IFC Caribbean speaks to Francoise Hendy, Tax and Trade Attorney-at-Law, Invest Barbados and Lead Negotiator, Barbados Tax and Investment Treaty Negotiating Team about how Caribbean IFCs have adapted to, and survived multiple initiatives designed to create a level playing field for financial services.
IFC: As more IFCs sign up to FATCA & the OECD’s Automatic Exchange of Information Standard, do you see a fundamental shift in policy happening in the Caribbean?
Francoise Hendy: Independent Caribbean IFCs have always been pre-disposed to information-sharing. Their comparative advantage in international business and financial services is not grounded in secrecy. The fundamental shift that is taking place is therefore in relation to the methodology of exchanges. For these states, the switching over to automaticity under FATCA and as part of the OECD transparency agenda cannot be considered in a vacuum, but rather as a part of a bigger economic re-orientation because of the exponential cost of compliance even in circumstances where the ‘risk profile’ among these states does not bear any correlation to the problem. These states understand that the refusal by some historical secrecy havens was simply a matter of securing their economic standing, however, so there has been a dogged insistence that the cost of compliance should attach to all countries without reference to their risk.
IFC: How have such developments changed the realm of tax diplomacy?
FH: Tax diplomacy is no longer a dialogue among a limited number of capital-exporting states eager to orient the world to provide maximum economic benefit. Nor is it simply about how the international aspects of one state’s tax rules affect foreign tax-payers. Tax diplomacy is now truly international, evidenced in the constituency of the now 102 members of the OECD Global Forum and its regularly scheduled meetings, and the increasing areas of state action (or inaction), which have now become part of the international tax dialogue. To their enduring credit, as part of the OECD’s campaign to keep their tax agenda forefront in the public domain and among world leaders, they enlisted the international wealth re-distribution lobby and helped craft and deliver a message about international tax that is less esoteric. With the tax woes of house-hold names like Amazon, Google and Apple routinely making the news, tax diplomacy stands alongside other areas of global discourse like the environment, health, culture and education that states and their citizens alike are keen to actively participate.
IFC: With the move away from a ‘by request’ method of exchange of information to the automatic exchange of information, are traditional tax treaties such as DTAs redundant or simply in need of reform to recognise the change?
FH: Automatic exchanges will lead to a greater demand for information sharing under tax treaties and TIEAs. Despite the way the automatic exchange of tax-payer information was initially promoted as a clear and necessary alternative to the bilateral methodology, it has always been the case within the text of the OECD Multilateral agreement that provides the legal basis for such exchanges, that automaticity is not ‘instead of’ but ‘in addition to’ exchanges on request. This is already trending among those jurisdictions actively engaged in spontaneous or automatic exchanges. Tax treaties do not exist just to facilitate information sharing. They are bilateral economic instruments in the true sense of the world because they address one of the risk factors associated with foreign investment. As the proliferation of these accords testifies, they are fundamental to the movement of goods and services around the world and contribute significantly to good global relations among states - as states agree to self-imposed fetters on state action for the good of the global trade, finance and investment.
For independent Caribbean states these instruments also support and encourage the movement of people including students, teachers, entertainers, retirees, and a range of professionals by providing clarity and certainty of tax treatment. In the absence of a World Tax Organisation, these agreements also provide a platform for dialogue between and among tax authorities. While there are important moves to adjust the terms of some tax treaties negotiated by some large international financial centres in the EU to reflect a more ‘balanced’ outcome for non-EU states, it would be unfortunate to consider tax treaties only in the context of their ability to facilitate information sharing.
IFC: With many in the region among the early adopters of the OECD AEOI standard, does this enhance the legitimacy of IFCs in the Caribbean?
FH: After more than20 years, unfortunately, it still remains the case that there is precious little that international best practice in the public policy of international tax can do to support or reinforce the legitimacy of Caribbean IFCs, in the public eye. Independent Caribbean states tend to be considered in the same light as other dependencies in the region as well as others who are closer to Europe. The facts that point to independent Caribbean states being so far removed from the epicentre of the financial upheavals because their share of, and access to, global wealth is out of proportion to the other ‘market-makers’ means that not only do they have to make financial adjustments out of proportion to their risk profile, they are also fodder for lazy, ill-informed and deeply damaging rhetoric. It is no longer fashionable to speak of cost-benefit or risk ratios in the area of international tax, especially in the case of the OECD reform agenda, when your work programme has to be seen as global and not confined to a small, but influential segment of the global community of states. Risk-based analysis and implementation is obvious to those in the group who continue to bemoan their significant market share, which frankly is not heading to independent IFCs.
