The OECD Initiative on Tax Havens
James K. Jackson
Specialist in International Trade and Finance
March 11, 2010
Congressional Research Service
7-5700
www.crs.gov
R40114
CRS Report for Congress
P
repared for Members and Committees of Congress
The OECD Initiative on Tax Havens
Summary
Since the 1990s, the Organization for Economic Cooperation and Development (OECD) has
pursued the issues of bribery and tax havens, resulting in changes to certain U.S. laws. In
addition, the OECD, under the direction of its member countries, spearheaded an international
agreement to outlaw crimes of bribery, and it continues to coordinate efforts aimed at reducing
the occurrence of money laundering, corruption, and tax havens. Also, the OECD is a pivotal
player in promoting corporate codes of conduct that attempt to develop a set of standards for
multinational firms that can be applied across national borders. On May 4, 2009, President
Obama outlined his Administration’s policy to “crack down on illegal tax evasion” and to close
loopholes. In the 111th Congress, companion legislation was introduced in the House (H.R. 1265)
and the Senate (S. 506) to restrict the use of tax havens. Some estimates indicate that tax havens
cost the United States $100 billion each year in lost tax revenues (The Christian Science Monitor,
Tax Havens in U.S. Cross Hairs, by David R. Francis, June 9, 2008).
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Contents
Background ................................................................................................................................ 1
“Tax Havens”.............................................................................................................................. 6
Financial Action Task Force ........................................................................................................ 8
Model Tax Convention on Income and Capital .......................................................................... 10
Global Forum on Taxation......................................................................................................... 11
Tax Information Exchange Agreements (TIEAS)....................................................................... 12
Legislation ................................................................................................................................ 15
Tables
Table 1. Progress Report on the Jurisdictions Surveyed by the OECD Global Forum That
Have Implemented the Internationally Agreed Tax Standard..................................................... 5
Table 2. Bilateral Tax Information Exchange Agreements Signed in 2009.................................. 13
Contacts
Author Contact Information ...................................................................................................... 15
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Background
The Organization for Economic Cooperation and Development (OECD) is an intergovernmental
economic organization in which the 30 member countries1 discuss, develop and analyze economic
and social policy.2 The OECD is organized around three main bodies: the Council, the
Committees, and the Secretariat. Committees are comprised of representatives of all the member
countries. The overriding committee is the Council, which has decision-making power. It is
composed of one representative for each member country, generally at the level of Ambassador,
gives guidance to the OECD, and directs its work. Since the work agenda is set by unanimous
consent by the Council, a veto by a Council member removes an item from the agenda. The
OECD is a strong proponent of the view that increasing world economic growth and welfare is
best supported by a free and open flow of goods, services, and capital. As a result, it views its
own role in this process as that of a leading proponent of the benefits of globalization and as a
force for developing institutions and regulatory structures that can make these benefits available
to the OECD members and to developing countries.
International flows of capital and goods and services around the world, a phenomenon referred to
as globalization, have grown dramatically over the past two decades and are producing significant
challenges for the OECD members, including the United States. International flows in dollars, for
instance, now total over $1.9 trillion per day, or nearly as much as the total annual amount of
U.S. exports and imports of goods and services. One part of these flows is foreign direct
investment, or investment in businesses and real estate. The United States is the largest recipient
of foreign direct investment and is the largest overseas investor in the world, owning over $2.1
trillion in direct investment abroad, or almost twice as much abroad as British investors, the next-
most active overseas investors. These investments generate profits for U.S. firms, which pay
taxes on those profits. In some cases, firms develop elaborate strategies to reduce their taxes, at
times using the financial services offered by some foreign jurisdictions, sometimes referred to as
tax havens, and some U.S. individuals engage foreign banks to hide their assets from being taxed.
Policymakers in the United States and elsewhere have addressed the issue of “tax havens” and the
double taxation of businesses that operate internationally for nearly a century. Recently, however,
tax havens have attracted increased attention from policymakers. In part, this attention reflects
new efforts to curtail the use of tax havens for tax avoidance, combined with efforts since the
terrorist attacks of September 11, 2001, to track financial flows that may be diverted to illegal
activities. Also, some policymakers are targeting tax havens as part of their efforts to increase
government revenues during the current economic downturn and to improve the integrity of the
financial system in the wake of the financial crisis. At the G-20 Summit meeting in London in
April 2009, the G-20 leaders indicated that they were adopting measures to curtail tax havens and
to target “non-cooperative jurisdictions.” In particular, the Summit communiqué stated that the G-
20 members “stand ready to take agreed action against non-cooperative jurisdictions, including
tax havens. We stand ready to deploy sanctions to protect our public finances and financial
1 The member countries include Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, The Netherlands, New
Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the
United States. Chile is scheduled to become the 31st member in 2010.
