OECD Views on Tax Competition: A Critical Appraisal

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OECD Views on Tax Competition A Critical
Appraisal

• Montreal
• 17 September 2007
• Richard J HaySTIKEMAN ELLIOTT LLP

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Presentation Summary

• key elements of tax competition
• OECD and the politics of tax competition
• Harmful tax competition
• OECD and tax havens
• DTAs as an antidote for the cross-border tax
  barriers

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Elements of Tax Competition

• rate
• base (income or consumption, scope)
• reach (worldwide or territorial)
• model (redistributive?)
• international interface

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OECD

• consensus process
• 30 sovereign members
• US / Europe are the principal constituencies
• generally pro competition in its work
• non-members are designated as participating
  partners in its work on tax competition

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US Policy on Tax Competition

• US states have long tradition of competition in
  tax / company law
• US taxes are 27 of GDP
• Europe averages 38 of GDP in tax
• 2001 Republican criticism of OECD Harmful Tax
  Competition Initiative triggers change of policy
  (and Report name)
• 2002-2004 US concern over corporate inversions
  into Bermuda

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EU Policy on Tax Competition

• diverse and complex
• tax competition seen as compensation for
  geographic or structural differences (Madeira,
  Ireland, Luxembourg)
• offensive or defensive measures?
• EU Code of Conduct condemns ring fencing
  (contrast US / OECD position)
• salami slicing is permitted
• general low tax rates are acceptable (e.g.
  Ireland)

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OECD Approach to Tax Competition

• 1998 Harmful Tax Competition Report
• concerns over poaching the tax base that
  rightly belongs to another country
• countries are free to design their own tax
  systems
• which abide by internationally accepted
  standards
• tax information exchange (on request)

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Harmful Tax Competition

• eroding the tax bases of other countries
• diverting mobile investment from one country to
  another
• distorting trade and investment patterns
• failing to provide tax data for enforcement by
  other countries
• project focus on information exchange by havens

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OECD and Tax Havens

• 1987 Any country can be a tax haven in relation
  to a particular situation. Attempts to provide a
  definition are bound to be unsuccessful
• 1997 no or nominal taxes are a necessary (but
  not sufficient) indication of tax haven. Havens
  are identified and listed
• 2002 commitments to transparency and information
  exchange
• 2006 OECD Report on Level Playing Field

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Top Global Economies, GDP per person2006
estimate, 000
SOURCE CIA World Factbook
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The Rap Sheet on Tax Havens

• world tax rates are forced down by unfair tax
  competition
• havens are predatory, distorting global economic
  activity
• havens impoverish developed countries,
  jeopardising tax funding for public services
• havens shift tax burdens from corporations to
  individuals

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More for lessCorporate tax rates versus Revenues
in developed countries
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Tax Competition Boon or Bane?

• effective competitors are always an irritant to
  other market participants
• competition is a healthy, liberalising force
• tax competition promotes discipline and
  efficiency in public sector expenditure
• does competition from low tax jurisdictions
  increase economic activity in neighbouring states?

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Tax Competition and Double Tax Agreements

• tax competition and barriers to cross border
  commerce
• tax information exchange agreements vs. DTAs
• will tax havens normalise relations with OECD
  states as they adopt international tax and
  regulatory standards?
• should tax barriers be lowered for tax havens to
  permit full tax competition?
• Canadian proposals are seen as novel and
  interesting

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DTAs and Low / No Tax Jurisdictions

• should OECD countries do DTAs with low/no tax
  centres?
• the UAE experience
• DTA relief is generally available between OECD
  countries for untaxed income in participation
  regimes, and for tax exempts
• OECD may find it easier to work with its
  participating partners if there is an exchange
  of value

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OECD and Tax Competition

• fair tax competition is encouraged, but what is
  fair?
• differing views in a complex political context
• level playing field is a greater problem than
  anticipated
• will OECD encourage its members to lower tax
  barriers for smaller countries as they facilitate
  tax information exchange?

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QUESTIONS ANSWERS

• Richard Hayrhay_at_stikeman.comSTIKEMAN ELLIOTT
  LLP www.stikeman.com