Tax Information Exchange Agreements[TIEAs] - Part2

In the first part of this article, we discussed the broad initiatives undertaken by the Organization for Economic Cooperation and Development (OECD) with respect to international tax matters and their significance on offshore jurisdictions. In the concluding part we discuss the issues involved and challenges in bringing the tax havens to follow the rules of the game of the global economy.

Progress on Exchanging Tax Information
The G-20 meeting of November 2008 has led to a number of significant and positive developments among financial centres and offshore jurisdictions in endorsing or committing to the exchange of tax information. The key provision for exchange of information in the OECD Model Convention is Article 26, which has undergone many revisions and is much improved in the current form over earlier versions. The earlier versions were limited to the exchange of information necessary for the purposes of the treaty, which many states interpreted as meaning only to prevent double taxation, but not to prevent tax evasion and avoidance. Positive signals have been noticed from a few of the noncooperative tax havens such as Andorra, Liechtenstein and Monaco having endorsed Article 26 and indicated their willingness to change their domestic legislation and to enter into agreements for the exchange of information. As of date 84 countries surveyed by the Global Forum have now endorsed the OECD standard. It is in the interest of globalised economy reeling under impact

Article 26 • Creates an obligation to exchange information that is foreseeably relevant to the correct application of a tax convention as well as for the purposes of administration and enforcement of domestic tax laws of the contracting states. • A country requesting tax affairs of an individual should not only demonstrate the foreseeable relevance of the requested information but also and should have exhausted all domestic means to access the requested information. • A state cannot refuse a request for information solely because it has no domestic tax interest in the information or solely because it is held by a bank or other financial institutions. • Exceptions to banking secrecy rules of any country would be minimal due to compliance to article 26. • Information received by a state shall be treated as secret and that it can only be used for the purposes provided for in the convention.

of collapse of banking and financial system and trying to recover from the mess, it is in the interest of all that tax havens fall in line and agree to the OECD guidelines. Nevertheless it will not be an easy task as the tax havens are patronised by multinational corporations, chartered accountants, lawyers and states which believe that tax avoidance is justifiable.
Steps that can make tax havens lose their charm in the near future may include:
- Adoption by all states, the standards on transparency and exchange of information developed by OECD;
- Making multilateral programme for automatic information exchange involving developing as well as developed countries a success;
- G-20 countries tightening the compliance requirements of businesses and individuals of their country operating from tax havens;
- Punitive sanctions against tax havens by all member states, including scrapping of existing tax treaty arrangements and tougher disclosure requirements for companies and rich individuals who use these tax havens;
- Allowing member countries to tax individuals and companies bringing investment from tax havens;
- Civil society putting pressures on their respective governments to stop dealing with businesses operating from tax havens. However it is not going to be easy to make tax havens fall in line with rest of the global economy, that follows tax regimes that apparently are more transparent and fair.
There are many challenges that need to be overcome to make tax havens lose their charm to businesses and individuals. A few of these are:
- Making all countries signup the OECD standard on transparency and exchange of
information;
- Forcing tax havens to disclose information related not only to bank secrecy, but also ownership of companies, trusts, foundations and other legal persons;
- Companies and individuals will simply shift their investment from tax havens to countries that have not agreed to OECD norms and continue provide tax benefits;
- Removal of economic distortions caused by the opportunities for tax avoidance created by tax havens due to wide divergences of tax rates, bases and practices between tax havens and other economies creates substantial incentives for multinational companies, including and especially banks, to engage in international tax arbitrage, introducing additional complexity and opacity into the financial markets;
- Resistance to international cooperation persists on tax haven is based spurious grounds that cooperation undermines national sovereignty in respect to tax and that “competition” between countries on tax and regulation is a good thing.
Tax havens have been operating for many decades and they have powerful lobbyists
amongst states, businesses, and high net worth individuals and in the media. It would not be an easy task to totally get rid of tax havens.
The focus of the civil society and intellectuals needs to be reoriented and shift from bribe takers and bribe‐givers towards the entire supply side of corruption, which includes those jurisdictions and individuals that assist in shifting the money. The focus needs to be less on individuals in a context of bribery, and more on the systems and processes that encourage and enable corrupt activities practiced by tax
havens.
Competition between countries on tax rates and exemptions, on secrecy and regulation, instead of improving productivity and rational use of resources, will only lead to more pains for the globalised economy in the future.

Pushpakaran K. Parambath
Partner,Incorporations