Move to more transparency brings new set of problems

By added on 29/09/2010

Monaco has long been branded an “uncooperative tax haven” by its bigger neighbours. But the unflattering title was formally withdrawn 18 months ago after it bowed to pressure by declaring it was “ready to increase its co-operation in the fight against tax fraud”, the Financial Times reports.

Monaco, like other paradis fiscaux, was under attack from France, Germany and other big countries. Responding to ballooning budget deficits, financial crises and a string of high-profile evasion scandals, G20 leaders declared “the era of banking secrecy is over”.

Welcoming Monaco’s announcement, Angel Gurría, secretary-general of the Paris-based Organisation for Economic Co-operation and Development, said meeting international standards was no longer optional. “Governments require it, customers require it, and competitors require it.”

Monaco says it has done what it was asked to do. But its attitude to tax evasion is again under scrutiny. The OECD, the author of the “uncooperative tax haven” tag, is about to publish a peer review of Monaco’s legal and regulatory frameworks, in the first tranche of reviews into transparency and information exchange.

The report, by an international team chaired by France, will be scrutinised during an OECD meeting in Singapore. Similar reports will be produced for Bermuda, Botswana, the Cayman Islands, India, Jamaica, Panama and Qatar.

The review could be an uncomfortable experience for Monaco, if it questions the thoroughness with which it complied with OECD norms.

It managed to vault on to the OECD’s “whitelist” of jurisdictions that have substantially implemented the international tax standard by quickly signing a dozen “tax information exchange agreements”. These were with small countries such as the Faroes, Liechtenstein and Andorra, as well as Sweden, Australia and the US.

Monaco was acutely aware that it would face criticism for signing deals with other small states that were accused of being tax havens. But its choice of partners was determined by its desire to move quickly to reach a dozen deals, the benchmark used by the OECD for the whitelist. Monaco also argues its good intentions can be measured by its deal with the US.

Now that it has signed about two dozen tax information exchange agreements, it reckons it has done enough. But the omission of Italy – a country with important links to Monaco – is likely to raise eyebrows.

The decision to spurn a potential deal with Italy partly stemmed from a concern that Italy would not remove Monagesque companies from its blacklist. It was also eager not to begin negotiations while the Italian government was offering its citizens an amnesty for undeclared money. It feared it would create an uneven playing field by striking a deal, while its rivals Switzerland and Luxembourg held out.

Ensuring a level playing field with Switzerland and Luxembourg will also influence its willingness to make concessions to the European Union over efforts to make the savings directive a more effective tool in fighting tax evasion.

Monaco’s long-standing reluctance to move faster than its rivals in abandoning banking secrecy reflects the value placed on privacy by many of the seriously wealthy. This may not primarily be because they want to dodge tax so much as a fear that information could fall into unfriendly hands.

But the spate of leaks of con­fidential information by bank employees in Switzerland and Liechtenstein has undermined confidence in offshore banks.

Another impetus for more transparency is Prince Albert’s desire to shed the image as a secretive tax haven. At his accession in 2005, he promised to put morality and probity at the heart of Monaco’s policies.

Monaco has long argued that the tax haven tag is unfair. Even though it charges no income tax – except for French citizens who took up residence after 1957 – the territory is not tax-free. It charges 19.6 per cent value added tax, stamp duty and other taxes. Companies face a 33 per cent tax on profits – unless they can demonstrate that three-quarters of company turnover is generated within the principality.

Monaco wants to promote itself as a country where people go to live, drawn by its benign climate, tight security, good transport and cosmopolitan atmosphere. But while the lenient tax regime is at the heart of its offering, its image as a tax haven is likely to be well nigh impossible to shift.