Jeffrey Owens is the director of tax planning and administration at the OECD’s Centre for Tax Policy, which is responsible for framing tax principles and ensuring that tax havens fall in line on disclosure norms and share information. He spoke to Sidhartha on recent developments and the strategy India should adopt on double taxation avoidance treaties. Excerpts:
What is the progress on Switzerland and the three un-cooperative jurisdictions — Andorra, Liechtenstein and Monaco?
Exchange of information with Switzerland became quite central in the Indian elections, which was very interesting. We have always had a constructive engagement with Switzerland, which has an open economy and lots of multinationals around the world. The important thing is that Switzerland has taken a political decision to endorse the Organisation for Economic Co-operation and Development (OECD) stance on transparency and exchange of information. In practice what that means is that they would begin to renegotiate tax treaties, not just with OECD countries but also with non-OECD countries to include Article 26 (on sharing of information).
So, there is an opportunity for India to ask for renegotiation?
All the three un-cooperative countries have made the political commitment that we were looking for in terms of the standards, transparency and exchange of information. All three have set a timetable for implementation though some are more advanced than others. Liechtenstein is moving fast. They have signed an agreement with the US and will have an agreement with Luxembourg and are in negotiations with the UK and Germany.
How long will the implementation take?
It was reported that you would undertake a quicker update instead of an annual assessment of the identified tax havens. Can you please explain the process?
The annual assessment will be much more detailed. The model we are looking at is the model we use in the bribery convention or the Financial Action Task Force. There will be peer reviews of groups of countries which will not just look at legislation but also at effective implementation and transparency. The whole project is about effective implementation and not just commitment. The assessment will cover any country that is in the list of 84 centres, such as Qatar, Jamaica, Ghana and Botswana, which are moving into the business. With the new countries, 99 per cent of the offshore centres are covered. We are always looking out for countries that are moving into this area as otherwise you end up with free riders.
There have been suggestions in India that Mauritius should come under review as it is not in the red box. Is the argument valid?
You have to look at effective implementation. Mauritius has a treaty with India, and you are trying to tie up the loose ends.
Is the Indian government correct in seeking renegotiation of the tax treaty with Mauritius?
There is a significant flow of investment into India, which is partly tax-driven. There may not be any justification for this when you do not have the old licence raj regime or high tax rates. In today’s environment, companies should be able to invest directly. In any case, there is no reason why you should let your taxes be undermined by any tax haven.
So, will your work result in more flow of information?
The coverage will be much broader. So far, Switzerland only provided information on tax fraud that led to criminal activity. But the Swiss definition of tax fraud is quite narrow, which means that a false invoice is not a crime. Now, any tax abuse will be covered.
What is the progress on implementation of the G 20 programme?
There are four areas where OECD is taking the work programme forward. One, review of the global forum and, perhaps, bring in more countries. Two, putting in place a more robust peer review mechanism. Three, we are trying to see how developing countries get more information. And four, we are looking at new mechanisms to speed up the agreements. At the moment, it’s all bilateral. But the Nordic countries are negotiating on a multilateral basis, which was provided for in the 2002 model agreement. It’s all about how you speed up the negotiations. Cayman Islands has put in place a unilateral mechanism where they would be able to provide information through their own domestic legislation if you are on what is called the schedule.
Have you done an assessment of the 80-odd tax treaties that India has signed?
The number of treaties that you have is impressive. The increase in recent years has been in recognition of your growing economy. The treaties tend to follow the OECD model. There are some provisions which deviate, such as Article 5 and 7 that deal with permanent establishment (PE) issues. You, and we, are still trying to work out what that means in practice. What’s good is to have India engaged in the dialogue we already have at the OECD on the definition of the PE and how do you attribute income to it. That’s a dialogue that also needs to involve the judiciary and business.
It should be your new government’s priority to upgrade the tax agreements to get the full Article 26 provisions on exchange of information. The priority should be to identify tax havens with which you may not want tax treaties but just have tax information exchange agreements. But there is no point in getting the data and keeping it in boxes in Delhi. What’s important is the ability to match it with the information in your tax files. To that the key is having a unique taxpayer identification number. For information coming from abroad, you need to have the number with 50,000 Smiths in the UK.
We are trying to see if we can have a unique international identifier. We are also doing a lot of work on standardising forms by removing practical barriers on setting out standards. For instance, on information exchange requests line one will always be the name, line two can be for the address and line three for the tax identification number. So there should be no problem of language.
Will the crackdown on tax havens affect their economies?
The large offshore centres have developed niches such as captive insurance or offshore investment regimes. So, they still have a role. But the days of tax havens as the term is generally understood — places to help people evade taxes — are over. Somerset Maugham’s definition of tax havens was sunny places for shady people. In the new environment, there is no provision for non-compliance.