Title: 1 9 9 6
Author: Stephanie Talbot

War of the (Offshore) Worlds: OECD Level Playing Field Report
Richard J. Hay
The Organisation for Economic Co-operation and Development released a seminal report on tax information collection and exchange practices on 29 May. The study, entitled Tax-Cooperation: Towards a Level Playing Field (the “Report”), took nearly two years to prepare and is a definitive comparison of the disclosure standards applied in the 82 countries surveyed. The Report appears in the context of an ambitious OECD program seeking global data tracking and exchange to improve the tax enforcement capability of its members.  

The Report is formally the output of the Global Forum, a grouping of OECD countries and non-member financial centres assembled by OECD to conduct its tax information exchange program.

The name for the new OECD report coincides with the one used in a more limited earlier report. Towards a Level Playing Field, published in September 2002, surveyed information access and exchange practices in thirteen OECD and non-OECD countries. That report showed that four years after the 1998 launch of OECD’s program for tax information exchange most of the principal OECD states competing for offshore services significantly lagged the progress on “transparency” in the smaller centres. The 2002 Towards a Level Playing Field Report was sponsored by the Society of Trust and Estate Practitioners and a grouping of smaller financial centres (the “International Tax and Investment Organisation”). It was researched by fourteen leading professional firms and prepared by Stikeman Elliott. That report is available at www.stikeman.com/en/practices/our_practices/paf.cfm?PA_ID=65; www.itio.org/NewTLPF-II.htm; and www.step.org/showarticle.pl?id=602&n=.

The controversy over comparative standards is not an arid debate over regulatory policy; big money is at stake. Financial services generate two trillion US dollars in annual revenue. This is forecast to triple by 2020 and to account for 10% of global GDP. International financial services are highly mobile, and consumers readily shift jurisdictions to pursue regulatory arbitrage opportunities. The new Report will accordingly shape the odds for jurisdictional success or failure in one of the most profitable sectors of the global economy.  

“Financial Services Sector Set For Huge Growth”, Financial Times, 20 April 2005.

This paper considers the controversial background for the OECD program on international tax information exchange and reviews the key findings in the new Report.
The Story so Far
Conduct that encourages, facilitates or is oblivious to tax evasion in another jurisdiction is morally reprehensible, and often criminal. However, international law is clear that there is no unilateral obligation on any jurisdiction to assist another to collect taxes.  

Government of India v. Taylor 1955 1 All ER 292 is the classic modern statement of this rule, but the principle is rooted in cases two hundred years earlier.

The OECD, an exclusive Paris-based club of thirty wealthy countries, launched a campaign in April 1998 to reverse this rule and oblige the smaller countries to help its members with tax enforcement. The OECD’s 1998 report, entitled Harmful Tax Competition: An Emerging Global Issue, proposed an ambitious jump in global tax enforcement capability through: (i) government access (around the world) to beneficial ownership and financial data, and (ii) cross-border exchange of such data on request to tax authorities, everywhere.  
The OECD demanded formal commitments from the so-called “tax havens” (small international financial centres) to actively assist with its program for global “transparency” (collection and exchange, on request, of financial data). These demands were backed by threats to shut non-cooperating international financial centres out of the world’s banking and securities markets. The OECD launched its program for data tracking without an effective means of ensuring participation in its program from key countries within its own membership.
Switzerland and Luxembourg, OECD states with substantial “offshore” financial services business, both dissented from the 1998 report and remain reluctant to support the OECD information exchange program. Portugal and Belgium, also OECD members, dissented from the project in 2001 and retain reservations.   

The OECD’s Project on Harmful Tax Practices: The 2001 Progress Report, footnote 1 reads as follows: 
"Belgium and Portugal abstain from this Report. Luxembourg recalls its abstention to the 1998 Report, "Harmful Tax Competition: An Emerging Global Issue," which also applies to the present Report and regrets that the 2001 progress report is further away from the goal of combating harmful tax competition with respect to the location of economic activities. In addition, Switzerland notes that its 1998 abstention applies to any follow up work undertaken since 1998." Portugal and Belgium expressed further reservations in the 2004 Progress Report, and Switzerland and Luxembourg continued their dissenting position. Belgium and Portugal’s abstention relates to concerns regarding the balance of the project because of the continued application of the ring fencing criterion to OECD member countries.

