The OECD Council has released a Report providing an update on the current status of its initiative on harmful tax practices. The Report seeks to clarify the aims and scope of the project.

In commenting on the new Report, Mr. Gabriel Makhlouf, Chairman of the OECD’s Committee on Fiscal Affairs pointed out that OECD countries are committed to ensuring that there is a genuine dialogue with the jurisdictions identified in the OECD’s 2000 Report as well as those jurisdictions that made commitments prior to the release of that Report.

He said, *”We are convinced that with the enhancements to the OECD project set out in the 2001 Report, which take account of the extensive and constructive dialogue we have had with the jurisdictions over the last 12 months, it will be possible for all jurisdictions to make the commitments we are now looking for.”*

The Chairman also noted that the OECD’s project on counteracting harmful tax practices is part of a wider initiative of Member countries to promote good governance in a globalised economy. *”Globalisation has enormous potential to improve living standards around the world. But it also brings risks, including the risk of abuses of the free market system, which could have a negative impact on the world economy and its people by distorting the free flow of capital and undermining the ability of governments to finance the legitimate expectations of their citizens for publicly provided goods and services.”*

According to Mr. Makhlouf, the OECD project is intended to counteract unfair tax practices, and particularly focuses on geographically mobile activities – including financial and other services – given that the risks posed to governments are greater with respect to these activities than in others.

The OECD initiative purports to provide a framework within which all countries – large and small, rich and poor, OECD and non-OECD – can work together to eliminate harmful tax practices. And, further, to promote tax competition that will achieve overall aims of fostering economic growth and development world-wide. Reportedly, the OECD project does not seek to dictate to any country what its tax rates should be, or how its tax system should be structured. It also does not seek to hinder enterprises in carrying out their normal business or to threaten the privacy of taxpayers. It seeks to encourage an environment in which transparent and fair tax competition can take place.

The newly released Report provides an update on all aspects of the project, (i) describing progress made over the last year in identifying and addressing harmful tax practices within and outside the OECD; (ii) reporting on the work done in connection with tax havens; and (iii) discussing the work related to Member countries and non-Member economies.

Additionally, the Report sets out a number of modifications to the tax haven aspects of the OECD’s efforts to eliminate harmful tax practices. (See below) These modifications relate to the commitments that the OECD is seeking from tax havens interested in co-operating with it to address harmful tax practices. The Report extends the time for making such commitments to 28 February 2002.

The Report makes no changes with respect to the transparency and effective exchange of information criteria. Thus, effective exchange of information will continue to be sought in both civil and criminal tax matters in specific cases. Further, the Report notes that the modifications to the tax haven work do not affect the work in relation to Member countries and non-Member economies and do not alter the factors used in the 1998 Report to identify tax havens.

A release from the OECD today indicated the organisation recognises that some jurisdictions have concerns about their administrative capacity to meet stated commitments. Consequently, OECD Member countries are now in the process of setting up a programme to offer through the OECD and other international organisations specific assistance to strengthen and improve the design of the administrative capacity of those jurisdictions, which require assistance. The OECD is in discussion with the IMF, World Bank and regional development banks on other forms of development assistance that may be appropriate to help committed jurisdictions further develop their economies as they move to eliminate harmful tax practices.

The OECD release further noted that Belgium and Portugal abstained from the 2001 Report but the abstentions do not affect their approval of the 1998 and 2000 Reports. The abstentions of Luxembourg and Switzerland to the 1998 Report extend to the 2001 Report.

Summary of Modifications to Tax Haven Aspects of the OECD’s Harmful Tax Practices Initiative:

(1) Commitments will be sought only with respect to the transparency and effective exchange of information criteria to determine which jurisdictions are considered uncooperative tax havens. The “no substantial activities” criterion will no longer be used in determining whether a tax haven is considered an uncooperative jurisdiction. Jurisdictions that have made commitments prior to the issuance of the Report have been informed that they can choose to review their commitments in respect of the no substantial activity criterion. The Report also states that OECD Member countries would welcome the removal by tax havens of practices falling within the no substantial activities criterion insofar as they inhibit fair tax competition.

(2) The potential framework of co-ordinated defensive measures would not apply to uncooperative tax havens any earlier than it would apply to OECD Member countries with harmful preferential regimes.

(3) The time for making commitments is extended to 28 February 2002.

(4) In order to ensure that committed jurisdictions have enough time to develop implementation plans, the time for making such plans has been extended from six months after the date of making a commitment to twelve months after that date.