In February 2009, Singapore and Hong Kong, China, undertook to bring tax transparency up to international standards and relax bank secrecy laws for tax purposes. Hot on the heels of these announcements were others from the Cayman Islands, Jersey, Andorra and Liechtenstein, and more recently we have seen Austria, Belgium, Luxembourg and Switzerland signing up to the OECD standard on exchange of information.
Why is this happening now? World leaders meeting in London on 2 April called for new controls over tax havens and strict bank secrecy jurisdictions as part of the G20's response to the financial crisis. But despite the welter of recent commitments to improve taxinformation sharing, there are still plenty of voices calling for the havens to be left alone, on the grounds that the advantages they offer to business and private investors are irrelevant to the financial sector reforms called for by the crisis.
So is this simply a case of bullying and buck-passing on the part of the large and developed economies, or is there a genuine need to tackle what many economies increasingly see as a key faultline in the global financial system? Improved sharing of tax information is essential in a reformed global financial system. It is not that the taxation-even non-taxation-regimes of havens and secrecy jurisdictions have contributed disproportionately to the causes of the current financial crisis and economic downturn.
What is at issue is the shielding of business and private investor transactions from legitimate tax scrutiny in their home country. Recent financial-sector deleveraging has been sharp and painful. Secretive taxdriven arrangements were partly to blame for the gearing up that brought about that pain. Circular, "double-dip", financing arrangements that give companies fiscal advantages both at home and offshore ensured that normal tax benefits for debt financing were magnified out of all proportion to any conceivable tax policy justification, resulting in tax subsidies for excessive debt as well as for high-risk investments that would otherwise have been unviable.
Tax savings for borrowing engineered through such artificial and circular transactions clearly boosted financial sector balance-sheet and share values. But they added no real value to the global economy and served simply to further inflate global asset bubbles. Governments have long been alert to tax-avoidance opportunities from what is euphemistically known as "structured finance", but the involvement of secretive jurisdictions in complex chains of structures and transactions has often hampered their attempts to counter this distortive scandal. Tax havens are also home to the majority of the funds-mutual funds, hedge funds, private equity funds-investing in high-yield securities and highly leveraged shareholder investment that drove the pre-crisis credit boom. Investors in offshore funds are of course responsible for reporting their offshore income and gains to their own tax authorities, and there are of course reasons other than tax minimisation for locating funds offshore.
But tax secrecy can tip the balance between an unattractive, taxed investment and one which is only attractive on the basis of non-taxation. Some would argue that tax is inherently distortive, and that all tax systems are far more complicated than they should be. It's true that most countries' tax systems have an inbuilt bias to companies financing themselves with debt. It's also true that complexities and differences between many countries' tax systems offer opportunities for tax arbitrage that can distort investment decisions, irrespective of the level of transparency. And it may be that administrative burdens, complexity, or perceived ineffectiveness of some tax systems encourage taxpayers to evade or avoid tax, with or without the use of tax havens.
However, if so many countries are now signing up to OECD's tax information exchange standards, it is because they recognise that with the privilege of participation in the global financial market comes the responsibility of cooperation and transparency-not just for the benefit of the tax revenues of other countries, but also for the stability of the financial sector as a whole. All countries have a responsibility to use their tax systems to promote, and not distort, sustainable economic growth, and to bear down on tax-driven distortions in the economy, while addressing local public expenditure needs.
That is a tall order for any country, even within its own tax system. At an international level, it calls for an open, co-operative approach. It is inconceivable that any country could be part of a future stable, global financial market without a clear commitment to that approach. This is the message that came out clearly from the G20 summit, and that the OECD will continue to promote.
*The views expressed in this article are those of the author and do not necessarily reflect those of the OECD or its member countries.
©OECD Observer No 273 June 2009
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