Non-Member Commitments to the OECD Project
By 2002 most of the small international financial centres had agreed, under duress, to support the OECD project for tax information exchange. This process was slow initially, because these “traditional” offshore centres found that clients were migrating elsewhere in anticipation of those commitments. In particular, many clients were moving to take advantage of the more relaxed data collection and exchange standards available in Switzerland and the United States, the principal cross-border finance centres within the OECD.

Crucially, at this stage the OECD had accepted that the offshore centres were free to operate income tax-free fiscal regimes (see Towards Global Tax Co-operation, 26 June 2000).

Following an early Isle of Man commitment in December 2000, the smaller offshore centres took the commercially sensible precaution of conditioning their commitments on a “level playing field”, i.e., an assurance that OECD countries (and others left out of the project) would adopt similar standards. The traditional offshore centres were  apparently willing to co-operate, but only on the basis that all financial centres would “join hands and jump into the cold pool together”.

For example, Singapore, Hong Kong and Dubai.

The author attributes this turn of phrase to Sir William Allen, Finance Minister of The Bahamas at the time of that jurisdiction’s commitment. The Bahamas commitment was made subject to the level playing field requirement.

EU Savings Tax Directive Skewers the OECD
The OECD’s lack of success in extending its program to its own members with substantial “offshore” financial services businesses became embarrassingly conspicuous in 2004 when the European Union made concessions in its own parallel program for tax information collection and exchange (the “Savings Tax Directive”). Unlike the careful management of the OECD initiative (where the key debates were conducted behind closed doors), the EU argument over the competitive and financial costs of compliance became a highly public confrontation between the EU and Switzerland.

The Directive became operational in July 2005. It requires automatic reporting of cross-border interest payments on savings income paid from an EU or other participating jurisdiction to EU resident individuals.  Switzerland, Austria, Belgium, Luxembourg and most UK Overseas Territories and Crown Dependencies will levy withholding tax, in lieu of exchanging information, until 2010. There is no obligation on these jurisdictions to adopt withholding tax in 2010 unless Switzerland agrees to do so. Securing Switzerland’s agreement to information exchange in 2010 is not a forgone conclusion; indeed on current indications it looks doubtful.

See “ECOFIN Bolkestein Urges Ministers to ‘Stick to their guns’ on Swiss tax deal”, AFX News Limited, 9 March 2004 and “Swiss failure to Agree Savings Tax Angers EU”, Financial Times, 9 March 2004.

Although all fifteen members of the EU at the time were also OECD members at the time, the EU exempted four OECD members from information exchange obligations until 2010. (For reasons rooted in the need to reach political compromise, commitments to impose withholding tax at increasing rates were accepted instead). The US refused to discuss provision of information on an automatic basis and was nevertheless (disingenuously) declared to have information exchange practices equivalent to those demanded by the EU. 

The four exempted jurisdictions were Austria, Belgium, Luxembourg and Switzerland.

The exemptions from tax information exchange granted in the EU Savings Tax Directive stunned the smaller financial centres. For several years, including through their commitment process, those centres had been steadily losing business to OECD countries lagging behind their efforts. The OECD kept their project on foot through continuous (ineffectual) promises of decisive action on the derelictions within its own membership.  

In Towards World Tax Cooperation, OECD Observer (June 27, 2000) Jeffrey Owens, OECD Head of Fiscal Affairs reviewed the OECD’s demands for transparency in the Harmful Tax Competition initiative and stated: “And let me emphasise that the same standards will apply to all [OECD] member countries and non-member countries”.

The exemptions granted by (and for) OECD countries in the EU initiative ripped the lid off the Pandora’s box of defaults by OECD countries. The OECD was demanding onerous information collection and exchange from others, but key OECD states were refusing to bear the costs of implementation at home. The OECD’s determined insistence that there were imminent changes in its own membership to catch up with progress elsewhere was no longer credible. The protests prompted by the exemptions granted under the Savings Tax Directive crippled the OECD project for information exchange. 

See “Little Cheats Will Have to Repent” (footnoted below) in which the Deputy Secretary General of the OECD claimed in May 2002 that OECD countries had pledged to eliminate their harmful tax practices by April 2003.

More serious problems for the OECD have arisen from the ambivalent position of the United States in its initiative. The US federal government provides funding and officer staffing for the OECD; the Clinton administration enthusiastically supported the OECD’s tax enforcement program when it was launched in 1998. However, it appears US officials did not advise the OECD that most of the new data-tracking commitments in the program fell outside federal competence, and instead within state legislative jurisdiction. In the event, nearly every state in the US now permits tax-free companies with anonymous ownership, flouting OECD demands to identify and collect information from persons establishing companies.

