Will the Offshore Industry Go Quietly Into the Night?
Transparency is an essential component of representative government. Citizens can neither exercise informed judgement nor hold public officials accountable without having access to pertinent information demonstrating how politicians are discharging their sworn duties. Lately, however, the idea of transparency has been turned on its head.At the urging of politicians in high tax nations and their ideological allies, international organisations are now demanding that citizens be transparent to government.
The new conception of transparency as an obligation of the individual to the state is a perversion of the neoliberal norm. Whereas the presumption used to be that individuals were in need of protection from the power of the state, it now holds that individuals are presumed guilty of betraying social obligations — such as the payment of sufficient taxes — until they prove otherwise.These are not merely concerns for social theorists, as stripping financial privacy from offshore centres has real world consequences.
Tax competition has had a profoundly positive impact on the global economy. The ability of taxpayers to move themselves or their assets to jurisdictions with less destructive tax rates puts pressure on politicians to consider pro-growth reforms, and since globalisation it has caused individual and corporate tax rates to drop throughout the world, resulting in faster economic growth and higher standards of living.Without the existence of offshore, low-tax jurisdictions, this competition would not have occurred.
In addition to providing services that enhance the efficient formation and distribution of capital, the offshore community also serves a vital role in the defence of human rights. Respect for individual privacy by financial institutions allows citizens in despotic or corrupt regimes to bank without fear of confiscation or political reprisal.With more than half of the countries in the world categorised as not or only partially free by Freedom House’s Freedom in the World survey, undermining financial privacy directly threatens the human rights of most of the world’s population.
In other words, financial privacy is essential for the functioning of a vibrant offshore community — not because investors are doing anything wrong, but because politicians can’t be trusted to do what is right.
Ongoing attempts at reversing the common understanding of transparency in order to undermine competition threaten to undo decades of taxpayer gains and pose an existential threat to the offshore community. Only an immediate, co-ordinated resistance to these forces can protect the industry from total annihilation.
Pressure on multiple fronts
Several major initiatives have led to the current state of affairs.The first, and perhaps most significant in its impact insofar as it precipitated further international action, was the Foreign Account Tax Compliance Act (FATCA). FATCA’s unilateral and cavalier impositions on the world’s financial institutions has not only taken a heavy toll in terms of time, money and heartache, but it has also signaled an open season on taxpayers throughout the world.
The gist of FATCA is that the United States has asserted the right to bully the rest of the world with enforcement of its domestic tax laws. Unlike almost every other nation, the United States taxes all forms of income on a worldwide basis, and it now expects the world to help collect it at the threat of financial penalty for non-compliance.This might seem as if it should be off-putting — and indeed for many it has been — but global tax collectors have also seen it as an opportunity. If the United States is greedily expanding its tax web, perhaps they could as well.
For most nations, it is not the goodness of their hearts that prevents them from taxing worldwide income. Some even try on a more limited basis, but lack the resources available to the US-based Internal Revenue Service to do so on a comprehensive basis. Putting the burden on other jurisdictions to collect and share information on their citizens may finally allow the rest of the world to join the United States as a global taxer.
It is of little surprise then to note that on the heels of FATCA’s global financial upheaval, the G20 and the OECD began agitating for the automatic transmission of tax information between governments. In 2013 the G20 Finance Ministers instructed the OECD with “establishing a mechanism to monitor and review the implementation of the global standard on automatic exchange of information” In early 2014 the OECD released its Common Reporting Standard for Automatic Exchange of Financial Account Information, which included an acknowledgement for FATCA’s role in acting”as a catalyst for the move towards automatic exchange of information in a multilateral context.” Any positive reference to FATCA’s onerous, counterproductive and vindictive dictates offers a telling glimpse into the mindset of the OECD and the likely path its agenda will take.
The OECD proudly declares itself a consensus-based organisation, but as any observer of its international tax efforts over the last several decades can attest, the OECD’s idea of consensus leaves much to be desired.The historical use of intimidation, blacklists, and sanctions to cajole low-tax jurisdictions into signingTax Information Exchange Agreements, as well as to submit their domestic tax policies to international scrutiny through so-called “peer reviews,” provides some indication as to how the OECD will press forward with its new standard. Its praise for FATCA’s ham-fisted dictates only magnifies the cause for concern.
