BrianGarst.com

Earlier this year, the Organization for Economic Cooperation and Development (OECD) released its finalized Standard for Automatic Exchange of Financial Account Information. The standard boasts requirements for sharing of a variety of information, including full account balances, that constitute both an intrusion on personal privacy and a costly imposition on the institutions expected to implement the standard.To make matters worse, nations are expected to adapt their laws and policies to accommodate the organization’s demands.

The OECD’s new standards are part of a lengthy effort by the Paris-based bureaucracy to police international taxation and force low-tax jurisdictions to conform to the will of large, high-tax welfare states. The fundamental issue has always been about the ability of individuals, businesses and capital to flow away from jurisdictions with bad or unfavorable tax and regulatory policies and toward jurisdictions with more attractive systems.The nations that consistently lose out to this kind of tax competition are the very ones who dominate the international discussion and hold the most influence within organizations such as the OECD.

The losers in this battle are nations like Panama, which seek to attract capital and investment through competitive policies but lack the power and leverage of the larger nations to advance their interests within international bodies. Past OECD efforts, such as the blacklisting of Panama and other low-tax jurisdictions as so-called tax havens, combined with efforts to compel adoption of policies against Panama’s economic interests, have proven costly and disruptive. But the new initiative is an existential economic threat unlike others Panama has faced.

Full automatic exchange of all tax information is de facto tax harmonization. It allows high-tax nations to pursue even income earned in other territories, which given their track record is likely to happen. This will negate the appeal of pro-growth tax systems and reduce the ability of Panama to attract international investment. Yet the OECD expects Panama and nations like it to jump at the initiative and pass legislation for the benefit of other nations. In a world where nations respected the sovereignty and rights of their neighbors, this would never happen. But we don’t live in such a world, and if Panama does not comply there will be punishments of some kind.

Given the heightened stakes and increased costs for compliance compared to prior demands, more significant punishments will certainly accompany the OECD’s current initiative. And while it’s worked in the past, eventually something will have to give. Low-tax jurisdictions cannot continue enabling the insatiable greed of international tax collectors, but on their own they also cannot be expected to simply absorb the high costs of non-subservience.

Perhaps it’s time to take a page from the OECD play book. Europe and the United States, which drive the OECD agenda, themselves rely heavily on international investment. Their fragile economies would not easily withstand a significant lose of foreign money. If low-tax jurisdictions band together and form a counter-OECD body to advance their own interests, they could similarly threaten to redirect investment toward more respectful nations unless their fiscal sovereignty is respected. That may seem like drastic action, but this could represent the last chance for Panama to defend its right of fiscal self-governance.

OECD tax competition