approach, and tends to foster double-standards that favour a small, unrepresentative club of powerful states over everyone else.

Against this unpropitious background, however, the OECD and most especially the new Global Forum represent the best deal IFCs are going to get. The same goes for the private financial services industry based in such jurisdictions. As the OECD points out, the Global Forum is officially based on a notion of equality between members. To the extent that smaller countries believe that powerful countries like the United States fail to live up to important global standards, the Global Forum may be their best chance to do something about this inequitable situation. IFCs may be able to make common cause on some issues with the developing members of the G20 like China. No doubt the options for smaller countries are quite limited, but nevertheless they do have options. They should now concentrate on playing a weak hand as best they can, and private industry and associations like STEP should be part of this process.

Sources Cited

Durst, Michael C. 2010. It’s Not Just Academic: The OECD Should Reevaluate Transfer Pricing Laws. Tax Analysis. January, pp. 247-256.

FATF. 2006. The Misuse of Corporate Vehicles, Including Trust and Corporate Service Providers. Paris.

FSB. 2010. Promoting Global Adherence to International Co-operation and Information Exchange Standards. March. Basel.

Langer, Marshall. 2002. The Outrageous History of Caribbean Tax Treaties with OECD States. Tax Notes International, June, pp.1205-1219.

G20. 2008. Declaration: Summit on Financial Markets and the World Economic, 15 November, Washington DC.

G20. 2009. Declaration on Strengthening the Financial System, 2 April, London.

G20. 2009. The Leader’s Statement The Pittsburgh Summit, 24-25 September, Pittsburgh.

Gordon, Richard. 2009. Laundering the Proceeds of Public Sector Corruption: A Preliminary Report. World Bank. Washington DC.

Kerry, John. 1997. The New War: The Web of Crime that Threatens America’s Security. New York: Simon and Schuster.

OECD. 1987. International Tax Avoidance and Tax Evasion: Four Related Studies. Paris.

OECD. 1998. Harmful Tax Competition–An Emerging Global Issue. Paris.

OECD. 2001. Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes. Paris.

OECD. 2010. Promoting Transparency and Exchange of Information for Tax Purposes: A Background Information Brief. Paris

Pagani, Fabrizio. 2002. Peer Review: A Tool for Co-operation and Change: An Analysis of the OECD Working Method. OECD General Secretariat, Directorate for Legal Affairs. Paris.

Paris, Roland. 2003. The Globalization of Taxation? Electronic Commerce and the Transformation of the State. International Studies Quarterly. Vol.47, pp.153-182.

Radaelli Claudio M. 1999. Harmful Tax Competition in the EU: Policy Narratives and Advocacy Coalitions. Journal of Common Market Studies Vol. 37, pp. 661-682

Sharman, Jason and Gregory Rawlings. 2005. Deconstructing National Tax Blacklists: Removing Obstacles to the Cross-Border Trade in Financial Services. A report prepared for STEP. London.

Sharman, J.C. 2006. Havens in a Storm: The Struggle for Global Tax Regulation. Ithaca: Cornell University Press.

Wechsler, William F. 2001. Follow the Money. Foreign Affairs Vol. 80, pp.40-57.

Leave a Reply