2 For additional information, see CRS Report RS21128, The Organization for Economic Cooperation and
Development, by James K. Jackson.
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systems. The era of banking secrecy is over.”3 The G-20 leaders also indicated that they had
agreed to support a group of measures, including:
• increased disclosure requirements on the part of taxpayers and financial
institutions to report transactions involving non-cooperative jurisdictions;
• withholding taxes in respect of a wide variety of payments;
• denying deductions in respect of expense payments to payees resident in a non-
cooperative jurisdiction;
• reviewing tax treaty policy;
• asking international institutions and regional development banks to review their
investment policies; and
• giving extra weight to the principles of tax transparency and information
exchange when designing bilateral aid programs.4
In addition, on May 4, 2009, President Obama announced a set of proposals to “crack down on
illegal overseas tax evasion, close loopholes, and make it more profitable for companies to create
jobs here in the United States.”5 The Administration’s proposal reportedly is intended to ensure
that the U.S. tax code does not “stack the deck against job creation” in the United States and that
it reduces “the amount of taxes lost to tax havens.” Within these two broad areas, the
Administration proposed the following:
(1) Replacing Tax Advantages for Creating Jobs Overseas with Incentives to Create Them at
Home.
• Reforming deferral rules to curb a tax advantage for investing and reinvesting
overseas.
• Closing foreign tax credit loopholes.
• Using savings to make permanent the tax credit for investing in research and
experimentation at home.
(2) Getting Tough on Overseas Tax Havens.
• Eliminating loopholes for “disappearing” offshore subsidiaries.
• Cracking down on the abuse of tax havens by individuals.
• Devoting new resources for IRS enforcement to help close the international tax
gap.
According to the OECD, standards on transparency and exchange of information developed by
the OECD were endorsed by all of the key countries, including jurisdictions which had opposed
exchanging bank information. This standard has been universally accepted and endorsed by the
United Nations, which has incorporated the OECD standard in the UN Model Tax Convention. In
2009, more than 300 agreements were signed by jurisdictions which previously had been
3 Global Plan for Recovery and Reform; the Communiqué From the London Summit, G-20, April 2, 2009.
4 Declaration on Strengthening the Financial System, G-20, April 2, 2009.
5 Remarks by the President on International Tax Policy Reform, May 4, 2009.
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identified by the OECD as not substantially implementing the standard.6 In September 2009, the
OECD restructured and strengthened the Global Forum on Transparency and Exchange of
Information for Tax Purposes to “monitor and trigger effective exchange” of information. The
Global Forum is comprised of 91 members, including all G20 members, all OECD countries and
all offshore jurisdictions. It has a three year mandate to peer review all the members and other
jurisdictions which may require special attention. The peer reviews will encompass two phases:
Phase 1 will review the legal and regulatory frameworks while phase 2 will assess the practical
implementation of the standard. The reports will include recommendations to improve the
situation in the reviewed jurisdictions. The members have directed the Global Forum to:
• Be restructured to include all OECD, G20 and other jurisdictions covered by the
2009 OECD Assessment.
• Establish a self-standing dedicated Secretariat based in the OECD Center for Tax
Policy and Administration.
• Carry out an in-depth monitoring and peer review of the implementation of the
standards of transparency and exchange of information for tax purposes.
• Develop multilateral instruments to speed up negotiations, and
• Ensure that developing countries benefit from the new environment of
transparency.
Two high-profile cases focused attention on the use of tax havens. The first case involved an
investigation in 2008 in Germany involving 600-700 German citizens reportedly funneling funds
into banks in Liechtenstein, taking advantage of Liechtenstein-based trusts to evade paying taxes
in Germany. At that time, Andorra, the Principality of Liechtenstein, and the Principality of
Monaco were the last remaining jurisdictions listed by the OECD as uncooperative tax havens. In
May 2009, however, the OECD’s Committee on Fiscal Affairs removed all three jurisdictions
from the list as a result of commitments they each made to implement the OECD standards of
transparency and effective exchange of information and the timetable they each set for
implementation.
