This article appeared in La Prensa (in Spanish) on October 21, 2013.
The United States and other members of the Organization for Economic Cooperation and Development (OECD) have engaged for years in a hypocritical campaign to punish low-tax jurisdictions for adopting policies designed to attract capital and boost their economies. Often times these same policies are practiced by members of the OECD. As an American, I am frequently accused of being disloyal by government officials and other proponents of international bullying for pointing out this blatant double standard.
Many attack low-tax jurisdictions as serving to primarily protect “tax cheats” and deprive foreign governments of their rightful tax dollars. This view supposes that governments have first claim on all economic output. In reality, the offshore community provides tremendous benefit both to the major powers and the global economy. It exists, in other words, not to foster tax evasion but to enhance the efficient formation and distribution of capital.
Rather than unregulated as critics claim, financial centers tend to be more efficiently and effectively governed. According to an assessment by the IMF, financial centers were found to be “broadly comparable or better, on average, than other countries” when it came to meeting international standards. Academic research further shows that better-governed countries are more likely to succeed in attracting capital, whereas even low taxes do little to bring investment into the poorly administered nations, which is why the list of so-called tax havens is largely devoid of such regimes. Contrary to common attacks on low-tax jurisdictions, it takes more than just low tax rates to successfully attract foreign investment; it also takes sound rules, an honest government with minimal levels of corruption, and effective enforcement of rules and regulations.
Like any other industry, specialization in financial services allows for a better product at a lower price, and the existence of skilled investors in the offshore community who allocate resources where they are most profitable has created millions of jobs and made the world more prosperous.
Nevertheless, not everyone appreciates the tremendous benefits offered by tax competition or the low-tax jurisdictions which foster it. Some politicians simply resent outside constraints on their ability to pursue desired policies, or oppose competition for ideological reasons. They want to freely tax more, spend more and regulate more. And if that means a weaker economy then so be it, so long as everyone is stuck in the same boat.
The OECD has served since the 1990’s as the chosen vehicle of attack by large nations against their would-be competitors. There they formed the Global Forum on Transparency and Exchange of Information for Tax Purposes, which under the guise of eliminating tax evasion has unfairly and hypocritically targeted low-tax jurisdictions with demands that they adopt uncompetitive practices. Far from promoting an even playing field, the OECD has served instead as a cartel formed to protect the interests of its membership.
For instance, the Global Forum initiated a “peer review” process where member nations would sit in judgment not only of their fellow members, but also of non-member states. An unfavorable review would result in various economics sanctions. But during the reviews, certain countries were given special treatment.
The United States is the world’s biggest tax haven, attracting more foreign capital than any other nation, in part because it does not tax passive foreign investments or report any information beyond basic deposits – itself a very recent development – to foreign governments. These are good polices on both economic and human rights grounds, but they are clearly in opposition to the stated goals of the OECD. Nevertheless, the U.S. peer review failed to acknowledge the practices.
Contrary to its policies at home, the United States has ruthlessly pursued elimination of similar practices abroad. In addition to being a major power behind the OECD cartel, the U.S. has also unilaterally passed laws like the Foreign Account Tax Compliance Act, a supposed effort to target tax evasion which demands that every foreign financial institution in the world engage in a costly process of identifying and reporting on every single U.S. client, while promising stiff withholding penalties on U.S. source payments for non-compliance. The result has been international chaos, as the rest of the world scrambles to accommodate a law which even the U.S. government acknowledges will bring in a mere $800 million in new revenues per year – a measly sum compared to the nation’s $3 trillion yearly budget.
International pressure continues to grow on nation’s like Panama to forgo attractive economic policies. While the U.S. engages in fiscal bullying through laws like FATCA, the OECD is once again moving its own goalposts, demanding “automatic exchange of information” as the new “international standard.” Yet if history is anything to go by, it’s a standard that those in the special club won’t be expected to meet.
Rather than acquiesce to demands that it adopt bad policies, Panama and other smaller jurisdictions should continue to demand a level playing field. In the early 2000s, Panama stood strong as a leader in opposing the OECD’s radical agenda. With international tax bureaucrats again looking to impose their will on low-tax jurisdictions, it would be easy to roll over and accept the ever evolving demands of tax cartels. This would be a mistake. Panama’s leaders must rise to the occasion by resisting further encroachments on the nation’s fiscal sovereignty, or they may wake one day to find there is none left.
