The Organization of Economic Cooperation and Development (OECD) last week published a progress report discussing the ‘‘internationally agreed tax standard‘‘, which showed that Israel is on its ‘‘white list‘‘.
Israel now appears on the white list of countries which have substantially implemented the internationally agreed tax standard together with 52 other countries. There is also a ‘‘grey list‘‘ of 34 countries which have committed to the internationally agreed tax standard, but have not yet substantially implemented it.
There used to be a ‘‘black list‘‘ of countries which have not committed to the internationally agreed tax standard (Austria, Belgium, Brunei, Chile, Guatemala, Luxembourg, Singapore, Switzerland) but they all hurried to get themselves off this list.
The OECD is an economic and tax group of 30 leading countries. Israel is in the process of joining the OECD.
So what is the internationally agreed tax standard?
According to a background information brief published by the OECD on September 22, the internationally agreed tax standard was developed by the OECD and endorsed by the G20 in 2004 and the UN in 2008. It provides for full exchange of information on request in all tax matters without regard to any domestic tax interest requirement or bank secrecy for tax purposes. It also provides ‘‘extensive safeguards‘‘ to protect the confidentiality of the information exchanged.
We have seen information exchange in action over the past year: Switzerland has recently been forced to exchange information about account holders at UBS and other banks with the US Internal Revenue Service. US citizens with tax skeletons in their closet now face an October 15 deadline to apply to join a voluntary disclosure program. And Liechtenstein has now been forced to open up to a number of countries, following the purchase of a customer list disk by the German Secret service from a Liechtenstein bank employee.
Why is this important?
The latest OECD progress report was issued in advance of the G20 Summit in Pittsburgh on September 24 and 25.
The leaders‘ statement issued at the end of the Pittsburgh Summit refers to the London Summit of the G20 held in an atmosphere of economic crisis and includes the following:
‘‘When we last gathered in April, we confronted the greatest challenge to the world economy in our generation…At that time, our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital…It worked…Our commitment to fight non-cooperative jurisdictions (NCJs) has produced impressive results.
‘‘We welcome the expansion of the Global Forum on Transparency and Exchange of Information, including the participation of developing countries, and welcome the agreement to deliver an effective program of peer review. The main focus of the Forum‘s work will be to improve tax transparency and exchange of information so that countries can fully enforce their tax laws to protect their tax base. We stand ready to use countermeasures [not specified] against tax havens from March 2010‘‘.
Why the emphasis on information exchange?
Very simple – many countries have tax breaks of one sort or another. For instance, a US LLC (limited liability company) owned by non-US citizens can sell UK real estate without incurring a tax liability in either country. But these countries cannot afford to turn away foreign investment nor do they wish to be labeled as tax havens. So tax havens came to be defined as those which are uncooperative, meaning they maintain an air of secrecy and do not share tax information.
What is a tax haven?
The OECD and the EU first started a campaign against specific ‘‘harmful tax regimes‘‘ in OECD countries in 1998 and claims the project was very successful – the last to be abolished was the ‘‘Luxembourg 1929 holding company‘‘ in December 2006.
In parallel, the OECD took aim at ‘‘uncooperative tax havens‘‘ and set out four key factors for identifying them: (1) No or nominal tax on income, (2) lack of effective exchange of information, (3) lack of transparency, (4) no substantial activities.
Over 40 jurisdictions were identified by the OECD as meeting these criteria in 2000. Now we have the white list and the grey list of the OECD, as mentioned above, but no countries currently on the black list.
How is information exchanged?
Most countries have comprehensive tax treaties for the avoidance of double taxation with other countries. Since many of the traditional offshore centers don‘t tax income, double taxation is hardly an issue.
But these offshore centers are now being pressured into signing shorter but effective Tax Information Exchange Agreements. The OECD grants positive recognition to countries which have at least 12 treaties or agreements.
Each treaty/agreement allows the competent tax authority of one country to request information regarding a specific taxpayer from the competent authority of the other country.
The tax standard prohibits ‘‘fishing expeditions‘‘ that do not name a specific taxpayer. And the requesting country must first use all available means to obtain the information in its own country first, unless this will cause ‘‘disproportionate difficulties‘‘. The request should be made in writing, but an oral request may be accepted in urgent cases.
What does this mean for Israel?
Israel was never on the tax black list or the grey list of the OECD but it has suddenly been catapulted onto the OECD‘s tax white list. Israel currently has 47 comprehensive tax treaties with other countries. Israel offers broad tax breaks to encourage investment in industry, technology, tourism and agriculture.
In addition, the Israeli trust tax regime seeks to encourage foreign residents to transfer assets to Israeli structures and structures for the benefit of Israeli residents. These tax breaks are not considered harmful. Israel is to be congratulated for getting it right.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is an international tax specialist at Harris Consulting & Tax Ltd.