The United States bears 23% of the OECD budget, and bears influence commensurate with this substantial funding.

The OECD Project was originally entitled “Harmful Tax Competition” (emphasis added). The disapproval of low tax rates was dropped and the project name was changed in 2001 to “Harmful Tax Practices” (emphasis added) in deference to reservations expressed by the incoming (Bush) US federal administration, which expressed unease about a program to curb tax competition. The Bush administration’s enthusiasm for tax competition later diminished when US headquarter companies started moving to Bermuda to cut their US tax bill.

Seiichi Kondo, Deputy Secretary General of the OECD, authored a widely circulated press article in May 2002 entitled “Little Cheats Will Have to Repent”. Mr. Kondo noted that the lack of transparency for ownership of companies established in “unco-operative tax havens” threatened the “integrity of the international financial system.” Shortly after Mr. Kondo’s remarks Senator Carl Levin, Chair of the US Senate Banking Committee was quoted in the Economist Magazine acknowledging that although America criticises other countries for allowing the creation of companies with secret ownership “we are basically doing the same thing.”  

International Herald Tribune, 10 May 2002.

“Shell Games”, The Economist, 26 October 2002, at page 99.

By mid 2004 the smaller financial centers were wondering whether it could be right that the “little cheats” had to repent, while the “big cheats” were touting for the business dislodged by the (unevenly implemented) OECD program. The OECD was under serious pressure to show swift and decisive action on their constant promises to remedy defaults within their own membership. It was time to prepare a report.  
Introduction To the Report
The commitment to prepare the Report was made at the June 2004 Berlin Global Forum, shortly after the exemptions from information exchange provided by the EU became apparent. The Report is now released two years later, eight years after the Harmful Tax Practices initiative was originally launched.  
Given the OECD’s universally acknowledged expertise in conducting complex comparisons of data across countries, some may see the long delay in providing empirical support for their controversial project as surprising. However, 80% of global “offshore” (cross-border) financial services are already conducted within the OECD’s sovereign constituency, and it is plainly difficult to combine the role of player and objective referee at the same time.

Rajiv Biswas “International Trade in Offshore Business Services: Can Developing Countries Compete?” by in International Tax Competition, Globalisation and Fiscal Sovereignty, edited by Rajiv Biswas (Commonwealth Secretariat, 2002), page 112.

OECD countries competing in the market for “offshore” financial services (mainly the US, Switzerland and Luxembourg) were better placed to seek exemption from the emerging rules. The 2002 Towards A Level Playing Field Report (see footnote 1) showed that they fell further behind as the OECD project gathered momentum. By March 2004 even the IMF was acknowledging that the larger countries were falling behind, noting that “Compliance levels for offshore financial centres are, on average, more favourable than those for other jurisdictions assessed by the Fund in its financial sector work.”  (See IMF, Offshore Financial Centres, The Assessment Project – An Update, 12 March 2004 at page 7.)

The Report, some 248 pages in length, is an impressive piece of work. The resource commitment required to produce it is indicative of the importance which the OECD attaches to its program for tax information exchange. The Report captures the situation as at December 31, 2005.
Production of the Report was managed within the OECD Centre for Tax Policy and Administration by a former US IRS official who has been with the OECD’s Harmful Tax Competition project from an early stage. High level organisation of the Report was conducted by officials from 15 jurisdictions drawn from a subset of the OECD and non-OECD participants in the Global Forum, and it was ultimately approved by all participants in that Forum.

US officials have played an active role in the project throughout. Suggestions from the Washington-based think tank, The Centre for Freedom and Prosperity, that the US is a reluctant participant in the OECD Harmful Tax Practices initiative spring from a lobbyist’s desire to encourage Congress to ditch the program. The US has always been interested in benefiting from the information produced by the initiative, though admittedly less interested in assuming the burdens associated with it.

Australia, The Bahamas, the Cayman Islands, France, Germany, Isle of Man, Italy, Japan, Jersey, Mauritius, Panama, Saint Kitts and Nevis, Samoa, the Seychelles and the United States were members of a Sub-Group with responsibility to supervise and comment on the developing Report.