The second case involves the Union Bank of Switzerland (UBS). For more than a year, the IRS
had pressured the Swiss banking firm to release the names of 52,000 Americans the agency
believes have offshore accounts in Switzerland and are using Switzerland’s banking secrecy laws
to avoid paying taxes. So far, UBS has agreed to pay $780 million in fines and has admitted that it
set up shell companies and accounts in Switzerland on behalf of U.S. citizens, that it advised U.S.
citizens on the best way to hide their assets from the IRS, and that UBS employees gave U.S.
clients tips on placing pricey art and jewelry in safety deposit boxes without declaring them to the
IRS.7
UBS officials had expressed some interest in accommodating the IRS request, but Swiss
regulators had instructed UBS to hand over the names of only 285 clients suspected of tax fraud.
The Swiss government indicted that it was instructing UBS not to comply with the IRS summons,
regardless of any outcome by a Florida court.8 Negotiations between the Treasury Department
6 Promoting Transparency and Exchange of Information for Tax Purposes: A Background Information Brief, the
Organization for Economic Cooperation and Development, February 5, 2010.
7 Foley, Stephen, Swiss Banks’ Veil of Secrecy Slips, The Independent, July 14, 2009. p. 40.
8 Mijuk, Goran, Swiss Will Block UBS From Revealing Client Data, The Wall Street Journal Europe, July 9, 2009, p.
(continued...)
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and the Swiss Government eventually reached a compromise that would give the IRS the names
of a substantial number of U.S. clients. The IRS had asked a court in Florida to enforce a
summons that it served on UBS in February 2009, but on July 14, 2009, a federal judge granted a
joint request by the U.S. and Swiss governments and UBS to delay a court hearing in a civil case
to give the parties more time to reach an agreement.9 On August 20, 2009, UBS agreed to turn
over the names of 4,400 American clients who are suspected by the IRS of using Swiss bank
accounts for tax evasion.10 On June 19, 2009, Switzerland and the United States agreed to amend
their long-standing income tax treaty to provide for an increased exchange of information for
income tax purposes.11
Although not a new issue, a recurring issue for the United States and for other OECD countries is
an effort to negotiate income tax treaties with Brazil. The growing prosperity of the Brazilian
economy is attracting U.S. and other foreign firms to trade with and to invest in Brazil, and it is
helping Brazilian firms raise their profiles as foreign investors. In May 2007, the United States
and Brazil signed an information exchange agreement on taxes. The Obama Administration has
expressed its support for closer trade and investment ties with Brazil, and the U.S.-Brazil CEO
Forum indicated on July 22, 2009, that a bilateral tax treaty with Brazil remains a high priority for
U.S. and Brazilian business leaders.12 U.S. business leaders and policymakers have indicated that
the lack of comprehensive bilateral investment treaties or income tax treaties with Brazil is
inhibiting foreign firms from fully engaging with the Brazilian economy. Such a treaty, some
argue, would provide a more consistent and permanent set of rules for foreign firms operating in
Brazil. Even those countries that have investment treaties with Brazil are frustrated, because
Brazil’s complicated tax system and its business and economic practices often are difficult for
foreign firms to navigate. Also, some business practices and some government policies are often
viewed by foreign firms as being protectionist, which inhibits trade and commercial relations. In
2005, for instance, Germany notified Brazil that it was allowing its tax treaty with Brazil to lapse
due to definitions the Brazilians used to tax entities (which differed from those used by the OECD
and undermined the value of the treaty), disagreements over the way Brazil taxes imports by
German firms, and changes in Brazil’s economic status that rendered parts of the agreement out
of date.
On July 13, 2009, the OECD released its latest progress report on jurisdictions that have agreed to
comply with the internationally agreed tax standard, which was adopted by the G-20 in 2004 and
the United Nations in 2008.13 As indicated in Table 1, there are no jurisdictions that are listed as
non-cooperative jurisdictions. For jurisdictions that have committed to the agreement, but have
not yet substantially implemented the agreement, the table lists the number of agreements each
(...continued)
11.
9 Mollenkamp, Carrick, In UBS Case, a Dogged IRS , The Wall Street Journal Europe, July 14, 2009, p. 1;
Mollenkamp, Carrick, UBS, U.S. Ask For a Delay – Settlement Sought in Dispute Over Swiss Privacy Laws and Tax-
Evasion Case, The Wall Street Journal Europe, July 13, 2009, p. 1.
