The Effect of Oecd and G20 Reforms on Tax Havens

The effect of OECD and G20 reforms on tax havens

ABSTRACT

The effect of OECD and G20 reforms on tax havens.

This paper will focus on the effect of the Organization for Economic Co-operation and Development (OECD) and G20 countries reforms on tax havens. The paper will define what a tax haven is and how tax havens are generally used by individuals and businesses. The paper will states reason that the OECD and G20 decided to reform the global tax system and the possible implications of these reforms in the future. The paper will also focus on the reasons for tax havens in the global economy and also the reasons for and against the use of tax havens the global economy.

Definition of the OECD and G20

The (OECD) is a group of 34 democracies from Europe, North and Latin America and the Pacific whose primary purpose is to provide a forum to discuss and identify compatible, mutually supporting, constructive approaches to economic and social issues to ensure sustainable economic growth, and to provide employment and rising standards of living for its own populations, and those of the international community as a whole.

The Group of Twenty Finance Ministers and Central Bank Governors (also known as the G20) is a group of finance ministers and central bank governors from 20 major economies which is comprised of 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank. The main purpose of the G20 is to act as a forum for cooperation and consultation on matters pertaining to the management of the international financial system. The G20 studies, reviews, and promotes high-level discussion of policy issues pertaining to the promotion of international financial stability, and also seeks to address issues that go beyond the responsibilities of any one organization.

What is a tax haven?

The Organization for Economic Co-operation and Development (OECD) has identified three key factors in considering whether a jurisdiction is a tax haven and these are listed as follows.

Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their main country of residence.

Protection of personal financial information. Tax havens countries typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. These laws prevent the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.

Lack of transparency. The lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that law should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer's situation is available. The OECD has stated that the lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. 'Secret rulings', negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government's lacks of legal access to financial records are contributing factors.

The use of tax havens

Tax havens are used by individuals and businesses over the years to facilitate the movement of investment capital around the world are used by those seeking a cheaper way to do business globally. Tax havens also give individuals and businesses the ability to avoid the costly obligation to comply with regulations that would apply onshore. Tax havens were also used by those wishing to avoid or evade their obligation to pay tax. Tax avoidance is legal, but contrary to the spirit of taxation law, while tax evasion is always illegal, involving the non-disclosure of a source of income to an authority that has a legal right to know about it.

Tax havens in some instances are used by persons to hide criminal activities from view. That criminal activity might be tax evasion itself, but might also be money-laundering or crimes generating cash that needs to be laundered - theft, fraud, corruption, insider dealing, piracy, financing of terrorism, drug trafficking, human trafficking, counterfeiting, bribery and extortion. Tax havens on a more positive note are also used by those who want their activities to be anonymous, even if they are entirely legitimate. Some people wish to hide their wealth from their spouses, for example; others might want to conduct trade which, though legitimate, might risk their reputation.

The main reason for reforms by the G20 and OECD

The global financial crisis which occurred in 2008 in the United States and spread across the globe was caused by several factors. The first and major factor was the "financial innovation" by the banking sector. The major investment banks developed several financial products which were designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. The examples pertinent to the financial crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization and a form of credit insurance called credit default swaps(CDS).

The usage of these products expanded dramatically in the years leading up to the crisis. Another key cause was the inaccurate credit ratings which were given by the credit rating agencies. These credit rating agencies are now under scrutiny for having given investment-grade ratings to MBSs based on risky subprime mortgage loans. The credit rating agencies suffered from conflicts of interest, as they were paid by investment banks and other firms that organize and sell structured securities to investors. There were also limitations of the many widely-used financial models to value these new financial innovations and they were not properly understood by many persons. Therefore as financial assets became more complex and therefore less transparent, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came