The Global Forum is a body organised by the OECD to conduct their tax information exchange project. That group includes twenty-six of the thirty OECD countries (Austria, Belgium, Luxembourg and Switzerland do not participate in Global Forum). Global Forum also includes all the jurisdictions targeted in the original 1998 launch which agreed to assist the OECD, and a number of other (generally reluctant) invitees to the OECD party, including Singapore, Hong Kong and the United Arab Emirates. 

Switzerland was present, for the first time, at the Melbourne Global Forum in November 2005, but as an observer only. Why did the OECD permit its own (non-committed) member to attend when it has made much of its refusal to exclude uncommitted non-members?

As respects the original jurisdictions in the Project, no commitments have been provided by Andorra, Liberia, Liechtenstein, Luxembourg, the Marshall Islands, Monaco, Switzerland or any of the US states.

The Report contains a vast amount of data, generally supplied directly by the countries participating in the exercise. The data was not audited by the OECD Secretariat, an understandable approach in a project with a finite time frame. In any event, participating countries had the opportunity to comment on the information provided by others, so inaccurate data was subject to review. However, the temptation for countries to indulge in editorial nuances in their contribution to the tables was more difficult to manage, and the informed reader of the Report will see many of those beyond the ones noted below.
Summary of the Report
The narrative in the Report, some thirty-five pages, introduces the philosophy for “transparency”, and laudably includes the principle of limiting information required to a response on request. (The EU preference for automatic and comprehensive information exchange is far more intrusive and costly.) The Report then provides a factual assessment summarising compliance with the principles following their analysis of the information collected from the countries participating in the review.  
The principal achievement in the Report is nearly 200 pages of tables reviewing comparative information collection and exchange practices in 82 countries (Annex IV). This data is highly informative to anyone seeking a summary view of a jurisdiction’s position on confidentiality (or “transparency”, depending on one’s perspective) for client financial records. The tables included in this Annex IV of the Report are listed in the appendix to this article.
Three other annexes appear in the Report, as follows:
•	the republished text of the communiqué from the last Global Forum meeting held in November 2005 in Melbourne, Australia (Annex I);
•	the list of countries covered by the factual assessment (Annex II); and
•	a paper from the Joint Ad Hoc Group on Accounts, setting out agreed standards for the keeping of accounts (Annex III).
Narrative and Analysis in the Report
The Report opens with an acknowledgement of the need for implementation of higher standards in a manner that is “fair, equitable and permits fair competition between all countries, large and small, OECD and non-OECD”.  The Report goes on to say 

The Report, page 7.

	The convergence of existing practices of information exchange towards these [high] standards thus should be coupled with a process that ensures equity and fair competition which aims to ensure that financial centres that are engaged in meeting the standards of transparency and effective exchange of information are not disadvantaged by countries that are not part of the process, and that the latter are not permitted to profit from the promotion of their position of being outside the process.  

The Report, page 8. The reader might reflect on this last phrase after reading the text below from the Delaware corporate service provider’s brochure under the heading “Replace Existing Offshore Companies [with Delaware Companies]”.

Confirming an earlier commitment to provide “mutual benefits through bilateral implementation”, the Report provides an assurance that matters will reach a stage where “financial centres that meet such high standards are and remain fully integrated into the international financial system and the global community”.  

Berlin Global Forum communiqué, page 3.

The Report, page 7.

This “mutual benefits” point addresses a primary hesitation for non-OECD member countries in supporting the OECD plans for tax information exchange. Even if there were to be a “level playing field” (so that competitive disadvantages were addressed) the non-OECD member states would still lack any incentive to shoulder onerous and expensive burdens in the interests of conferring benefit exclusively on the high (direct) tax countries. The Report acknowledges this issue, but this theme is otherwise entirely ignored in the Report. The absence of any effort to develop this point is a key shortcoming in the Report.  

It is often overlooked that the so-called “tax havens” often have high (usually indirect) taxes. Government revenue in the Isle of Man, for example, is 38% of its GDP.

The goals of the OECD exercise are summarised as follows:
•	exchange of information mechanisms;
•	appropriate access to the information; and
•	availability of information.
Exchange of information generally springs from double tax conventions (DTCs) or tax information exchange agreements (TIEAs). Less usually, tax information may be provided under Mutual Legal Assistance Treaties or through exchange under anti-money laundering laws which include tax evasion as a predicate offence.
The Report notes some 1782 bilateral DTCs amongst the survey group, and 46 bilateral TIEAs. The key issues are: 
(i) 	whether there is a requirement for a domestic tax interest in the requested state; 
(ii) 	the presence of safeguards such as notice to the person about whom information is being exchanged (unusual, apparently); 
(iii) 	assurances from the requesting state that the information will be treated as confidential; and 
(iv) 	dual criminality requirements, ie, insistence by the jurisdiction receiving the request that the information requested concerns activity that would be criminal under its own laws.  
Singapore’s ability to access bank information is restricted to cases where it has a domestic interest in the information. Singapore has made a big push in the private banking area based on their robust domestic protections for bank information and this has attracted the custom of the Swiss banks. Concerns over the reluctance of Singapore to join the tax information exchange program may be inferred from the fact that the commentary in the Report notes this domestic tax interest restriction six times.

