Q: What is the OECD’s harmful tax competition initiative? Should companies that operate in countries with favorable tax policies be worried about it?
Oak Park, Ill.
A: The Organisation for Economic Co-operation and Development could be called a governmental think tank. It has 30 member countries (including the United States) that meet periodically to discuss and report on economic and social policy. The OECD Secretariat in Paris collects data, monitors trends, analyzes and forecasts economic developments, as well as researches social changes or evolving patterns in trade, environment, agriculture, technology, taxation, and more.
The OECD report on harmful tax competition was released in April 1998 and identified criteria for “tax haven” status, including no or low levels of taxation, lack of fiscal transparency, and ineffective exchange of information practices with other nations. A follow-up report–which listed 35 uncooperative countries that could be subject to economic sanctions–was released in June 2000. The list includes several Caribbean countries and the U.S. Virgin Islands.
Many conservatives have objected to OECD activities on the grounds that they imperil U.S. sovereignty and could adversely affect efforts to reduce taxes. In March of this year, the Congressional Black Caucus got into the act, but for different reasons. The CBC urged Treasury Secretary Paul O’Neill to reject the OECD initiative because it could “undermine the ability of developing nations and one of our own territories to strengthen and diversify their economies and reduce poverty.”
The CBC noted that the initiative threatens the “fragile economies of some of our closest neighbors and allies”–countries that are already grappling with reduced tariffs and declining preferences for their industrial and agricultural products. Wealthy OECD countries, the group stated, should not have the right to rewrite the rules of international commerce. Because the initiative will impose serious economic harm on developing countries, the CBC urged that it be rejected.
The Treasury Department recently announced that it would review the U.S. participation in the initiative, based on two principles: First, countries must be free to pursue their own tax policies, including policies regarding tax systems and tax rates. Second, countries generally should not engage in practices that make it easier for other countries’ laws to be broken or frustrated.
VP of Taxes, MGM-Mirage Inc.
President, Tax Executives Institute
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