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OECD project to fight harmful tax practices

Our Bureau

NEW DELHI, Oct. 29

SINCE tax base erosion due to harmful tax practices could be a particularly serious peril to the economies of developing countries, the Organisation for Economic Cooperation and Development (OECD) is implementing a project by instituting a framework for global tax cooperation.

Disclosing this in its latest quarterly financial market survey, the Paris-based inter-governmental think-tank of 29 rich industrial countries said that the project was about ensuring that the burden of taxation was fairly shared and that tax should not be the dominant factor in making capital allocations. It is focussed on the concerns of OECD and non-OECD countries, which are exposed to notable revenue losses as a result of harmful tax competition.

It said OECD's cooperative framework through its forum to contribute to emerging international norms of transparency, fairness and disclosure should be viewed in the context of other international efforts to encourage offshore financial centres to improv e their regulatory milieu.

For instance, the widespread financial crisis of the late 1990s has led to the creation of the Financial Stability Forum, the strengthening of the IMF and Finance Committee of the IMF and other proposals to improve the transparency and operation of finan cial markets.

In 1998, the OECD council adopted guidelines for dealing with harmful preferential regime in member countries under which these should be removed within five years (by April 2003). There is a limited grandfather clause for taxpayers benefiting from such regimes on December 31, 2000; these benefits are to be removed at the latest by 2005.

The guidelines include a `standstill' provision requiring that member countries must refrain from adopting new measures or extending the scope of extant measures that constitute harmful tax practices.

The OECD Council has directed the Committee on Fiscal Affairs to produce an OECD list of Uncooperative Tax Havens. This list is to be completed by July 31, 2001. Besides, the OECD would also be `vigilant' against adverse developments such as new jurisdic tions entering the field, the introduction of new harmful preferential regimes by jurisdictions/countries that are already being evaluated and a change in postures regarding commitments to eliminate the harmful aspects of their regimes.

Some defensive measures the countries might resort to for combating any harmful tax practices as framework for a common approach with regard to uncooperative tax havens (UTHs) include, among others,(i) to disallow deductions, exemptions, credits or other allowances related to transactions with UTHs or to transactions taking advantage of their harmful tax practices; (ii) to require comprehensive information reporting rules for transactions involving UTHs or taking advantage of their harmful tax practices , supported by substantial penalties for inaccurate reporting or non-reporting of such transactions; (iii) to impose `transactional' charges or levies on certain transactions involving UTHs and (iv) not to enter into any comprehensive income tax conventi ons with UTHs and to consider terminating any such extant conventions unless certain conditions are met.

The OECD project also involves non-member economies since the latter feature strongly in the global financial market place, with possibly major distortions being caused by the harmful tax practices they have put in place.

For India, the cooperative framework would be an opportunity to associate itself with as it was also concerned over the proliferation of offshore financial centres and tax havens such as Mauritius which incidentally has given advance commitment to the OE CD in June this year for removal of its harmful tax practices.