Global tax rules and the Caribbean

When Britain assumed the Presidency earlier this year of the G8, the grouping that brings together the world’s most powerful developed economies, it made clear that tax compliance would be one of its core priorities.

Although much of the rhetoric then and since has been dismissed as being for domestic political consumption by the UK’s austerity-weary electorate, it is becoming clear that the UK’s approach forms part of a much broader co-ordinated campaign that will change global tax structures.

That is to say, what is now being discussed by a widening group of nations goes far beyond the initial concerns expressed by the UK about the countries that fall within its jurisdiction that provide offshore financial services.

What has become clear is that Prime Minister Cameron’s meeting in mid-June with the Premiers of all of the UK’s Overseas Territories in the Caribbean plus Bermuda, was a part of a much broader approach intended eventually to end the practice whereby companies and individuals move their assets anonymously between jurisdictions to lessen or avoid the payment of taxes in the countries in which they make their profits.

The fear is that the tax base of all countries is rapidly being eroded by wealthy individuals who are accumulating capital in low tax environments, or by multinational companies distorting competition by paying less and less tax by engaging in arbitrage between competing tax jurisdictions.

The latest development in this respect is the announcement that at a meeting of G20 finance ministers in Moscow on July 19 developing and advanced developing nations have agreed to work together to address aggressive tax avoidance by multinational companies such as Google, Amazon and Starbucks.

Over the last few years it has become clear that national tax laws have not kept pace with globalisation. Most governments have become concerned about the way in which large corporations and very wealthy individuals have been are able to shift their profits or income between countries, eroding the national tax base of governments that need such revenue to deliver services for citizens such as education, health care and policing.

As a consequence the G20 asked the Organisation for Economic Co-operation and Development, (the OECD) to produce an action plan as to how governments might collect the tax revenue they need on a global basis while enabling businesses to invest and grow.

The report, now published, identifies fifteen specific actions intended to prevent corporations from paying little or no taxes under international double tax rules that date back to the 1920s. It particularly focusses on the digital economy and the way in which this now enables goods and services to be provided in ways that do not fall within the tax regime of any specific country.

The OECD report suggests that a new set of standards should be developed to prevent double non-taxation and that there should be closer international co-operation so that income does not disappear from the reach of tax authorities, for instance though the use by companies of multiple deductions for the same expenses but in different jurisdictions.

It is as yet unclear whether all governments will be prepared to make the compromises necessary to put what is proposed into action. However, the fact that so many leading nations have been prepared to agree to the general principles involved, suggests a sea change in the way in which sovereign states tackle taxation and tax competition when faced with the fact that globalisation, offshore centres and the digital revolution are causing ever greater sums of money to move around the world beyond their fiscal reach.

It is intended that the all OECD members and G20 countries will deliver the plan in the coming two years.

The process of bringing about this change is, however, likely to be fraught with difficulty, not least because it is unclear whether nations beyond the OECD and G20 can be encouraged to adopt these new tax principles.

Amongst the first to feel the effects of these new policies are likely to be the Overseas Territories in the Caribbean and in particular the British Virgin Islands and the Cayman Islands which quite legitimately, and with the encouragement of the UK, have developed sophisticated legal environments that enable low or no tax operations through a variety of offshore financial vehicles.

However, independent nations in the region offering offshore financial services are unlikely to be immune for long, as it is likely that they too will be encouraged to consider how to relate their offshore and onshore regimes to the approach that the OECD and G20 are now planning.

In all of this there are a number of messages for the Caribbean.

Firstly, as reporting requirements for the US FATCA have shown, all governments, local financial entities and professionals will find themselves under increasing pressure to ensure that the details of all non-national beneficial owners of accounts, trusts and funds registered offshore, will become subject to agreements relating to information exchange. Trinidad, Dominica, Guatemala and Panama are particularly at risk, having failed to meet OECD requirements on information exchange.

Secondly, developed countries will need to provide support to developing countries to create secure and well managed registries that maintain reliable records of beneficial owners and banking transactions.

Thirdly, developed nations’ approach to tax competition and information sharing should also come under closer scrutiny in international fora if they do not themselves do what they are demanding of others.

And fourthly, the writing should be on the wall for those in the Caribbean who for one or another reason have been able to pay little or no tax. This position in economies facing austerity and hardship is no longer sustainable.

David Jessop is the Director of the Caribbean Council and can be contacted at david.jessop@caribbean-council.org

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