Academic journal article Houston Journal of International Law

The OECD Tax Competition Initiative: A Critique of Its Merits in the Global Marketplace

Academic journal article Houston Journal of International Law

The OECD Tax Competition Initiative: A Critique of Its Merits in the Global Marketplace

Article excerpt

I. INTRODUCTION

One policy-based principle within the area of international tax law is the promotion of worldwide efficiency and growth. (1) The means to accomplish this principle is to remove tax rates from the factors considered in selecting the country in which to locate business operations or other investments. (2) The United States, in furtherance of this principle, generally pursues a system applying capital export neutrality which maintains that, if tax rates are immaterial, a business enterprise will locate where it will potentially have the greatest return on capital. (3) To this end, the United States taxes the worldwide income of domestic entities, but allows a credit against U.S. tax liability for foreign taxes paid. (4)

Despite widespread application of the capital export neutrality principle among many industrialized nations, tax considerations continue to strongly influence the behavior of individuals and multinational corporations. (5) The United States and other developed nations invest based on tax considerations, which maintain or improve the competitive position of their multinationals in the world economy. (6) These considerations may include investment in developing nations as a means of tax reduction. (7)

Developing nations create attractive tax incentives, causing an influx of foreign investment capital from individuals and business enterprises. (8) In response, the Organisation for Economic Co-operation and Development (OECD) has prepared two reports targeting jurisdictions with nominal or no income tax in certain circumstances. (9) The reports identify those jurisdictions that the OECD believes engage in harmful preferential tax schemes and discuss the criteria for identifying a tax haven. (10)

This Article argues that the OECD findings are fundamentally flawed and that the lack of involvement of the OECD-deemed tax havens in any attempted tax harmonization deliberations undermines the credibility of the reports. Additionally, this Article suggests that the issues involved in a nation's system of taxation make competition the most favorable alternative. Though investment capital may be displaced, the notion of sovereignty dictates that a nation best determines the structure of its domestic affairs. (11) Competition will dictate the best location of investments for the greatest return on capital. (12)

II. THE MAKE-UP OF A TAX HAVEN

High taxation and increased regulation in developed nations have persuaded individuals and corporations to search for more favorable locations for depositing funds and transacting business. (13) Tax-haven governments recognized a niche that they were able to fill and attracted capital by providing favorable tax rates for non-resident monetary deposits. (14) Tax havens are generally characterized by stringent bank secrecy laws, a lack of information exchange, and a lack of transparency. (15)

One consequence of this arrangement has been extensive criticism surrounding tax-haven activities. (16) The criticism includes two major issues. The first concern is that bank secrecy obscures evidence of tax evasion and money laundering. (17) Secrecy makes these jurisdictions very attractive to drug dealers, terrorists, and individual tax cheats for the protection of their illicit activities. (18) The second concern is the steep rise in the transfer of funds to tax havens and the corresponding loss of revenue to high-tax jurisdictions. (19) Many opponents of tax-haven activities cite inequitable allocation of the world's investment dollars to tax-haven jurisdictions as a reason to protect against the displacement of investment dollars. (20)

A. Information Exchange

Information exchange refers to the willingness of different taxing authorities to share the data necessary for effective enforcement of residence-based taxation, especially data on tax-haven investments. (21) Typically, a tax-haven jurisdiction maintains the confidentiality of depositors and investors within its territory and does not release information to foreign tax authorities. …

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