Sarkozy got it wrong, but it is not enough to say so

France’s President Nicolas Sarkozy has publicly – and wrongfully – identified 3 Caribbean countries as “tax havens”. The response to him should be unified and robust.

Sarkozy named the Caribbean countries, Antigua and Barbuda, Barbados and Trinidad and Tobago, among eight others – Botswana, Brunei, Panama, Seychelles, Uruguay, Vanuatu, Switzerland and Liechtenstein.{{more}}

Sarkozy also threatened that “countries that remain tax havens … will be shunned by the international community” and he threatened that the G20 countries will publish a list of countries – presumably one that includes these 11 – as “non-cooperative”.

Among French Presidents, he is not alone. Jacques Chirac, the former French President, also made similar statements in the late 1990’s. Then, under Chirac, as now under Sarkozy, the French government’s sole intention was to shut-down all off-shore financial centres anywhere outside the European Union (EU) countries and the United States on the basis that they are “tax havens” and are harbouring money that would otherwise be taxed. Yet, the biggest tax havens exist in the EU and the US.

The instrument for beating-up and booting out jurisdictions with offshore banking sectors is the Organisation for Economic Cooperation and Development (OECD) in which the EU countries predominate. In 1998, the OECD produced a list of countries which it said would be “blacklisted” for “harmful tax competition”. Included in this “harmful competition” was the exercise of their sovereign right not to tax offshore companies or their deposits in banks.

It was only after a spirited joint response, supported by intellectual and lobbying work by the Commonwealth Secretariat, exposed the OECD’s actions as unilateral, bullying, and without authority in international law, that the Organisation relaxed its demands in 2000. But, the major players in the OECD created a so-called “Global Forum” into which offshore jurisdictions allowed themselves to be lured.

The OECD has become a cartel for dictating global tax policy in a way that suits EU countries in particular. As a recent study by a US University research team points out: “There has recently been a spate of aggressive efforts by large developed countries to demand an end of financial privacy through tax information exchange agreements, threats of blacklisting, and direct payments to individuals for stealing data from financial institutions in other jurisdictions”.

In reality, the governance and rule-making of the “Global Forum” is not global at all. Up to 2009, it was run by the OECD Secretariat and it set standards and practices for jurisdictions other than the large and powerful member nations of the OECD. The OECD nations attend the Forum to pass judgement on others.

China has now joined the “Global Forum” largely to protect its own interests in Hong Kong and Macao which the OECD had contemplated blacklisting. But, little has changed, and engagement by the non-OECD countries with China as an ally is urgently needed.

While within the Forum, there is no solidarity among developing countries, which hold no pre-meetings and have no joint strategy and no common position, the OECD members carefully coordinate their positions, set the agenda and prepare the working papers. Few government ministers of the developing countries attend the Forum, and civil servants from developing countries are overwhelmed by the high-powered OECD staff and the representatives of the big OECD member states particularly France, Germany and Japan.

The ultimate weapon that the OECD uses to force other jurisdictions to comply with their unilaterally-determined “standards and best practices” is publication of areas of legislation, regulation and enforcement in which it is claimed that the non-OECD countries are not compliant and are, therefore, open to illegal activities.

The result is that, over time, the OECD has succeeded in killing the offshore financial sectors of several developing countries and those that have not been killed, have certainly been crippled. This has been achieved by demands for requirements that not only cost the governments of these countries large sums of money to implement, but also by depriving them of their sovereign right to tax or not tax as they see fit, and coercing them to enter into Tax Information Exchange Agreements (TIEAs). There are also no accompanying double-taxation agreements that would make tax information agreements palatable. At least, a double taxation agreement would make an investor more comfortable to invest in a country, which has TIEAs, on the basis that he/she would not be taxed twice.

The OECD has itself counted over 600 TIEAs signed since 2009. Some of them are between countries that have very little – if any – trade or investment relationship. But they establish for the OECD a network of TIEAs through which it influences tax policies across the globe. Additionally over 60 peer reviews of jurisdictions have been completed. The point is that jurisdictions with offshore financial centres have bent over backwards to accept the intrusions of the OECD because of fear of being blacklisted.

It is not for nothing that President Sarkozy has invoked the G20 as the latest forum for judging countries as “tax havens”. Membership of the G20 is heavily – and wrongfully – weighted in favour of EU countries, and even the European Commission has a voice in it. They are well placed to push an EU agenda while the jurisdictions they attack have no opportunity to put their case.

Countries of the Caribbean and others not represented in the G20 have an obligation to fight back. The Caribbean countries would best do so by creating joint regional machinery, under the CARICOM Secretariat, to represent their collective interests; to build alliances with other countries that have been equally affected by the OECD’s overwhelming ambition either to direct their tax policies or to close them down as financial centres. No one country can do this alone. And ‘beggar thy neighbour’ policies won’t work. This is not a time for individual jurisdictions to try to cut separate deals; it is time for joint actions to put their case before influential nations in the G20 such as Canada which represents Caribbean countries on the boards of the World Bank and the IMF.

It is also time for the Global Forum to be extracted from the hands of the OECD and placed under the auspices of the United Nations where it will truly be global.

If the countries accused of being “tax havens” now fail to act collectively, coherently and decisively, no statements that President Sarkozy got it wrong will help them.

(The writer is a Consultant and former Caribbean diplomat)

Responses and previous commentaries at: www.sirronaldsanders.com