Report: page 16, paragraph 38; page 22, paragraph 52; page 23, paragraph 65; page 25, paragraph 71; page 43, paragraph 160; and page 44, paragraph 165.

Switzerland is singled out for special attention on dual criminality requirements, as it will generally only respond to requests for information on tax matters that constitute “tax fraud”. To the consternation of Switzerland’s OECD colleagues, “The mere non-declaration of income is not considered to be tax fraud [under Swiss law].” However, a recent protocol to the Swiss/US double tax convention now extends the exchange of information (to the US) to circumstances where there is “tax fraud or the like”.

Swiss response in Table A5 of the Report, Application of the Principle of Dual Criminality.

Access to bank information (i.e. bank secrecy) has been a longstanding bugbear for the OECD. As one would expect in a project mounted by tax authorities, it is treated as self-evident that all aspects of an individual’s financial affairs are the legitimate subject of government scrutiny. Accordingly, while bank secrecy (as between a bank and its customer) is seen as appropriate, laws preventing access by tax authorities send the OECD into orbit. The OECD is making progress in this area, as only five of the eighty-two countries surveyed now lack access to bank records for purpose of eliciting data for tax exchange purposes.

The Report at page 21, paragraph 55. The countries are Guatemala, Nauru and Panama, with “insufficient information” to assess Brunei and Dominica. Following a recent change, Panama now permits access for domestic civil tax purposes.

Access to Ownership Data
The OECD program to create enhanced tools for tax enforcement has been most successful amongst non-members in effecting a change of mindset on the need for a government to maintain access to ownership, identity and accounting information. At an early stage the OECD encouraged non-members to establish government registers to hold such data on companies and other structures established in a country. However, the absence of such facilities in many of its larger countries made it difficult to insist on this approach.   
The OECD now appears content with government access to ownership data maintained by the local agent (i.e., a corporate service provider). In most non-member states, the OECD has succeeded in extending this data to beneficial ownership, not merely the registered owner of companies.    
Tax-free companies with anonymous ownership were commonplace in the traditional offshore centres in 1998. However, such companies have been hunted to near extinction throughout the OECD project for tax information exchange. Eliminating such structures has also been a high priority of the United States, whose law enforcement authorities have fulminated on the subject of criminal activities relating to (US) tax evasion, money laundering and securities frauds, terminating in anonymous structures established in the traditional offshore centres.
Given the importance that the OECD has attached to the goal of eliminating bearer shares, it is surprising that a majority of the jurisdictions surveyed permit bearer shares (48 countries) and bearer debt (52 countries). The OECD notes that the majority of countries with bearer facilities have mechanisms to require identification of owners; for example requirements to deposit shares with a custodian and compliance with anti-money laundering requirements. In practice, these mechanisms will have varying and unpredictable success in achieving the goal of identifying holders of such securities.  

The Report, page 25.

US Practices on Corporate Ownership Data
The US is the largest financial services market in the world and is often cited as a model for sophisticated regulation. However, eight years after the launch of the OECD initiative anonymously owned companies continue to flourish in US states, having become a rarely sighted beast in the smaller financial centres. US single member LLCs are widely used now as a substitute for the anonymous companies now nearly extinct in their traditional homes. The brochure of a Delaware-based service provider explains the tax status of such companies as follows:
	5.3.1.2	IRS Tax Position
	Single member Delaware LLCs can also provide tax avoidance benefits to international investors who are neither citizens nor residents of the U.S. because they combine anonymity with the tax-free status of non-U.S. source income. Since the single member Delaware LLC is classified by the IRS as a “disregarded entity,” it is not required to file a U.S. federal tax return. At the individual tax level, non-resident aliens of the U.S. do not pay federal income tax on non-U.S. source income.  

Fidinam & Partners, “International Tax Planning Using U.S. Entities”, May 2003 at page 23.

