This article appeared in La Prensa (in Spanish) on June 24, 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. Countries like Panama have been bombarded with threats of blacklisting and economic sanctions, all designed to wear down the willpower of lawmakers who prefer competitive, pro-growth policies. As Panamanian officials debate action to further placate the OECD, they should consider that the next hoops through which they will be expected to jump are already being constructed.
Panama has bent over backwards to meet OECD demands. When Panama finally signed enough Double Taxation Treaties and Tax Information Exchange Agreements in 2011 to be removed from the OECD’s “grey list” – designed to pressure sovereign nations into undermining their global competitiveness – then Minister of Economy and Finance Alberto Vallarino celebrated it as an “historic milestone.” Unfortunately for Panama the bureaucrats at the OECD have proven less impressed and are busy devising new ways for Panama to accommodate an unelected club of rich countries.
Recently, Panama has at the behest of the OECD considered immobilization of bearer shares. The privacy afforded by bearer shares allow for protection of assets from corrupt governments or those prone to confiscatory excess. Despite their being allowed by a majority of OECD member nations, the organization has threatened to return Panama to the grey list if bearer shares are not effectively abolished, among other demands.
The legislative effort to immobilize bearer shares has been put on hold, but regardless of what is ultimately decided by Panamanian lawmakers it is all but guaranteed that the OECD will require yet further action. Based on current trends and an understanding of the OECD’s agenda, in other words, it is apparent that demands for further concessions are just around the corner.
The OECD Committee on Fiscal Affairs is beholden to a radical theory called capital export neutrality, 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 low-tax jurisdictions. The Global Forum on Transparency and Exchange of Information has settled on the more politically expedient intermediary step of information sharing.
Compounding the OECD threat are U.S. efforts to strong-arm the world into serving as an army of deputy tax collectors. Since passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, which 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, the Treasury Department has learned that the law is too poorly written to enforce.
To circumvent FATCA’s faults, the U.S. Treasury Department is pressuring foreign governments to sign intergovernmental agreements (IGAs), which require them to enforce FATCA on their domestic institutions and remove any conflicting privacy laws. To convince foreign governments to do their work for them, Treasury has promised reciprocal sharing by U.S. banks, but hasn’t the statutory authority to deliver. Congress would have to authorize reciprocal information sharing, and that is simply not likely to happen.
FATCA is bad enough, but other nations are beginning to use it as an example to follow. 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. It’s only a matter of time before acceptance of FATCA becomes the next international standard required by the OECD.
The OECD recently singled out Panama for failing to meet their Phase 2 standard of international information exchange, and Panamanian policymakers must decide what is in the best interests of Panama as they consider altering their corporate and tax framework at the behest of the OECD. With a pro-growth system that doesn’t try to tax beyond its borders, Panama gains nothing directly through information sharing, but thanks to OECD bullying its leaders understandably must consider adopting measures to meet whatever happens to be the so-called 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 Panama wishes to continue competing with larger, wealthier nations by attracting investment to grow its economy, 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 Panama can either draw a line in the sand against the OECD today, draw a line in the future, or accept that they are not in charge of their own financial and economic destiny. Ultimately, the OECD will settle for nothing less.
