The OECD, a TIEA, Lists & Acronyms

(SANEPR.com) June 8, 2009 -- This month I thought I would have a look at the recent listing by the OECD of a range of offshore territories. What is the OECD and what do these lists mean? And what on earth is a TIEA? Lastly, I will consider the implications for Gibraltar and why all this is important to our financial services sector.

As always these are my personal thoughts. I hope this article will go some way to help the general readership of this web site to make some sense of all these developments and their ramifications.

Firstly, what is the OECD - or the Organisation for Economic Co-operation & Development to give it its full name? Established in Paris in 1961, it has 30 member countries and employs some 2,500 people. If you're really interested, you can read the detailed "mission statement" on its website - www.oecd.org - but briefly, the Organisation provides a forum where governments can compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.

So why were we all so interested in its pronouncement on "uncooperative tax havens" at the beginning of April and what was this list that it published? Timed to coincide with the G20 summit (see last month's column for more details of that gathering), it's worth looking at the list in some detail for the answer.

The world's media has focused on terms such as "white, grey and black" lists. Readers of this site are, I am sure, rather more discerning so let's give the sections their proper definitions - as set out by the OECD itself.

Firstly there is a list of 40 countries (or jurisdictions as the OECD prefers to call them) that have "substantially implemented the internationally agreed tax standard". It will come as no surprise to find OECD members themselves amongst the names.

The next list is the one that should interest us the most because it includes Gibraltar. It features a further 30 countries that are classified as "jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented". Of course, Gibraltar would ideally like to be upgraded from this so-called "grey" list to the first list - I will look at how she plans to do so below.

Finally there is the third category (the "black" list if you will) of four countries that "have not committed to the internationally agreed tax standard". Only Costa Rica, Malaysia (Labuan), Philippines and Uruguay found themselves in this section. It is interesting to note though that within days of publication of the listings, all four jurisdictions had made commitments to the OECD and were consequently removed from the list. At the time of writing no country currently appears in this third section

So what is the "internationally agreed tax standard"? It was developed by the OECD in co-operation with non-member states and was ratified by the G20 at an earlier meeting in 2004, as well as by a major UN committee. Simply stated, it requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax, without regard to a domestic tax interest requirement or bank secrecy for tax purposes. The agreement goes on to stress that it also provides for extensive safeguards to protect the confidentiality of the information exchanged.

The OECD is currently considering six sanctions against countries - or "tax havens" as it insists on terming them - that do not comply with these rules. These are:

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Increased disclosure requirements for companies and individuals using tax havens;
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The imposition of withholding taxes on transactions with tax havens;
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A ban on the use of interest paid in a blacklisted country to offset tax;
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A review of tax treaty policy;
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Political pressure on global companies to withhold investment;
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A reduction in aid;

Clearly these sanctions are to be avoided. The principal way for the countries on the secondary list to get themselves "promoted" to the list of "fully compliant" states, is to sign more tax information exchange agreements ("TIEAs") with other countries. In this business we love acronyms!

Under the OECD definition, countries will be considered "cooperative" if they have concluded a minimum of 12 bilateral agreements to exchange tax information on request with foreign governments. Each TIEA needs to be signed individually although the wording can be standardised to a certain extent.

In Gibraltar's case, we had not until very recently entered into any TIEAs. In fact the first was concluded just days before the recent G20 summit in London. In a ceremony in London, Chief Minister Peter Caruana signed Gibraltar's initial TIEA with the most high profile member of the OECD - the United States itself. Not only was the agreement groundbreaking for being our first, but the signing ceremony itself was very high profile for a small jurisdiction such as Gibraltar. Representing the United States was none other than the U.S. Treasury Secretary Tim Geithner.

Since this historic event, the Gibraltar Government has announced that it intends entering into several more such agreements with other countries over the coming months. The OECD says it will review progress made by the "grey-listed" jurisdictions and will be making an updated announcement toward the end of 2009. It is therefore to be hoped that Gibraltar will reap its reward by being re-classified as soon as possible. So there is much work to be done in the coming months. All of this should be read in conjunction with the wider picture. Sovereign Group, whom I work for in Gibraltar, has for many years stressed the importance of using only compliant, tax efficient structures when dealing with its international client base. This is also true of other regulated firms here in Gibraltar and by re-stating this, we are simply echoing the strategy employed by our local regulator, the Financial Services Commission. A recent independent review by the International Monetary Fund (IMF) of local regulation and the way it is implemented gave Gibraltar an excellent report card - so we are well on our way.

In summary, these are critical times for jurisdictions such as Gibraltar. It has been all too easy for the international press to blame "offshore centres" for the global financial turmoil we are currently experiencing.

In Gibraltar, the government, regulators and licensed firms have all worked hard to demonstrate both our professionalism and the world class standards that are in force here. It is to be hoped that a more level playing field can be created. Important changes are coming shortly to our local corporate taxation system and, if we can conclude more TIEAs soon, Gibraltar will be well placed to benefit from the anticipated upsurge in global business when growth resumes. That can only bring benefit to local firms and the wider economy as a result. Watch this space!