A target of the OECD’s efforts is said to be so-called double non-taxation, which exists when potentially taxable income is taxed by none of the relevant governmental bodies. Double non-taxation, in other words, is the sort of scourge that only a tax collector could fear, and its framing as a problematic concept cannot co-exist with the principle of fiscal sovereignty and the right of nations to set their own tax policies. Rather than embrace tax diversity and the numerous benefits provided through state-level experimentation in tax and regulatory policy, the large nation members of the OECD want to centralise policy-making and eliminate perceived inefficiencies in the flow of revenue from private producers to public consumers.
A false justification
The OECD’s new reporting standard is based largely on the model FATCA agreements. It is also being sold in part as a means to prevent the proliferation of FATCA-like laws, and thus the need for nations and institutions to comply with a hodgepodge of different rules and requirements.This may at first seem reasonable, but even ignoring the obviously superior solution of standing up to and rejecting US fiscal imperialism, the OECD framework provides a poor alternative.
As it turns out, the new standards are themselves just a minimum requirement, which allows nations to implement even more onerous and costly demands. The standard that offshore jurisdictions will be required to implement will assuredly creep upwards over time, eliminating any supposed efficiency benefit.
The reporting standard simply does nothing to protect jurisdictions from having to implement systems complying with a multitude of different reporting systems. But it will ensure the flow of information to high tax nations, which in turn can and likely will be used to facilitate the flow of tax dollars. It is a direct assault on the very existence of low-tax jurisdictions.
Completing an old mission
When the OECD began its campaign against tax competition in the late 1990s, its reports referred favourably to the theory of capital export neutrality (CEN), which promotes tax harmonisation in the name of economic efficiency. Supposedly, so-called neutrality provides benefits by promoting allocation of investment resources based on business rather than tax considerations, which in turn enhances economic efficiency. Ignored are the political ramifications of eliminating tax competition.
CEN theory is popular among politicians and statists for the same reason it is not among economists. Eliminating the ability of taxpayers and capital to flee from jurisdictions with poor tax policies reduces the negative feedback that comes as an inevitable consequence of political greed. That’s great for politicians but bad for the economy.
Open support for so radical a concept as CEN became politically unfeasible for the OECD, but it has clearly not stopped its pursuit of CEN’s ultimate goals — the inability of taxpayers to ever benefit from better tax policy in other jurisdictions. In fact, while the OECD was still publicly claiming that on-request sharing of information would be sufficient to satisfy its concerns with low-tax jurisdictions, the Center for Freedom and Prosperity and other advocates for tax competition were predicting the arrival of full automatic exchange of information based upon the OECD’s adherence to such radical theories.Today we see those warnings have come to fruition.
A fight for survival
The OECD and its compatriots are determined to implement policies that benefit the global political class at the expense of taxpayers and the local economies of offshore jurisdictions. They’ve also proven willing and capable to punish jurisdictions that choose not to comply with their demands, which puts low-tax jurisdictions in a difficult position.
The OECD’s ever evolving goalposts have relied on the false hope that each new requirement would be the last in order to convince jurisdictions to keep complying.Yet appeasement has produced so far nothing but scapegoating, heightened demagoguery, more aggressive demands, and continued threats of punishment.
The legislation that sparked international action, FATCA, is today facing significant opposition. Not only has the Center for Freedom and Prosperity and other advocates made considerable inroads politically — resulting in the introduction of anti-FATCA legislation and the addition of FATCA repeal as part of the Republican Party platform — but well-grounded lawsuits have taken shape both within the United States and Canada, which hosts a large number of American expats adversely impacted by the law.
Depending on how these suits unfold, FATCA may well already be on the decline. The OECD would love nothing more than to step up and fill the void with a global FATCA. Only a concerted international effort can put a halt to their plans.
It is impossible to know what would have happened if targeted jurisdictions had banded together to oppose initial OECD incursions into their fiscal territory. Perhaps the tax bureaucrats would have been beat back, and perhaps not.There’s also no doubt that there remains great risk in standing up to the OECD today and asserting the sovereign right to defend financial privacy and maintain pro-growth policies, but it is the final option remaining before offshore jurisdiction become extinct.