A report of the US Government Auditor on anonymously owned US companies entitled Corporate Formation: Minimal Ownership Information is Collected and Available was recently commissioned by the US Senate and published in April 2006 (the “GAO Report”). The GAO Report opens with the comment that “Most [US] states do not require ownership information at the time a company is formed.” That report, some 72 pages in length, reviews information requirements for establishment in US states, and notes the use of anonymous, tax-free US companies in international criminal activity. Remarkably, the policy section of that report makes no reference to the eight year OECD campaign to stamp out anonymous companies.  

Available at www.gao.gov. For analysis of this Report, see GAO Report on Company Formations Focuses on U.S. Shell Companies, Evidence Gathering Problems, by Bruce Zagaris in International Enforcement Law Reporter, volume 22, issue 7, July 2006.

See the introduction to the GAO Report.

Another major report released in January 2006 by an interagency US Government team, led by the US Treasury, comments on the use of such tax-free US companies as follows:
	A Delaware-registered company may be owned by a national of any jurisdiction, regardless of his or her place of residence. The company can be operated and managed worldwide, and is not required to report any assets.  Eastern European and Russian law enforcement agencies have expressed concern that regional criminal organizations were abusing Delaware shell companies for money laundering. And German prosecutors have reportedly complained that the secrecy inherent in Delaware’s regime for legal entities has hindered investigations into suspicious financial activity.  But, Delaware is not the most permissive jurisdiction in the United States with regard to company formation. Both Nevada and Wyoming permit companies to have bearer shares and nominee shareholders, which Delaware does not.

U.S. Money Laundering Threat Assessment, prepared by the Interagency Working Group led by the Department of the U.S. Treasury, dated December 2005, and released January 2006, (available at http://www.cf.ac.uk/socsi/whoswho/levi-laundering.pdf). Once again, this report made no reference to the OECD project to curb the availability of anonymous companies.

US consternation over anonymous companies elsewhere has evidently not prevented US states and their service providers from providing similar facilities for foreigners at home.  The brochure of a US service provider selling US corporate shells confirms the migration of “offshore” (tax-free) companies to the US as follows:
	5.3.2.1	Replace Existing Offshore Companies
	Due in part to increased regulation in traditional and non-traditional offshore jurisdictions, many international fiduciaries and attorneys are replacing their clients’ existing offshore companies with Delaware LLCs. The major benefit is that Delaware law does not require that information on the beneficial owners be kept or disclosed so the anonymity of the client can be preserved. Also, many financial professionals prefer the reputable stature of the U.S. jurisdiction of Delaware as compared to some of the offshore jurisdictions.  

Fidinam & Partners, “International Tax Planning Using U.S. Entities”, May 2003 at page 23.

The US response in the Report on the absence of access to corporate ownership information refers only to the availability of corporate ownership data in US federal tax returns. The OECD commentary on this gap merely confirms that “In the United States, federal tax law provides that [ownership] records must be kept so long as they may be relevant to the administration of that law…”. These comments overlook the evident point that most foreigners incorporating US companies for international use will not need to file a US tax return, so as a matter of practice the requirements of US federal tax law do not generate any relevant reporting.  

The Report, Table D-1.

The Report at page 28.

The communiqué following the OECD Global Forum meeting in Melbourne (Annex I in the Report) notes in several places the need for countries to enlist the participation of their “political subdivisions” in the harmful tax practices work. This represents progress on addressing the disruption posed by the reluctance of US states to participate in the global program for greater transparency. If the US federal government is unable to commit its states because of the constitutional division of powers, then the states should be asked to commit directly, just as the British Overseas Territories and Crown Dependences have done.

The UK Overseas Territories and Crown Dependencies were asked to participate and commit directly, despite the UK having the power to conduct their international relations.

This failure to note widespread US derelictions in permitting anonymously owned companies is a significant shortcoming in the Report. If illicit companies with secret ownership merely migrate out of the tax havens and into the US, what is the point of the OECD project?
Accounting Records
The OECD’s original goal was to require all companies to prepare financial statements and file them with the government in their jurisdiction of establishment. Again, the OECD was persuaded to permit financial information to be kept by service providers in non-member states, and so accessible to the home country government on request. Apart from occasional OECD grumbles over whether local agents were properly supervised in all non-member jurisdictions, the process is seen as striking an acceptable balance between client confidentiality and the obligation to assist foreign states when information is required.
The Report notes that company, trust, partnership and foundation laws generally require the keeping of accounts, or at least the retention of financial data. In high tax countries these statements must either be filed or kept available for government authorities where there is a domestic tax interest in the structure. Accordingly, where there is a domestic tax interest, financial data is normally available in the larger countries. 
Gaps occur in the larger countries where the structure is not subject to tax in the jurisdiction of establishment. Thus the single member US LLC discussed above, commonly used as a substitute for a tax-free offshore company, has no US tax exposure or corresponding obligation to report or make financial statements available to US tax authorities. US law enforcement officials on the ground acknowledge that locating financial data from these (anonymously owned) US companies on investigation often leads down a cold trail.

