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Harmful tax competition:
Beating up your offshore neighbours

Outsiders moving in on your patch? Learn from a gang of taxmen who used mob tactics to deal with their competition.

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What do you do when you have a whole team of small, developing nations competing for the funds of international investors by offering serious tax breaks?

Nothing, you might think -- unless, of course, you are in charge of chasing taxes for one of the large, high-tax countries that see money slipping offshore as a result. In which case you get concerned -- and you act.

You could, of course, join the competition on a level playing field and prune your own tax rates. You could offer tax holidays to businesses to encourage people to incorporate in your country. You could offer value to today's global economy.

Then again, what if you are unwilling to change your ways? Unhappy to economise? Unprepared to swap your cosy existence for the uncertainties of the open market?

No problem -- there's another answer. You join forces with other high-tax regimes and -- under the umbrella of the mighty Organisation for the Economic Cooperation and Development (OECD) -- try a very different strategy altogether.

The OECD has called it the "carrots and sticks approach". It happens roughly like this:

You prepare a list of countries that you blame for your loss of tax revenue. You announce that they create problems for the world economy by being "unfairly" tax-competitive.

"Hang on a minute," your audience ask, "hasn't history taught us that competition is healthy? Isn't Soviet-style central planning dead?"

"Not all competition is equal," you retort, "and this kind is bad for you."

Your list of offenders includes just about every well-know, successful offshore tax haven, except for those that have mighty political masters (Hong Kong) or those that you simply couldn't remember or those that are just too obscure to care about.

You complement the list with a directive on global tax that attempts to justify why tax harmonisation -- and not competition -- is the new way forward. You argue that tax rates should be broadly set according to a global norm overseen by the OECD -- and when they are, you claim, the world's economy will prosper and everybody will be better off.

You can guess that economists will later call your analysis "fundamentally flawed" and "downright suspect", but you don't worry. A lack of credible evidence might be a problem in court, but that's not where you are going -- instead, you take your case to the media.

Your blacklist gets published, heavily spiced up by allegations of money laundering and other monkey business that apparently happens offshore. Those journalists sure produce some exciting reading, you note with satisfaction.

Not surprisingly, the countries included on your list watch their reputation drop to levels not seen before. "Will the negative publicity impact our economies?" they worry. You, in turn, threaten sanctions, to let them know you mean business.

Mission accomplished? No way! You have only just began.

Now it's the time to put down your bloody stick and pick up the sweet carrot. You give your targets a way out -- on your terms, of course.

In exchange for publicly denouncing the evils of offshore tax competition, you offer your targets a pat on the head and a promise of removal from your blacklist.

Lionel Hurst, Antigua's Ambassador to the United States, told us how it happens:

"The OECD sent us some silly letter telling us that if we placed it on our letterhead and allowed our Prime Minister to sign it, that would take us off the list."

Note
A few offshore tax havens even signed advanced "commitment letters" in order to keep their names off any blacklists.

Here is an example of one from Bermuda.

See example >>

Mr Hurst was referring to a "letter of commitment" (in OECD speak), a promise to stop being tax-competitive and begin sharing information. Mr Hurst continued:

"How dare the OECD send such a letter to an elected head of government when the OECD officials who sent that letter have no authority whatever... We regard it as an insult and we are not about to kowtow..."

Insulted or not, many countries do in fact kowtow sooner or later. Off your list they go, and off the world's offshore map at the same time.

And as for those that resist the first round? Never mind -- just have another go. Updated list, more publicity, even more pressure. Some more kowtow.

OECD bureaucrats, earning tax-free salaries in Paris, are more than happy to help out managing the media war. Banking on future glory and even bigger tax-free salaries as the new regulators of global tax harmony, they surpass themselves by even threatening to cut off international aid.

Nicholas Bray of the OECD Media Relations Division commented:

"What we are trying to do is clean up a racket that's going on to the detriment of world democracy," he said. "These jurisdictions are taking advantage of people's desire to escape taxes at the expense of voters in the countries concerned."

Clearly lacking any sense of reality, it was the targeted tax havens that Bray referred to when he said: "Why give aid to people who are behaving like gangsters?"

In the meantime, your own gangster tactics are paying off. Your campaign runs as long as you can get away with it, and by the time you've finished, a substantial number of tax havens are no more.

 



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