FATCA and You - Part II: Beyond Harmful Tax Competition

Introduction

In the first installment of this series, we discussed the true genesis of FATCA – the OECD's Anti-Harmful Tax Competition Initiative which began in 1998 and ended in victory for the OECD, a victory OECD members undoubtedly still savor. Part II looks at the great capitulation by CARICOM and how American policy affected the eventual outcome of the Third World's struggle for tax and economic policy sovereignty.

The Great Capitulation

In Part I, we discovered that in 1998, the OECD issued Harmful Tax Competition: An Emerging Global Issue (hereinafter Harmful Tax Competition). This report revealed certain criteria the OECD used to characterize some countries as tax havens. In 2000, the OECD, through its Forum on Harmful Tax Practices, issued another report on tax havens. The 2000 Report listed thirty-five jurisdictions the OECD claimed satisfied the criteria (described in Harmful Tax Competition) for being labeled tax havens. Several of these jurisdictions were members of CARICOM. Following lengthy and sometimes acrimonious negotiations between the OECD, the Commonwealth of Nations and CARICOM, the parties agreed that blacklisted countries would be removed from the list if, by February 28, 2002, they issued commitments to cooperate with the OECD's guidelines.

As that deadline approached, CARICOM nations issued the long-awaited commitments to board the anti-harmful tax competition bandwagon. Antigua and Barbuda, the Bahamas, Belize, the British Virgin Islands, Grenada, Montserrat, St. Vincent and the Grenadines, and the Turks and Caicos Islands wrote letters to then-OECD General Secretary, Donald Johnson, pledging their commitment "to the principles of effective exchange of information in tax matters and transparency." These letters contained attachments outlining the measures the respective jurisdictions would take to fully implement their commitments by December 31, 2005.

Dominica and St. Lucia took a different approach. These two island-nations issued press releases announcing their commitment to the OECD principles of transparency and effective exchange of information. The press releases also outlined just how these two countries would fulfill their commitments by December 31, 2005.

Barbados was not required to take any action. Even before the CARICOM nations began issuing their rash of commitments, the OECD announced that Barbados was no longer included on the List of Tax Havens. Barbados' removal from the list terminated a very public battle between the OECD and one of its most vocal opponents.

All things considered, the OECD had won its fight with CARICOM. It had received commitments from the CARICOM nations that they would fall in line and help arrest the flight of capital from high-tax to low-tax jurisdictions. Accordingly, no CARICOM country was included on the List of Uncooperative Tax Havens released by the OECD on April 18, 2002.

The capitulation by the fifteen CARICOM nations came at quite a price for the Caribbean nations. Not only did fourteen of them issue commitments to the OECD, but they also surrendered their sovereignty and enacted legislation signaling their commitment to arresting harmful tax competition and money laundering – although they did not consider their tax policies harmful and money laundering in the region had been unheard of until the OECD began making its absurd charges. The list of CARICOM nations enacting new legislation or amending already existing legislation to satisfy the OECD includes:

1) Antigua and Barbuda: This twin-island nation enacted several amendments to the Money Laundering (Prevention) Act of 1996, and the International Business Corporations Act of 1982;

2) The Bahamas: This group of islands enacted the Money Laundering (Proceeds of Crime) (Amendment) Act, 2000, the Evidence (Proceedings in other Jurisdictions) Act, 2000 and the Evidence (Proceedings in other Jurisdictions) (Amendment) Act, 2000. The Bahamas also enacted the following nine laws between October 2000 and February 2001:

(a). Central Bank of the Bahamas Act, 2000;

(b). Banks and Trust Companies Regulation Act, 2000;

(c). Financial Intelligence Unit Act, 2000;

(d). Financial and Corporate Service Providers Act, 2000;

(e). Criminal Justice (International Cooperation) Act, 2000;

(f). International Business Companies Act, 2000;

(g). Dangerous Drug Act, 2000;

(h). Financial Transactions Reporting Act, 2000; and

(i). Proceeds of Crime Act, 2000.

3) Cayman Islands: This British dependency enacted the Amendments to the Monetary Authority Law, Proceeds of Criminal Conduct Law, Banks and Trust Companies Law, and the Companies Management Law. The Cayman Islands also issued new regulations and enacted new laws that addressed customer identification and record-keeping for a wide range of activities.

