OECD should step aside and let UN tackle tax havens

In response to the OECD's Pascal Saint-Aman's recent comments in the International Tax Review, here are the published replies from Action Aid's Martin Hearson and our director John Christensen.

Martin responds to Saint-Aman's comments about transfer pricing - in which he suggests that the OECD's approach to transfer pricing is wrongly criticised - and John defends TJN's Financial Secrecy Index from accusations that it was rigged to ensure that countries we wanted on top of the list "be on top of the list".

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The OECD does not have all the answers

27 October 2011

Responding to Pascal Saint-Amans’s comments in an exclusive interview with International Tax Review, Martin Hearson, policy adviser at ActionAid, argues that the OECD does not have all the answers in the formulation of international tax standards.

In an interview with International Tax Review, Pascal Saint-Amans suggests that the OECD’s approach to transfer pricing is “disputed and sometimes contested by people who don't really get it right”. We welcome the appointment of Pascal, who has always made an effort to reach out to civil society organisations, to the OECD’s top position at a time when tax and development is rising up the global agenda. But his comments somewhat mischaracterise an important debate.

Development NGOs such as ActionAid have invested a lot of time in engaging with tax officials from developing countries. We understand that building transfer pricing capacity is the immediate priority, especially in Africa; we also appreciate that many countries will prefer to do this on the basis of the OECD guidelines, because they are currently the pre-eminent international standards. But we also know that we are not the only ones to question the guidelines’ long-term suitability for developing countries.

First, it is important to recognise that transfer pricing, the arm’s length principle and the OECD guidelines are three different things. The OECD standards propose several ways to determine the arm’s length price (ALP), and represent one approach to transfer pricing. But the OECD does not have a monopoly on transfer pricing or the ALP – just ask the Brazilians.

It is perfectly possible to believe in transfer pricing, and indeed in the ALP, but to think that the OECD guidelines may need to be adapted to the resource-constrained context of an African revenue authority. This is one of the issues with which the UN Committee of Experts is grappling in the drafting of its practical manual on transfer pricing. I have heard strong support for this perspective from many African quarters, along with an insistence that the adoption of transfer pricing standards is a matter of national tax policy, to be made by each state itself.

Second, it is not the OECD’s role to reconcile the interests of OECD members and of developing countries. The existence of two model tax conventions – maintained separately by the UN and OECD – is an acknowledgement that these interests do not always coincide. The OECD’s report on attribution of profits to permanent establishments is frequently singled out by African revenue officials as an example of a step too far away from the taxing rights of source countries, and has been rejected in the recent update of the UN model convention for precisely this reason. My impression is that many also question whether, in the longer term, a similar balancing might not be necessary with regards to transfer pricing standards.

As should already be clear, the characterisation of the transfer pricing debate as between those who favour OECD standards and those who advocate formulary apportionment overlooks much of the current discussion. But Pascal’s advice to developing countries to “be cautious about the white man” who advocates formulary apportionment is also wide of the mark. I recently attended a meeting at the OECD on transfer pricing capacity building, at which only one person brought up the topic of formulary apportionment. It was not a white man, or indeed an NGO participant, but a woman from an African tax authority.

There is much important work to do on tax and development, and I consider the OECD secretariat an important partner which is already doing a lot of good work. For NGOs, however, the long-term objective is for developing countries to participate, on an equal footing, in the formulation of international tax standards. The first step towards this is to admit that the OECD does not have all the answers.

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OECD should step aside and let UN tackle tax havens

31 October 2011

In response to Pascal Saint-Amans’s comments in an exclusive interview with International Tax Review, John Christensen, director of the Tax Justice Network, defends the Financial Secrecy Index and argues that the OECD is unsuitable to lead global attempts to tackle offshore secrecy.

The OECD’s Pascal Saint-Amans cannot go unchallenged when he asserts, in an interview with International Tax Review, that the Tax Justice Network created its 2011 Financial Secrecy Index (FSI) “with a mathematical formula to get countries they want on top of the list to be on top of the list”. If Saint-Amans has evidence to support this extraordinary attack on the integrity of the FSI he should provide it; if not he should withdraw his comment and apologise to those concerned, myself included since I was responsible for the overall direction of research for the 2011 FSI.

The FSI is based on 15 indicators which were applied in exactly the same way to all 73 countries assessed in the 2011 FSI. Readers wanting to explore the background to these indicators can access our explanatory notes.: They can judge for themselves whether these indicators are biased towards unspecified countries we want “to be on top of the list”.

Readers can also judge for themselves whether the mathematical formula we used in 2011 is biased towards one country or another. When we evaluated the results of the 2009 index we were told that the formula used that year did not put sufficient emphasis on the secrecy score arising from our assessment of the 15 indicators. This had the outcome of elevating larger offshore financial centres higher up the ranking relative to the more secretive jurisdictions.

This year we rectified this by adjusting the mathematical formula used for combining the secrecy scores with the scale weightings to emphasise secrecy over scale. Readers can access the detailed methodology on the FSI website. Saint-Amans implies that we have an unrevealed agenda for getting countries we “want on top of the list to be on top of the list”. I would ask him to expand on the political agenda he accuses us of pursuing. From our perspective, we designed the index in 2007 precisely to overcome the deficiencies of the OECD’s 2000 list which omitted many of the world’s largest secrecy jurisdictions, including OECD member states like Austria, Luxembourg, Switzerland, UK and USA.

Not surprisingly the 2000 OECD list was widely condemned. To compound their earlier error, in 2009 the OECD published a black/grey/white list of secrecy jurisdictions based only on their hopelessly inadequate tax information exchange agreement (TIEA) criteria. Mere commitment to cooperate was sufficient to secure removal from the black list, and simply signing up to 12 TIEAs on the OECD ‘upon request’ model was sufficient to secure a white listing. Hey presto, almost every secrecy jurisdiction is now white listed and the OECD claims victory in the battle against tax havenry.

Sadly, the OECD claims are greatly exaggerated. The effectiveness of the TIEAs cannot be assessed since the OECD has not published data on how much information is actually being exchanged. Where information does exist, it appears that very little data is being exchanged under the TIEA process. Worse, despite the claims made by Saint-Amans, banking secrecy remains operationally intact. Do not take my word for it; take this from the horse’s mouth:

"The Swiss Bankers Association (SBA) welcomes the finalisation of the tax agreement between Switzerland and the United Kingdom. Overall, the agreement is comparable to the one concluded with Germany. Firstly, the bilateral treaty gives clients of banks in Switzerland who are taxable in the United Kingdom a path to tax compliance while maintaining their financial privacy."

Financial privacy in this context is banking code for secrecy.

Time and again, the OECD has demonstrated its unsuitability to lead global attempts to tackle offshore secrecy. It is a rich countries’ club whose members feature prominently on the 2011 FSI ranking. The policy prescriptions it promotes are either ineffective (. the ‘upon request’ TIEAs), or impossibly complex and unsuited to the needs of non-OECD countries ( the ‘arms-length’ approach to transfer pricing).

The OECD is not the appropriate organisation to carry forward global attempts to tackle offshore secrecy. Lacking both legitimacy and political will, it should stand aside and allow a suitably politically upgraded UN Committee of Experts on International Cooperation on Tax Matters to take over responsibility for carrying forward the vital agenda of ending tax havenry.