10 Browning, Lynnley, Names Deal Cracks Swiss Bank Secrecy, New York Times, August 21, 2009.
11 United States, Switzerland Agree to Increased Tax Information Exchange, press release TG-177, the U.S.
Department of the Treasury, June 19, 2009.
12 Preliminary Statement of Brazilian and U.S. CED Priorities, U.S.-Brazil CEO Forum, June 22, 2009.
13 The complete assessment is contained in: Tax Cooperation: Towards a Level Playing “Field – 2008 Assessment by
the Global Forum on Taxation, the Organization for Economic Cooperation and Development, 2008.
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country has signed. The standard set by the G-20 is that a jurisdiction must sign agreements with
at least 12 other jurisdictions to be considered to have substantially implemented the agreement.
Table 1. Progress Report on the Jurisdictions Surveyed by the OECD Global Forum
That Have Implemented the Internationally Agreed Tax Standard
Progress Made as of July 13, 2009
Jurisdictions that have substantially implemented the internationally agreed tax standard
Argentina
France
Korea
Seychelles
Australia
Germany
Luxembourg
Slovak Republic
Bahrain
Greece
Malta
South Africa
Barbados
Guernsey
Mauritius
Spain
Bermuda
Hungary
Mexico
Sweden
Canada
Iceland
Netherlands
Turkey
Chinaa
Ireland
New Zealand
United Arab Emirates
Cyprus
Isle of Man
Norway
United Kingdom
Czech Republic
Italy
Poland
United States
Denmark
Japan
Portugal
US Virgin Islands
Finland
Jersey
Russian Federation
Jurisdictions that have committed to the internationally agreed tax standard, but have not yet
substantially implemented
Jurisdiction Year
of Number of
Jurisdiction Year
of Number of
Commitment Agreements
Commitment
Agreements
Tax Havensb
Andorra
2009
0
Marshal Islands
2007
1
Anguilla
2002 0
Monaco
2009
1
Antigua and
2002 7
Montserrat
2002
0
Barbuda
Aruba
2002
4
Nauru
2003
0
Bahamas
2002
1
Neth. Antilles
2000
7
Belize
2002
0
Niue
2002
0
British Virgin
2002 11
Panama
2002
0
Islands
Cayman Islandsc
2000
11
St Kitts and Nevis
2002
0
Cook Islands
2002
1
St Lucia
2002
0
Dominica
2002
1
St Vincent and the
2002 0
Grenadines
Gibraltar
2002
2
Samoa
2002
0
Grenada
2002
1
San Marino
2000
0
Liberia
2007
0
Turks and Caicos
2002 0
Islands
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Liechtenstein
2009
1
Vanuatu
2003
0
Other Financial Centers
Austriad 2009 2
Malaysia
2009
0
Belgiumd 2009 6
Philippines
2009
0
Brunei
2009
5
Singapore
2009
0
Chile
2009
0
Switzerlandd
2009
0
Costa Rica
2009
0
Uruguay
2009
0
Guatemala
2009
0
Jurisdictions that have not committed to the internationally agreed tax standard
Jurisdiction
Number of Agreements
Jurisdiction
Number of Agreements
All jurisdictions surveyed by the Global Forum have now committed to the internationally agreed tax standard
Source: Organization for Economic Cooperation and Development.
Notes: The internationally agreed tax standard, which was developed by the OECD in co-operation with non-
OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the
UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting, requires
exchange of information on request in all tax matters for the administration and enforcement of domestic tax
law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for
extensive safeguards to protect the confidentiality of the information exchanged.
a. Excluding the Special Administrative Regions, which have committed to implement the internationally
agreed tax standard.
b. These jurisdictions were identified in 2000 as meeting the tax haven criteria as described in the 1998 OECD
report.
c. The Cayman Islands have enacted legislation that allows them to exchange information unilaterally and have
identified 12 countries with which they are prepared to do so. This approach is being reviewed by the
OECD.
d. Austria, Belgium, and Switzerland withdrew their reservations to Article 26 of the OECD Model Tax
Convention. Belgium has already written to more than 80 countries to propose the conclusion of protocols
to update Article 26 of their existing treaties. Austria and Switzerland announced that they have started to
write to their treaty partners to indicate that they are now willing to enter into renegotiations of their
treaties to include the new Article 26.
