The OECD’s Global Forum on Transparency and Exchange of Information recently held a progress meeting in Mexico City.  The meeting was attended by 178 delegates from over 70 jurisdictions and international organisations, including delegations from the Cook Islands, the Marshall Islands and Samoa.  Nauru, Niue and Vanuatu did not attend.  

The main objectives of the meeting were to:

• agree on restructuring the OECD Global Forum to expand its membership and ensure its members participate on an equal footing;
• agree on how to establish an in-depth peer review process to monitor and review progress made towards full and effective exchange of information; and
• identify mechanisms to speed-up the negotiation and conclusion of agreements to exchange information and to enable developing countries to benefit from the new more cooperative tax environment.

The OECD Secretary-General, Angel Gurria, heralded the efforts of the OECD and its members, stating that the OECD had delivered more in the past 10 months than it had achieved in the 10 years prior.  According to Gurria, all 87 jurisdictions surveyed by the Global Forum have now endorsed and agreed to implement the standards set by the OECD in respect of transparency and exchange of information, meaning that currently no countries are blacklisted for their tax activities.  However, he also warned that there are still some countries, which committed to the standards long ago but have not yet delivered.  For these jurisdictions, “time is running out”.

Following the meeting in Mexico City, the OECD issued a short summary of the outcomes of the meeting, however the document is not comprehensive.   In brief, the main outcomes were:

• a restructuring of the Global Forum  - interestingly Australia was nominated as the new chair of the Global Forum;
• the establishment of a Peer Review Group (PRG) “to develop methodology and detailed terms of reference for a robust transparent and accelerated process” of information exchange.  The PRG is to be implemented in two phases.  Phase One will examine the regulatory framework in place in any given jurisdiction and Phase Two will see how the implementation of that framework works in practice;
• a commitment to speed up the process for the negotiation of Taxation Information Exchange Agreements (TIEAs).   This will include the examination of:
• the effectiveness of regional multilateral negotiations leading to simultaneous signature of bilateral agreements;
• the practical implementation of multilateral TIEAs;
  
• how the unilateral approach taken by the Cayman Islands and St. Kitts and Nevis can be developed; and
• a commitment to enhancing the capacities of developing countries and how developing countries can be further integrated in and benefit from the Global Forum’s work.

The outcomes of the meeting were to be further discussed by the G20 at their meeting in Pittsburgh.

Country Movements

As a result of the meeting in Mexico City, eight further countries were included on the OECD white list, including Bahrain, Bermuda, Belgium, India, Luxembourg and Switzerland.   In order for a country to be included on the white list, they need to have signed 12 TIEAs.  Prior to the meeting, Bahrain and Bermuda were considered tax havens by the OECD, so their inclusion on the white list is a significant achievement for them. 

The Cook Islands has also taken a big step towards being removed from the OECD tax haven list managing to initial six TIEAs and to sign one full TIEA with Denmark, Italy, Mexico, Finland, Korea, Ireland and the Netherlands respectively.  Given the size of the Cook Islands, this progress is considerable, in particular, since the Cook Islands has been sitting largely dormant on the OECD tax haven grey list since 2002. 

However, other developing nations throughout the Pacific, such as Samoa, Vanuatu and the Marshall Islands, have failed to make any progress on the TIEA front.  It is arguable that in some respects, the Global Forum meeting failed to address some of the continuing problems faced by developing nations. 

The threat that “time is running out” for those nations who long ago committed to substantially implementing the OECD tax standards, but that have not signed the requisite amount of TIEAs, is not particularly helpful.  The lack of specific guidance in the report on outcomes suggests that the OECD needs to focus on providing more specific and tangible support to developing nations who may lack the resources and diplomatic channels to implement strengthened taxation frameworks acceptable to the OECD.

The OECD did comment that “a report to be issued early next year will examine how developing countries can be further integrated in and benefit from the global forum’s work”, however it is arguable that greater priority needs to be given to this issue.

Critics of the OECD’s work have pointed out that “what the OECD has achieved in the past twelve months is to secure, in its particular form, a replication of transparency treaties”. However, these TIEAs have merely created “arrangements for tax transparency in another form when mechanisms already existed.”

The one-size-fits-all approach of TIEAs may not suit smaller nations and it may be more appropriate to examine alternative solutions for such nations, which would nonetheless have the same outcome as the implementation of TIEAs. 

The Cook Islands

The Cook Islands Treasurer, Andrew Haigh, who attended the meeting in Mexico City as part of the Cook Islands delegation, does however emphasise that the “OECD and some of its member countries have helped facilitate the entering of TIEAs with the Cook Islands through multi-lateral negotiations and technical support”.  He further explains that the OECD facilitated contact with the various countries the Cook Islands entered into TIEAs with and that there “was support to help the developing countries meet their obligations”.

In order for the Cook Islands to be moved onto the OECD white list, it has set itself the goal of entering into the requisite 12 TIEAs as soon as possible and is hopeful that this process will be complete by the end of 2009.  If successful, the Cook Islands will become the first Pacific Island nation on the OECD white list.  Treasurer Haigh believes that it is important for the Cook Islands to become a white list nation, so that it will no longer be seen as an uncooperative jurisdiction, thus avoiding possible future sanctions.

Possible Sanctions

And further sanctions seem imminent.  In their draft communiqué released at the G20 meeting in Pittsburgh, the G20 emphasised that it is committed to “maintaining momentum in dealing with tax havens, money laundering, terrorist financing and prudential standards" and that the G20 "stand ready to use countermeasures against tax havens from March 2010."  It seems likely that that developing nations will be those countries most threatened by these sanctions. 

Although the OECD is providing some assistance to developing nations, as can be seen by the support granted to the Cook Islands, its rigid requirements concerning TIEAs may leave some smaller nations unable to meet the high expectations of such a taxation framework.  The meeting in Mexico City did not provide any significant discussion or specific guidance about alternatives to TIEAs.  Alternatives may include defining processes to foster multilateral TIEAs or  approving legislation providing for unilateral provision of taxation information exchange (as has been introduced in the Cayman Islands and St. Kitts and Nevis).  Both of these mechanisms could prove particularly helpful for developing nations and some clearer guidance or examination of these alternate mechanisms at the Mexico City meeting may have been helpful.

The OECD has agreed to provide an updated report ahead of the next Global Forum meeting in June 2010. 

The authors wish to thank Bret Gibson of Gibson’s Law and Andrew Haigh, Treasurer, Ministry of Finance and Economic Management, Revenue Management, Cook Islands for their contribution to this article.

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

PLN BankNote October 2009