IFC: With calls for a Beneficial Ownership registry continuing for the British Overseas Territories do you think transparency will continue to remain central to discussions on the global movement of wealth?
FH: Yes, transparency will continue to feature in the public discourse of wealth. Coordinating state action to throw light on the financial affairs of the rich will always appeal to a large demographic. It also helps people to quickly identify with this aspect of the international tax agenda. Relative success in voluntary disclosure programmes are often given more credit than is actually due because these programmes are voluntary and the recovered sums reached by agreement. That said, this kind of press is appealing and is good for public relations. Whether Beneficial Ownership registries will be central to transparency will be determined by the uptake of such a facility by those countries that have the information. It is clear thatthese rosters will not be available to the public but it is also clear that some countries will not share this information if they believe that the country seeking the information contained in the register will not be subject to the confidentiality safeguards required of the sending country. It remains of keen interest to independent Caribbean IFCs to see how long other IFCs will be permitted to be sanguine in adopting such measures and so maintain a relative comparative advantage.
IFC: Is it possible to balance such proposals with a client’s right to privacy?
FH: Clearly a balance must be struck in the policy and practice of such a regime. The bigger issue is not the balance per se, but the refusal of some states like the United States to exchange information with countries whose safeguards in this area are below what the ‘sending’ countries consider to be sufficient to provide comfort that such tax payer information may not put the foreign taxpayer in a position to be targeted for kidnapping or any other dangers. Privacy laws are not uniform across the constituencies that are seeking to expand tax transparency and information exchange. The balance to be struck will therefore be a matter of domestic law and as such one state will make such a determination in respect of another state based on its own domestic standard. Of course, this has nothing to do with state compliance with global standards as it is unlikely that a small IFC can argue that concerns regarding a foreign tax payer’s right to privacy is adequate and on that basis information is not shared. In the real world few states can do so without been publicly shamed as recalcitrant.
IFC: In our first edition in 2011 you critiqued the arbitrary nature of the then radical G-20 tax lists, do you believe that the initiatives that have overtaken this policy in the past five years have, or will, create a more ‘level playing field’?
FH: No. I believe that the EC list of EU-member state lists illustrates that although the OECD seems to have excised such a methodology from its policy tool kit, this has not been the case within its membership. The concern now is not so much the arbitrary nature of such lists but their accuracy. The EC has accepted the inaccuracies of its list, which frankly caused great harm to the good-standing of a number of independent Caribbean IFCs.
Although the methodology adopted by the EC in making public the content of their members’ national blacklists has been nuanced slightly to indicate it is a compilation ‘facilitated’ by the EC, it will most certainly be received as an EC list. In fact, it is arguable that the EU tax reform agenda, which is OECD BEPS-plus, means that another layer of arbitrariness has crept into the international tax agenda. While the OECD and EU vie for leadership in this area, the non-members of the OECD and the EU will continue to stumble over the increasing undulating topography of state international tax relations. As was the case in the later 1990s, the Commonwealth will have a decisive role to play for independent Caribbean IFCs, especially in light of the Secretariats revamped Economic Section and its drive for a more meaningful dialogue with the G20 and other regional groupings on the international tax reform agenda.
In the absence of a World Tax Organisation there must be a voice that speaks to the largely ignored but crucial correlation between tax, trade and investment. The Commonwealth track record in this area speaks for itself.
IFC: A number of IFCs have begun to introduce ‘Knowledge Boxes’, do you see this as a valid response to offset some of the damage potentially done by policies such as the OECD’s BEPS?
FH: The media reach of independent Caribbean IFCs cannot be compared to that of the OECD and other onshore IFCs. Unfortunately, while these knowledge boxes may help to set out the character of an IFC, invariably that is not a message that is news worthy enough to constrain the tendency to use any information about a Caribbean IFC as a point of reference to rehash inaccuracies and popular ‘folklore’ about the calibre of these IFCs.
IFC: An increasing number of traditional IFCs have been looking towards emerging and developing economies as potential avenues for further growth, which markets do you believe will provide future opportunities for Caribbean IFCs?