The GAO Report notes that most law enforcement officials interviewed for their report advised that they had closed cases “that reached dead ends because of the lack of US company ownership information”.  (Page 36).

The commentary in the Report notes in this context, again, only that US federal tax law provides that accounting records must be kept so long as they are relevant to administration of that law. Perhaps this is a complete answer for US purposes, though its relevance is questionable where the US has no domestic interest in, or capacity to collect, the data from US companies with no US operations.  

The Report, para 144 at page 38.

Maintenance of Financial Statements 
The other key point in the accounting data area is whether companies and other structures should be required merely to collect information or obliged to prepare financial statements as well. It may seem self-evident that financial statements should be prepared for a company to lay the basis for good corporate governance, on the basis that the directors could hardly discharge their duties without this.  
However, many companies will, for example, be established to hold a single (non-income producing) piece of real estate, or, say, a portfolio administered by a fund manager that already produces all the financial data required to administer the company. Should such companies be required to incur an extra layer of cost to produce financial statements which are not required for their operations, just so they are available on the off-chance that they are requested by a foreign government?
The Joint Ad Hoc Group on Accounts Report, contained in Appendix III to the Report, adopts a pragmatic solution to this issue. This report adopts a “shoebox” approach, requiring companies and other structures to maintain reliable accounting records adequate to explain the transactions of the entity, enable the financial position of the entity to be determined at any time, and facilitate the preparation of accounts if required. This seems a reasonable compromise between the needs of the state and the interests of business in avoiding unnecessary cost.

The Report at page 59.

Changing The Direction of the Debate: Co-operation For Mutual Benefit
While OECD seeks the assistance of non-member financial centres, OECD member states continue to marginalise the role for such offshore centres in the world financial system by restricting the ability of OECD residents to consume financial services provided from such jurisdictions. These restrictions are imposed through blacklists, controlled foreign company rules, denial of deductions, higher withholding taxes, denial of domestic tax concessions and a myriad of similar rules. Higher reporting requirements for transactions taking place in traditional offshore centres also chill client appetite for the tax competition provided by such centres, even in the absence of formal technical barriers.

See the STEP report by Jason Sharman and Gregory Rawlings, on Deconstructing National Tax Blacklists – Removing Obstacles to Cross-Border Trade in Financial Services, 19 September 2005.

These anti-avoidance rules are understandably directed at abusive behavior but end in overkill. They damage the legitimate aspirations of small economies with limited resources to provide transparent international financial services. It is also unreasonable for OECD countries to take the position that the tax conventions and similar treaties that facilitate cross-border investment should be available only to the larger countries. A rethink of these outdated exclusionary practices is appropriate for non-member states prepared to compete for international financial services on a transparent and level playing field.  

The Isle of Man agreed to exchange data with the Netherlands in October 2005 on the basis of a plan by the parties to commence negotiations on a full double taxation agreement between the jurisdictions. This unique precedent has attracted attention of policy makers on all sides of the dialogue. For a review of the agreement see The Isle of Man leads the Way with New Approaches to International Tax Agreements, by Malcolm Couch, Offshore Investment Magazine, issue 162, December 2005/January 2006. See also the interesting series of articles by Marshall Langer on tax agreements between large and small countries in the March to May 2006 editions of Offshore Investment Magazine.

See the summary of Jersey’s policy position in Removing Commercial Obstacles to Market Access, by Colin Powell C.B.E, in the published papers from the September 2005 STEP Symposium Beyond A Level Playing Field, page 103 at 106.

The OECD makes much of its efforts in the Global Forum to include the non-member financial centres as “participating partners” in its plans for broader information exchange.  However, this participation is too limited to be meaningful; the opportunity furnished to small countries to implement the agenda of their powerful competitors is not much evidence of a partnership.

