Ireland Included On Oecd List Of Countries That Have Substantially Implemented Internationally Agreed Tax Standards

A dramatic crackdown on tax havens was unveiled by G20 leaders at their summit on 2 April 2009, where agreement was reached to take action against “non-cooperative jurisdictions, including tax havens”. The G20’s move against territorially-based tax evasion is one of the substantial outcomes of the summit and encourages states to impose sanctions on regions where they fear that capital is being siphoned away from their financial systems resulting in the loss of billions of euro in tax revenues.

The G20’s first task was to define which territories need to be brought in line with international tax standards in order to “name and shame” them. They therefore endorsed the latest progress report produced by the Organization for Economic Cooperation and Development (OECD) which documents the progress made by financial centres around the world towards implementation of these standards. In the last few weeks a large number of countries and territories have announced their intention to comply with OECD standards on exchange of information. The OECD report identifies the following three tiers of jurisdictions:

  • States that have implemented agreements bringing them in accord with international tax standards: the largest economies of the G20 group, such as the US, the UK, Germany and France, appear on what has been dubbed the OECD's “white list”. Critically, Ireland is also included on this list. The “white list” also includes China, but not the financial centres of Hong Kong and Macau, although they are eventually expected to be included.
  • States that have made international tax agreements but have not implemented them: this "grey list" of countries includes Switzerland, Luxembourg as well as the wide range of islands in the Caribbean including Cayman and BVI, and elsewhere that are frequently cited as tax shelters.
  • Jurisdictions that have not committed to the internationally agreed tax standard: Costa Rica, Malaysia, Philippines and Uruguay were the only four jurisdictions who had not made any commitments with the OECD at the time that the progress report issued. However, on 7 April, the OECD announced that these remaining four “blacklisted” countries have now committed to co-operate in the fight against tax abuse and consequently will be moved to the second tier of “greylisted” countries above.  

The OECD started working on the issue of tax evasion more than a decade ago in the wake of the Asian financial crises but over time the campaign lost political support. However, as the financial crisis has caused fiscal stress around the world, the hunt for missing tax income has increased. The G20 have asked the OECD to report back on tax haven cooperation by November 2009 and sanctions could be imposed on those who do not comply. Dublin was recently included in the top 10 ranking in the Global Financial Centres Index, and Ireland’s inclusion on the list of cooperative tax jurisdictions further reinforces our reputation as an international business centre of quality.

Ireland Omitted From A List Of Blacklisted Tax Havens Cited In The Recently Introduced Us “Stop Tax Haven Abuse Act”

Legislation introduced by Senator Carl Levin on 2 March 2009, entitled the "Stop Tax Haven Abuse Act" (the “Bill”) is intended to curb tax evasion through transactions that take advantage of secrecy rules in offshore tax haven jurisdictions.

The Bill’s primary target is “offshore secrecy jurisdictions” (“tax havens”). As well as providing a statutory framework to determine what a tax haven is, the Bill includes a list of 34 countries which will, upon enactment, be automatically considered as such. It is crucial to note that Ireland has not been included on this list which effectively blacklists the Cayman Islands, Luxembourg, Bermuda, BVI, Jersey, Guernsey and the Isle of Man amongst others. The list would be evaluated by the Treasury Secretary annually, meaning that jurisdictions may be added to or taken off the list based on its “ineffective information exchange practices” and “secrecy or confidentiality rules and practices” during the prior 12 months. Inclusion on this “black list” would undoubtedly impact the ability of a listed jurisdiction to operate in the global financial market, especially where US investments are involved. Thus, if this Bill is enacted in its present form, it would place Ireland at a distinct competitive advantage as a jurisdiction of choice as investors may be reluctant to invest in funds domiciled in tax havens (as the prospect of further regulation breeds uncertainty as to their status.)

At this stage, it is still uncertain whether the current Bill’s provisions will ultimately be enacted into law. The outlook for the Bill may be complicated somewhat, by the release on 10 March 2009, of draft legislation (which also addresses corporate tax shelters), by Senate Finance Committee Chairman Max Baucus which seeks to improve tax compliance by amplifying reporting requirements for and imposing stricter underreporting penalties on offshore financial arrangements. The Baucus alternative avoids the compilation of a black list of tax havens, but still includes some strong measures in the fight against offshore tax evasion.

On 4 May 2009, the White House issued a press release stating that the Obama Administration hopes to build on proposals by Senate Finance Committee Chairman Max Baucus and Senator Carl Levin to pass bipartisan legislation to reform international tax laws over the coming months. Further details are due to be unveiled in the Administration’s full budget later in May. Whatever the outcome may be, it is inevitable that Washington will act against offshore tax havens, but at present there is no consensus amongst policymakers on how they are going to proceed. If the Bill it is enacted in its current form, the fact that Ireland has been excluded from the list of blacklisted tax havens, will have significant ramifications in terms of the countries’ continuing success as an international fund domicile of choice.

Changes In Fin 48 Practices Result In Certain Investment Funds Preferring Countries With Tax Treaties In Existence

Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) requires all private and public entities that file US GAAP accounts to disclose any uncertain tax positions based on a “more-likely-than-not” (MLTN) threshold in their financial statements. MLTN can be equated to a greater then 50 per cent chance of occurrence. A “tax position” for this purpose includes a current or future reduction in taxable income reported or expected to be reported. For funds applying US GAAP with 31 December year ends, FIN 48 must be adopted for the year ending 31 December 2008. If the MLTN standard is met, a tax liability must be accrued thus reducing the fund’s NAV for US GAAP purposes.

FIN 48 requires that a fund’s management reaffirm or otherwise determine that no income-based taxes need to be accrued under US GAAP in the fund’s financial statements. The availability and likelihood of obtaining relief from double taxation should be considered when calculating a tax accrual under FIN 48. Fin 48 requires tax on foreign trading activities such as dividends, interest and capital gains to be assessed and measured both on a paid and accrued basis. Countries that impose withholding tax on trading activities include Australia, Brazil, Germany, Poland, Portugal, and Spain. If a fund is domiciled in a country with no double taxation treaty in force with a relevant country, the fund may be required to accrue a liability for withholding tax. As a result, Ireland, which has a comprehensive network of double taxation treaties in force with 45 countries, may be seen as a more desirable fund domicile in comparison to many off-shore jurisdictions such as the Cayman Islands who have not entered into any tax treaties with other countries.