The OECD, TIEAs, and the white list explained

Throughout the past year the international media has reported on the Organisation for Economic Co-operation and Development, Tax Information Exchange Agreements, and lists of countries that have been categorised as “black”, “grey” or “white” on the international financial stage.  For the Cayman Islands, these reports culminated in a positive announcement on 13 August 2009 when the Islands were elevated to the OECD “white list”.  However, what does the OECD do, what is a TIEA, why is a spot on the white list important, and will such a designation have a positive impact on the Cayman Islands?

The OECD was established in 1961 and is currently comprised of 30 member countries.  It is a forum where governments can compare jurisdictional policies, identify good practices, and coordinate domestic and international economic initiatives. The OECD works to promote efficient, open, and stable market-orientated financial systems, based on high levels of transparency and integrity.

Motivated by the global financial crisis, the OECD and the G20 nations announced an aggressive approach to tax evasion, timed to coincide with the G20 Summit held in London in April 2009. The OECD published a report which divided 82 jurisdictions into three categories: (i) a “white list”: jurisdictions that had substantially implemented internationally agreed-upon tax standards; (ii) a “grey list”: jurisdictions that had committed to the tax standards but had not yet implemented them; (iii) and a “black list”: jurisdictions that had not committed to the standards.

So, what is an “international tax standard”?  Developed by the OECD, the standard requires an exchange of information upon request regarding a company’s or person’s tax matters in order to administer and enforce domestic tax. There is no regard to bank secrecy or other such protections. The standard also provides extensive safeguards to protect the confidentiality of the information exchanged. Every TIEA has a set of guidelines and criteria which must be adhered to by the jurisdiction submitting a request for information. Information requests can only be processed once the TIEA comes into force and they cannot be made retroactively.

The OECD places a jurisdiction on the white list if it has entered into a minimum of 12 bilateral agreements to exchange tax information with foreign governments. The key negotiating points for countries in signing TIEAs are the type of information to be exchanged, the timing and route of information, the distribution of costs incurred in complying with requests and the protection of individual and corporate rights under the laws of each jurisdiction.

The OECD and the G20 nations argued that an increase in transparency among nations and access to tax-related information would substantially decrease tax evasion.  Some commentators have alleged that tax evasion is supported by low-tax or no-tax jurisdictions, which, in many cases, have been mischaracterised as “tax havens”.

When the OECD announced that offshore business centers must sign a minimum of 12 OECD-compliant TIEAs in order to earn white list status with the organisation, the Cayman Islands acted quickly in signing off on those TIEAs already under negotiation and completing negotiations with other nations to meet the 12 required. The result was that the Cayman Islands earned white list status in August 2009, indicating its commitment to and substantial implementation of, the OECD’s internationally accepted standards of transparency and co-operation. The Cayman Islands government has also signed essentially similar tax information exchange agreements under its own “unilateral mechanism” with various additional jurisdictions, however the OECD has yet to approve this modified approach.

The OECD has reiterated that it is critically important for jurisdictions to practically illustrate that they have an ongoing commitment to effective and transparent exchange of tax information with those countries they have negotiated agreements with.  Countries on the white list are to commit to expanding their negotiations to seal further bilateral TIEAs over the coming months and years. Both the OECD and the G20 nations have indicated that they will shift their focus from counting signed TIEAs to establishing a system of peer review of the effective implementation and cooperation by all the countries of the provisions of the TIEAs signed. Furthermore, the OECD and its member states have started to implement defensive measures against jurisdictions that refuse to enter into TIEAs with other jurisdictions in the international financial community.

In actively implementing the TIEAs and continuing to engage in international economic dialogue, the Cayman Islands demonstrates its status as a well-regulated, forward–looking, and leading offshore financial jurisdiction. The Islands positive approach to negotiating TIEAs with other nations has resulted in mutually beneficial terms for all involved. Currently, the Cayman Islands have entered into 14 TIEAs and is negotiating many more. The Cayman Islands’ white list status is but one example of the Cayman Islands’ willingness to be at the forefront of compliance with international tax information exchange and transparency standards.

This publication is intended only to provide a summary of the subject mattered covered.  It does not purport to be comprehensive or to provide legal advice.  No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.