30 April 2007

FT: Financial standards come under fire

The UK and other industrialised countries have regulatory standards no better, and sometimes worse, than many offshore financial centres seen as tax havens, according to a report published on Tuesday by the Commonwealth Secretariat.

Shortcomings include exchange of tax information and identifying individuals behind companies or trusts, says the report, commissioned on behalf of the International Trade and Investment Organisation, a group of small countries with international finance centres. It said: “Legal and administrative limitations to the effective exchange of information in the UK include the availability of bearer shares and the lack of requirements for companies to have beneficial ownership information.”

Malcolm Couch, an Isle of Man tax official and deputy chairman of the ITIO, said small countries had been unfairly stigmatised by larger, more powerful ones. “It’s time to stop treating small countries with finance centres as different. Big countries have no moral or legal edge over small ones.”

Offshore financial centres have improved their regulatory standards as a result of the Organisation for Economic Co-operation and Development’s harmful tax competition initiative, launched in 1996. In 2000 it published a “blacklist” of 35 tax haven countries, which prompted offshore centres to make commitments to remove harmful tax practices, improve transparency and exchange information.

This process, initially acrimonious, has given way to “considerable rapprochement” between OECD and non-OECD participants, says the report. Both sides have recognised the case for creating “a level playing field”, although non-OECD countries still have concerns about distortions caused by the tax treaty network and the OECD’s “organisational blindness” about the regimes of its own members.

Many US states, including Delaware and Nevada, do not require companies to provide beneficial ownership information. Many industrialised countries permit the use of bearer shares, which reduce transparency. Switzerland limits exchange of tax information to cases of fraud; Hong Kong and Singapore limit information exchange to cases where they have a domestic interest.

Mr Couch said small countries should be involved in the creation of new international standards, rather than have these imposed on them by multilateral bodies controlled by large countries, such as the OECD.

The report also called on large countries to open up access to the international network of double taxation treaties to small countries. It criticised OECD members for offering small countries “tax information exchange agreements” without mutual benefits. It said OECD members wanted to obtain information about taxpayers “at as low a cost and with as little disruption to their competitive positions and existing international arrangements as possible”.

Ransford Smith, deputy secretary-general of the Commonwealth Secretariat, said: “To reduce global inequality, international standard setting exercises need to promote a level playing field and fair competition.”

© Graham Bishop