No-compliant consequences

Decisions were taken internationally (i.e. Basel III), at the regional level (European Banking Authority capital requirements) as well as the national level (Dodd-Frank Act) to address this issue.

The UN, Organisation for Economic Co-operation and Development (OECD), EU and countries have tried to tackle the problem of tax havens, which may provide corporations and individuals with the opportunity to avoid or evade taxes.

In a globalized economy, no solitary national tax authority can fully oversee its tax base without the support of other jurisdictions. Against the backdrop of the OECD’s efforts to address tax compliance in tax havens, the Global Forum on Transparency and Exchange Information (Global Forum) has been the multilateral framework through which work on transparency and exchange of information has been undertaken since 2000.

The Global Forum has set the standards for transparency and exchange of information and oversees evaluating and enforcing exchange of information treaties in an attempt to reduce the use of tax havens for tax evasion. It conducts a two-phase peer review of each jurisdiction’s legal and regulatory framework for transparency and the exchange of information for tax purposes (Phase 1) and practical implementation of the standards on transparency and the exchange of information for tax purposes (Phase 2) (Global Forum, 2013).

In 2013, the Global Forum began giving ratings for the jurisdictions that completed both Phase 1 and Phase 2 of their reviews. The ratings are applied on the basis of four criteria: compliant, when the essential element is, in practice, fully implemented; largely compliant, when there are only minor shortcomings in the implementation of the essential element; partially compliant, when the essential element is only partly implemented, and non-compliant, when there are substantial shortcomings in the implementation of the essential element.

Ratings have been given to 113 jurisdictions who have completed Phase 2 reviews. The overall ratings show that 22 jurisdictions are rated “Compliant”, 77 jurisdictions “Largely Compliant”, 12 jurisdictions “Partially Compliant”, and five jurisdictions “Non-Compliant”.

Trinidad and Tobago is among the five which have been rated overall Non-Compliant on this basis without having undergone a Phase 2 review as elements critical to ensuring an effective exchange of information in their legal and regulatory frameworks remained not in place for more than two years after their Phase 1 reviews. (The other countries are Marshall Islands, Panama, Guatemala and the Federated States of Micronesia.)

In addition, some G-20 countries have chosen to create, unilaterally, lists of countries and jurisdictions that are non-compliant (black lists). This is the case, for example, of countries being blacklisted without due process for “primarily preventive” reasons rather than for actual non-compliance. As an example, in May 2013, France placed Trinidad and Tobago on a blacklist “primarily” in order “to put pressure on these countries… to progress towards more transparency.” There are a variety of consequences from the application of heavier tax burdens on investments in those countries (Uruguay, 2010) to limitations in the access of financial lending by international organizations.

Other consequences we need to note is the additional indirect effect produced through the influence of G-20 countries on other multilateral organizations. The International Financial Corporation (IFC) decided not to approve “any investment in an investment vehicle or holding company organized in an intermediate jurisdiction, where IFC does not have sufficient comfort as to the tax transparency of such jurisdiction. IFC will not approve new investments in any investee company (IFC borrower or guarantor, a company in which IFC has invested equity, or the beneficiary or obligor of an IFC guarantee or risk sharing facility if IFC is unable to obtain adequate comfort in the tax transparency of such jurisdiction.”

International finance is one of the few sectors where small countries hold a comparative advantage. These economies cannot be seen to facilitate money laundering. Are we intent on appearing in the international community to be dismissive of FATCA and non-compliant on Global Forums’ standards?