In any event, the OECD cannot be held responsible for any lack of initiative on the part of the non-member states to collectively articulate their needs for a more balanced and inclusive agenda. Critical though it may be, the demand for a level playing field is a mere brake on the process. The substantive policy direction is far more important than the actual pace of progress.  
Conclusion
The post 9/11 world has come to accept government scrutiny as the price of protecting our freedom. Whether there will be much freedom left after our financial affairs, DNA, movements and communications find their way into globally converged and digitally searchable government databases is a moot point. It is, apparently, not a point that troubles the tax collection community promoting the OECD Harmful Tax Practices project. The vestiges of privacy that remain to us are clearly seen as black holes to be eradicated in the interests of “transparency”, a universal good (when applied to the affairs of others).
Laudably, or perhaps out of necessity, the OECD project for transparency is moving towards a defensibly proportionate further invasion of the limited privacy left to us. The OECD’s longstanding proposal for “on request” provision of information is far more balanced than the automatic, comprehensive surveillance demanded by the EU. The requirement to maintain financial records adequate to construct financial statements, rather than the financial statements themselves, is also sensitive to the varying circumstances of the structures sought to be covered by the OECD’s program for data collection and exchange.  
Two issues continue to rankle and are unresolved by the OECD’s Report. The first is the exceptionalism invoked by the United States in failing to adhere to the basic tenets of a program significantly funded and staffed by the US government, but intended, apparently, only for the little people in the global economy. The US thirst for bank deposits comprised of foreign flight capital evading home country taxation is scandalous, particularly in view of the aggressive posture adopted by the US when its own tax revenue is at stake. Similar hypocrisy underpins the US refusal to deal with anonymously owned US companies while demanding that others jettison such structures. The OECD’s failure to enlist “do as I do” support from their principal constituent undermines the credibility it requires to cajole co-operation from others. 
The second issue that rankles is the missed opportunity for the OECD’s Global Forum to identify the meaningful quid pro quo promised for inducing co-operation from non-member states.  
Durable and stable agreements invariably require an exchange of value, and the sovereign context is no exception. If the OECD wishes to progress its project, it will need to facilitate the “full integration” into the global economy promised to the non-members whose support it seeks. This will require attention to the existing tax, commercial, and regulatory barriers which marginalise the traditional offshore centres seeking free trade in cross-border financial services. Without this, it is hard to imagine that non-member states will cheerfully assume the substantial costs of facilitating an agenda which benefits OECD’s membership alone. 
For all its faults, the OECD process provides a forum for countries large and small to discuss the needs of a globalising world. Notwithstanding that there are many abused smaller jurisdictions ready to dance on the grave of the OECD’s tax information exchange project, it is in no one’s interest for the dialogue to fail. Frustrated OECD states would seek to fill the vacuum and the EU approach would fit the bill.  
Two points are essential for further progress. First, large countries should not ask smaller ones to bear the cost of implementing standards ignored at home. Before the OECD proceeds further, it should ensure that it has the means to require its own members to adhere to the rules proposed for others. Second, as business and regulation converges in the large and small financial centres, the current discrimination against the smaller competitors looks increasingly inequitable. OECD countries should act on the Report's commitment to remove barriers to fair trade in financial services for all jurisdictions implementing the new standards.
Appendix
List of Tables in the OECD Report
A. 	Exchanging Information  
A1 	Number of Double Taxation Conventions and Tax Information Exchange Agreements
A2 	Summary of Domestic Laws That Permit Information Exchange in Tax Matters
A3 	DTCs and TIEAs Providing for Information Exchange upon Request
A4 	Summary of Mechanisms That Permit Information Exchange in Tax Matters
A5 	Application of Dual Criminality Principle 
B. 	Access to Bank Information
B1 	Bank Secrecy
B2 	Access to Bank Information for Exchange of Information Purposes
B3 	Procedures to obtain bank information for exchange of information purposes 
C. 	Access to Ownership, Identity and Accounting Information
C1 	Information Gathering Powers
C2 	Statutory Confidentiality or Secrecy Provisions
C3 	Bearer Securities
D. 	Availability of Ownership, Identity and Accounting Information
D1 	Ownership Information-Companies 
D2 	Trust Laws
D3 	Identity Information-Trusts
D4 	Identity Information-Partnerships
D5 	Identity Information-Foundations
D6 	Accounting Information-Companies
D7 	Accounting Information-Trusts
D8 	Accounting Information-Partnerships
D9 	Accounting Information-Foundations