FH: For established independent Caribbean IFCs, it will be important to re-define their competitive advantage and articulate that message to an audience predisposed to a message that resonates transparency and other hallmarks of the OECD tax reform agenda. Regarding independent IFCs, it is extremely difficult to put a finger on which markets will provide future opportunities. The first reason is that it is not certain the kind of services they will be able to provide. To put it plainly, the very existence of independent Caribbean IFCs is not assured. It is not only a matter of keeping on top of compliance cost and the constant battle for ensuring their reputation is not used as the whipping boy for publications always interested stirring up popular misinformation as a means of creating headlines. There has been no support for market retention or growth from an international body in support of these countries. In fact, the trend has been the exact opposite. Despite the clear and uncontested information about where the risks have always been with respect to the global financial infrastructure still there seems to be no room for a sensible conversation about the role of Caribbean IFCs in the positive growth of the world economy. To make the point one only has to look to the de-risking exercise that the corresponding banks are embarking on against independent Caribbean financial institutions. Without a means of settlement, it is impossible to have a clear picture of the future.
IFC: How do you think the region is placed in the global financial architecture? FH: The position is tenuous only because the international tax agenda has forgotten that market share of IFC services by independent Caribbean states while not large, is significant. In many cases this industry is the backbone and necessary corollary to the domestic sector. Indeed, in small states they are one and the same. The global financial architecture must be able to accommodate the legitimate economic endeavours of small states. The region’s importance cannot be merely that as a complacent, standard taker, it must be allowed to benefit from the industry. Compliance, even proportionate compliance will be unsustainable if countries seeking to apply and maintain the global norms are not able to earn their keep. Independent Caribbean IFCs have an important role to play in emerging economies precisely because small governments can be nimble and quick to respond to the needs of emerging markets. In many cases they have a better understanding of the broad macro-economic indices which drive decision making. Importantly they can develop unique partnerships which would otherwise be impossible with large un-wielding bureaucracies. These are not avenues for malfeasance but rather it is a small state’s competitive advantage .
IFC: Should and could Caribbean IFCs collaborate together to further the financial services sector in the region?
FH: The recent publication and circulation of the EC plan to apply its internal policy on Tax Good Governance to its non-EU partners in the African, Caribbean and Pacific Group makes the case clear and unequivocal for institutionalised collaboration among Caribbean IFCs who are also members of the ACP. The correspondence from the EU to CARIFORUM discusses the nature of the threat to the EU Tax Base and the proposed solution. The solution will be coordinated across EU members inter se and externally. The two aspects of the solution will focus on effective taxation by addressing aggressive tax planning using structures that promote tax avoidance and harmful tax competition by promoting corporate tax rates and the provisions in tax treaties with lower rates related to dividends, interest and royalties. This EU Tax Good Governance Agenda will focus on Tax and Trade and Tax and EU Funding.
The first area will seek to negotiate revised and appropriate good governance and state aid clauses in their trade agreements with third states. The second area will focus on EU support for third states under its existing 'collect more, spend better' programme; international tax diplomacy capacity building with multilateral bodies like the OECD, G20, UN, CIAT CREDAF and TADAT; and bilaterally by supporting proposed revisions to existing bilateral treaty arrangements, namely tax treaties to ensure withholding tax rates do not undermine the EU's tax base or contribute to harmful tax competition. The third area of EU support will focus on assisting its members in creating and amending their tax haven lists with a view to achieving a common EU list; applying counter-measures in addition to its Controlled Foreign Corporation rules to make doing business with blacklisted countries less attractive. The second area of proposed EU intervention to address the erosion of member states' tax bases will see an extension of the existing rules which promote 'good governance' requirements in its contractual relations to include transparency standards. At the request of the EU Parliament, although requests for EU financial support were blocked if the associated structure was too complex, now measures will be put in place to preclude EU funds being routed through low or no tax jurisdictions.
IFC: With such a wide range of often overlapping and competing regulatory requirements coming from various organisations such as the IMF, OECD, UN, US & EU, do you believe having a single multilateral organisation dedicated to legislating on tax policy would be more effective?
FH: This has been my widely publicised view long before the G20 adopted the OECD’s, aggressive, seemingly all-encompassing agenda for International Tax Reform (BEPS). Of course, this is not to discount the work of the OECD’s Centre for Tax Policy Administration and its Global Forum on Transparency and Exchange of Information for Tax Purposes. Rather it recognises the progress, successes, and the lessons learned in seeking to create a 'level playing field' for non-EU, non-G20, non-OECD members of the Forum who are largely excluded from OECD membership. Despite the well-documented shortcomings of the Bretton Woods system of global governance, there is still great value that can be added to the international tax dialogue; especially since tax is now firmly a part of the UN Sustainable Development Goals, and not merely the exclusive concern of capital exporting countries. Indeed, while the OECD may have a competitive advantage in managing the affairs of its 34 members, the UN system has the expertise in attending to the concerns of 194.