4) Dominica: The island-nation enacted the Money Laundering (Prevention) Act, 2001, and the Exchange of Information Act, 2002.

5) St. Kitts-Nevis: This twin-island state enacted the following four laws:

(a).The Financial Intelligence Unit Act, No. 15 of 2000;

(b).The Proceeds of Crime Act, No. 16 of 2000;

(c).The Financial Services Commission Act, No. 17 of 2000; and

(d).The Nevis Offshore Banking (Amendment) Ordinance, No. 3 of 2000.

6) St. Vincent and the Grenadines: This CARICOM member enacted the International Banks (Amendment) Act, 2000 and the Confidential Relationships (International Finance) (Amendment) Act, 2000.

By the time the dust had settled, the OECD appeared satisfied with the actions taken by the Caribbean nations. The organization turned its attention elsewhere. The same was not true of the world's only superpower, the United States of America.

Role of the United States in the Anti-Harmful Tax Competition Initiative

As the world's only remaining superpower, the United States has had much influence at the OECD. Although the organization is based in Paris, it is the Americans, not the French, who often have the last word.

When the OECD began its anti-harmful tax competition initiative, Bill Clinton was President of the United States. The Clinton Administration strongly supported the OECD initiative. However, in January 2001, George W. Bush succeeded Clinton as president. Well aware that Republicans strongly favor free enterprise and less governmental intrusion, CARICOM leaders hoped the new administration would take a different approach to the OECD initiative. Accordingly, they undertook considerable efforts to make their case to the new Secretary of the Treasury, Paul O'Neill, Congressional Republicans, and the Congressional Black Caucus. Then-Prime Minister of Antigua, Lester Bird, even discussed the matter directly with President Bush.

In May 2002, Secretary O'Neill announced that the United States was withdrawing its support for the OECD initiative. Secretary O'Neill stated that he was "troubled by the underlying notion that any country, or group of countries, should interfere in any other country's decision about how to structure its own tax system." Secretary O'Neill also voiced concern that some provisions of the OECD tax initiative could be unfair to some non-OECD countries. He made it clear that the United States did not "support efforts to dictate to any country what its own tax rates or tax system should be, and w[ould] not participate in any attempt to harmonize world tax systems." He went on to state that the United States "simply ha[d] no interest in stifling the competition that forces governments – like businesses – to create efficiencies." According to Secretary O'Neill, in its then-existing form, the OECD initiative was too broad and should be refocused towards the need for the exchange of specific information in the detection and prevention of illegal tax evasion.

In response, the OECD originally announced that it would defy the Bush Administration and press forward with the tax initiative. But the organization soon realized this course would be unwise. Without the support of the United States, the initiative would go nowhere. Accordingly, instead of defying the U.S., the OECD decided to seek some form of U.S. cooperation. The organization's leaders scheduled a meeting to be attended by tax officials of the United States and other industrialized countries in Paris for June 2001. At that meeting, the OECD gave in to U.S. demands and agreed to a less aggressive approach to its tax initiative. In fact, the OECD made a major concession, agreeing that it would not impose sanctions on tax havens that simply offered favorable tax breaks to foreign companies and investors. In return, the United States agreed to continue its campaign to convince certain jurisdictions to disclose to the IRS and OECD tax authorities account information of people suspected of tax evasion.

This agreement led to a new approach by the OECD in its dealings with non-OECD members. But for the seven jurisdictions eventually included on the OECD's 2002 List of Uncooperative Tax Havens, non-member nations capitulated and followed the OECD's orders. The OECD was happy with this result. The Republicans in the United States Congress were happy as well. The Democrats were not; they would not rest until they got what they wanted – a world bowing to American imperialism. Our next installment in this series will chronicle how the U.S. Democrats went about achieving their goal.

(FATCA and You is a Five-Part Series By Vaughn E. James, MBA, JD, Ph.D.

Dr. Vaughn E. James is a former Calypso and Roadmarch King of Dominica, and former President of the Dominica Calypso Association. A member of the Dominica Calypso Music Hall of Fame, he is currently an Endowed Professor (The Judge Robert H. Bean Professor of Law) at Texas Tech University School of Law in Lubbock, Texas. He is the former Director of the Texas Tech University Tax Clinic, and the Incoming Director of the Texas Tech University Master of Laws Program. He teaches International Taxation, Federal Income Taxation, Federal Estate and Gift Taxation, Elder Law, and Law & Religion.]