This article appeared in Harbour Times on May 9, 2013, and was coauthored by Brian Garst.
The Organization for Economic Cooperation and Development (OECD) has tried numerous strategies to compel low-tax nations to raise tax rates and eliminate financial privacy, or to otherwise make their tax systems less attractive. Countries like Hong Kong have been bombarded with threats of blacklisting and economic sanctions, all designed to wear down the willpower of lawmakers who might otherwise prefer competitive, pro-growth tax policies. As Hong Kong officials consider acquiescing to the latest round of OECD demands through implementation of a framework for Tax Information Exchange Agreements (TIEA) and potential new agreements with the U.S. and others, they should consider that the next hoops through which they will be expected to jump are already being constructed.
Efforts to amend Inland Revenue rules to allow for exchange of information through the TIEAs without requiring a double taxation agreement are understandable. The OECD, after all, has essentially come strolling by to say, “That’s a nice economy you have there, Hong Kong, shame if something were to happen to it.”
But like most bullies, the OECD is unlikely to back off once appeased. Through examination of the organization’s history, and careful observation of current trends, it is apparent that demands for further concessions will quickly follow even once Hong Kong has met its TIEA quota.
Understanding the OECD’s Agenda
The OECD began its campaign on behalf of high-tax nations with a 1998 report entitled, “Harmful Tax Competition: An Emerging Global Issue.”The report made clear that the OECD’s Committee on Fiscal Affairs was beholden to a radical theory called capital export neutrality (CEN), which concludes that all differences in tax rates should be eliminated, along with the ability of taxpayers to protect themselves from confiscatory rates by shifting economic activity to jurisdictions with better tax policies.
In the face of considerable push back spearheaded by the Center for Freedom and Prosperity (CF&P) at a high-level consultation meeting held in Barbados in 2001, the 1998 report eventually led only to formation of the Global Forum on Transparency and Exchange of Information. Unable to find enough support for direct tax harmonization, the focus shifted to information sharing, along with the threat of economic sanctions and penalties to compel low-tax nations to adopt bad tax policy.
A somewhat recent example of skullduggery does much to illuminate the aims of the OECD’s Global Forum. In 2009 at the Mexico City Global Forum meeting, the organization unilaterally asserted the power to impose rules restricting tax avoidance and other legal forms of tax planning. It might not be obvious why a body claiming to be concerned about tax evasion would make such a move, but CEN theory considers tax avoidance to be just as bad as evasion. Any competition, in other words, puts pressure on politicians not to tax excessively.
At the second day of the 2009 meeting, organizers tried to sneak a startling provision into the “summary of outcomes.”The draft circulated on the first day began simply, “The main objectives of the meeting are…”Whereas by the second morning it read, “In the context of the broader effort to fight tax evasion and avoidance and to remove harmful tax practices that facilitate such activities, the main objectives of the meeting are…”
When low-tax jurisdictions objected to the new language and its conflation of evasion and avoidance, CF&P watched as their high-tax counterparts sought to stall or move on to other topics. But because low-tax jurisdictions stood strong, the language was eventually forced to be removed. Surprisingly enough, China was instrumental in the effort to stop this particular OECD power grab.
What They’ll Demand Next
Just two years after the Mexico City incident and at the 2011 Global Forum in Bermuda, the OECD sought again to undermine tax planning with the unveiling of the Multilateral Convention on Administrative Assistance in Tax Matters.
The Multilateral Convention itself was not new, but it was radically altered in 2010 and given a renewed focus. The Convention serves to obligate signatories to become deputy tax collectors for every other nation that joins, while granting the OECD enormous powers as the “co-ordinating body”to interpret the agreement and resolve disputes.
With the OECD serving as sole arbiter for the Convention, the result of widespread adoption would be the creation of what amounts to a World Tax Organization. Allowing foreign tax collectors to cross borders will mean the end of tax competition and result in higher tax burdens throughout the world.
In its April 19th, 2013 Communiqué, the G20 Meeting of Finance Ministers and Central Bank Governors wrote that they “strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress.”But when it comes to the OECD, today’s strong encouragement is likely to be tomorrow’s mandate. Or else.
The U.S. Sets a Bad Example
Compounding the OECD threat are U.S. efforts to strong-arm the world into serving as its own private army of deputy tax collectors. Since passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, the U.S. Treasury Department has sought to entice foreign governments into enforcing a law too poorly written to otherwise work.
FATCA requires foreign financial institutions to report on their U.S. account holders to the IRS, or face a stiff 30% withholding penalty on U.S. source payments. But working directly with every foreign institution in the world has proven to be a tall order for Treasury, which has opted instead to negotiate directly with foreign governments, without authorization from Congress, in the hopes that they will collect and report on U.S. client information. Foreign governments are being asked to sign intergovernmental agreements (IGAs), compelling them to enforce FATCA on their domestic institutions and remove any conflicting privacy laws.
To convince foreign governments to do their work for them, the U.S. Treasury Department has promised reciprocation, but hasn’t the statutory authority to deliver. Congress would have to authorize reciprocal information sharing, and that is simply not likely to happen. The U.S. has long had a policy of attracting foreign investment to the U.S., and could ill afford the economic consequences of driving away significant sums of foreign investment.
Just this week, Senator Rand Paul introduced legislation that would repeal FATCA. The only thing keeping the legislation on the books is the fact that some foreign government are signing the IGA’s with the Treasury Department and relinquishing their sovereign fiscal authority to the United States.
By itself FATCA would be bad enough, but high-tax nations are beginning to use it as an example to follow. The UK is pursuing “son of FATCA”arrangements with the Crown Dependencies, while other European nations are pushing for a broader, or worldwide, FATCA system. The OECD has even weighed in to praise a multilateral FATCA agreement reached by the U.S. with France, Germany, Italy, Spain and the UK. How long before acceptance of FATCA becomes the next international standard required by the OECD?
What’s Best for Hong Kong?
In a letter addressing questions from Legislative Council, Hong Kong’s Financial Services and the Treasury Bureau promises to protect taxpayers’ privacy and confidentiality by, among other things, only exchanging information upon receipt of request, saying specifically that “no information will be exchanged on an automatic or spontaneous basis.”
Automatic exchange may not be necessary to placate the OECD at this time, but it is precisely what they want. The organization already provides a toolkit to assist governments in establishing automatic exchange, and has all but endorsed the concept in numerous reports. The recent G20 Communiqué furthermore stated that they “welcome progress made towards automatic exchange of information,”and tellingly added, “which is expected to be the standard and urge all jurisdictions to move towards exchanging information automatically.”
Hong Kong policymakers must now decide what is in the best interests of Hong Kong as they once again consider altering their legal tax framework at the behest of the OECD. With a pro-growth system that doesn’t try to tax beyond its borders, Hong Kong gains nothing directly through information sharing, but thanks to OECD bullying the nation understandably must consider adopting measures to meet whatever happens to be the so-called international standard of the day. But lawmakers should also consider that the OECD is constantly moving the goalposts – as soon as one requirement is satisfied, two more are created.
If Hong Kong is serious about holding on to principles like financial privacy, there will soon come a time when the international standard as defined by high-tax nations will require a very hard decision. Like most bullies, the OECD doesn’t handle resistance well. Standing up to the OECD is the only strategy that has proven effective. Simply put, leaders in Hong Kong can either draw a line in the sand against the OECD today, draw a line in the future, or toss their principles out the door. Ultimately, the OECD will settle for nothing less.
