IFC government cooperation needed to counter G20 pressure

The most recent G20 summit showed that the pressure on offshore finanical centres continues to grow. Organisations such as the IFC Forum, a private sector intiative, will need to convince the governments of small international financial centres to get together, share information and represent a united front in expressing their aligned interests, says Grant Stein, chairman of offshore law firm Walkers.

Given that France assumed the presidency of the G20 in 2011, renewed pressure on offshore financial centres should not have come as a surprise. But the most recent G20 summit in November in Cannes, France, represented a setback for OFCs, by reintroducing the term tax haven in the official vocabulary, leading an open dialogue with offshore critical non-governmental organisations and with the surprise announcement of the signing of a Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

The revised summit declaration, which puts the term “tax haven” before “non-cooperative jurisdictions”, shows how successful NGOs and the more offshore critical governments such as India have been at the summit.

For the first time NGO representatives were part of a social services summit and met with French President Nicolas Sarkozy the day before the G20 meeting.

More importantly the new multilateral tax convention will give additional impetus to the global cross-border enforcement of taxes. One clause in the convention provides for one state to recover the tax claims of another state in the same way that it would claim its own taxes. The automatic exchange of tax information is another aspect of the convention that can be voluntarily and bilaterally agreed between parties. The G20 declaration went further by stating that “we will consider exchanging information automatically on a voluntary basis as appropriate”.

A member process controlled by the OECD and the EU will be able to alter the convention, which could see signatories bound by any changes, unless they denounce the convention altogether.

Political pressure to sign the convention has already grown with the G20 calling for all countries to follow the examples of the OECD members and sign the convention.

Grant Stein, whose brainchild the IFC Forum informs political decision makers on the benefits of offshore financial centres, agrees the most recent G20 summit was a setback. For some time political leaders had focused on more pressing issues, but the idea that there is a huge tax gap that could be closed by recovering tax evasion money from international financial centres is still prevalent.

Grant says this notion is “complete pie in the sky” and never going to happen.

“They may get some monies back, in fact with some of the amnesties, in Italy for example, they have recovered monies, but it won’t sort out their deficit issues, unquestionably.”

France has always been critical of small international financial centres, particularly Cayman, says Grant, in part because of France’s competition with the City of London, a main beneficiary from the financial flows that are directed through IFCs. Still, the new initiatives came as a surprise. However, Grant does not think the private sector has been complacent.

The IFC Forum in fact tracked new proposals and was in constant dialogue with all the players, including French politicians and the Director of the Centre for Tax Policy and Administration at the OECD Pascal Saint-Amans, who only four days prior to the G20 summit attended a conference hosted by the IFC Forum in London.

But neither did the French publicise that they would invite NGOs to the table on the eve of the summit, nor did Saint-Amans announce the imminent signing of a multilateral tax treaty by all G20 countries.

Grant argues that it is hypocritical for an organisation such as the OECD to demand transparency. “The issue that I have is why should anyone be transparent with an organisation that is as obscure as the OECD.”

Asked whether the new developments would necessitate a change in strategy on behalf of the IFC Forum, Grant says the strategy would need to change anyway. “This is an evolution if you like and our strategy has to change as the issues evolve.”

Grant notes that even though offshore centres were initially blamed for the global financial crisis, the discussion has moved on as it is now firmly established that the root causes lay elsewhere.

“Aside from getting to the policymakers, the tactic has to be that we need to get the small IFC governments to take a much more joint-up approach,” he says.

The initial private sector approach, in the case of the IFC Forum the collaboration of mainly offshore law firms, has to be complemented by trying to get small international financial centre governments to share information and to respond to the issues in a consolidated way.

In the past such pan-Caribbean political initiatives have often been met with scepticism at the government level.

“We have been trying to persuade the governments that there is no need to have complete alignment. There needs to be information sharing on certain subjects and where there is common ground to actually take a concerted approach and to take forward a united front,” says Grant. He adds in the private sector competitor firms have found a way to work together because they have the same interests. “Governments have to realise the same thing.”

Such a move would change the dynamics of the process, he says. And it is not without precedent. In 2000 and 2001 the International Tax and Investment Organisation was very successful and managed to push back the OECD.

The ITIO published a report “Towards a Level Playing Field” which among other things demanded that the same rules must apply to OECD and non-OECD members in a proportionate way in the regulation of corporate vehicles in cross-border transactions. It showed that some of the arguments made against offshore centres were unfounded, while others applied to onshore countries as well.

Another effort by the IFC Forum aims at sponsoring academic research in an attempt to provide concrete evidence that capital flows through offshore centres are actually a benefit to the domestic economies of countries like France and Germany and support growth and employment there.

One part of the problem is that there is simply not a lot of data available on small IFCs, because there is often not an automatic filing of financial information. In Cayman the Economics and Statistics Office or CIMA do not produce comprehensive information in relation to capital flows. The data that does exist comes often from different sources and as a result incoming and outgoing flows of capital do not match.

Grant says that while there is some concern in the industry that demand for more transparency is simply an attempt to get access to client information, there is also an understandable desire to understand the role of offshore centres in the global economy.

“Given that the OFCs control about 8.5 per cent of the global economy that makes a difference,” he says.

Grant suggests that there should be a way to compile the data required by the World Bank and the IMF, while allaying the concerns of the financial sector.

With regard to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the push towards automatic exchange of information, he says, it is less a conceptual problem than it is a question of mechanics and costs for the public and private sector.

“It is one thing to have [automatic exchange] for the relatively limited scope of the EU Savings Tax Directive, it is quite another thing to have a general exchange of information with all of the OECD countries and possibly more,” argues Grant.

Not only is it a huge task to develop a system that incorporates the wider scope of different national regulations and rules of each signatory nation that have to be applied under the treaty, it is also going to be extremely expensive, he concludes.