“Tax Havens”
The OECD has addressed the issue of tax havens in various forms since the organization was
formed in 1961. It issued its first convention on tax havens in 1963, with the Draft Double
Taxation on Income and Capital. In 1977, the OECD issued its first major update of its Draft with
the Model Convention and Commentaries to reflect the experience of OECD members with
bilateral treaties, the increasingly sophisticated methods for tax evasion, and the development of
new and more complex international business activities and relations. In 1991, the OECD again
updated its tax convention to reflect the liberalization in capital markets and the globalization in
business activities with the Model Tax Convention on Income and Capital, the forerunner to the
current convention.
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During the last half of the 1990s, the OECD pursued an effort to curtail the use of what it termed
“harmful tax competition,”14 which it defined as attempts by some countries to attract capital by
offering tax-benefit inducements with the sole purpose of attracting foreign investment. These
concerns arose from a judgment that certain kinds of competition for internationally mobile
capital can threaten the tax bases of other OECD countries and can distort the worldwide
allocation of capital. This issue gained increased attention with the publication in 1998 of the
OECD’s report, Harmful Tax Competition: an Emerging Global Issue. In this report, the OECD
indicated that it was not focusing on any particular nation’s tax structure. It stated:
Historically, tax policies have been developed primarily to address domestic economic and
social concerns. The forms and levels of taxation were established on the basis of the desired
level of publicly provided goods and transfers, with regard also taken to the allocative,
stabilizing, and redistributive aims thought appropriate for a country.15
Instead, the OECD indicated that it was attempting to curtail tax practices by countries that have,
“No or only nominal taxation combined with the fact that a country offers itself as a place, or is
perceived to be a place, to be used by non-residents to escape tax in their country or residence.”16
Such countries often are termed tax havens. Although there is no agreed-upon definition of a tax
haven, or an agreed-upon list of countries that are tax havens, the OECD has established four
basic principles it uses to determine whether a country is a tax haven. These four criteria are (1)
the jurisdiction imposes no or only nominal taxes; (2) there is a lack of transparency; (3)
there are laws or administrative practices that prevent the effective exchange of
information for tax purposes with other governments on taxpayers who are benefiting
from the no or nominal taxation; and (4) there are no requirements that the activity be
substantial. In establishing these criteria, the OECD indicated that “every jurisdiction has a
right to determine whether to impose direct taxes and, if so, to determine the appropriate
tax rate.” The OECD indicated that it was not targeting differences in tax structures between
countries that may be exploited by individuals or firms, but that it was focusing on a practice that
is meant specifically to reallocate investment:
Unlike the situation of mismatching.... Here the effect is for one country to redirect capital
and financial flows and the corresponding revenue from the other jurisdictions by bidding
aggressively for the tax base of other countries. Some have described this effect as
“poaching” as the tax base “rightly” belongs to the other country. Practices of this sort can
appropriately be labeled harmful tax competition as they do not reflect different judgments
about the appropriate level of taxes and public outlays or the appropriate mix of taxes in a
particular country, but are, in effect, tailored to attract investment or savings originating
elsewhere or to facilitate the avoidance of other countries’ taxes.17
The Clinton Administration played a leadership role in shaping the OECD’s tax competition
initiative. When the initiative was publicly announced, for instance, the Clinton Administration,
through Treasury Secretary Lawrence Summers, released a statement that read:
14 Harmful Tax Competition: an Emerging Global Issue. Organization for Economic Cooperation and Development,
Paris, 1998.
15 Harmful Tax Competition, p. 13.
16 Ibid, p. 21.
17 Ibid., p. 16.
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The identification of tax havens and potentially harmful tax regimes is a crucial step in
preventing distortions that could undermine the benefits of enhanced capital mobility in
today’s global economy.... We encourage all countries to follow the example set by the
OECD member countries ... that have committed to eliminate harmful tax practices.18
The Bush Administration, however, led by Treasury Secretary Paul O’Neill, decided to pursue a
different approach. In a statement before the Senate Committee on Governmental Affairs July 18,
2001, Secretary O’Neill voiced the Bush Administration’s opposition to portions of the OECD’s
efforts to target tax havens. The Secretary said:
The 1998 OECD Report19, and a follow-up report issued in June 2000, contained rhetoric
that implicated fundamental internal tax policy decisions of countries within and outside the
OECD, including decisions regarding tax rates. The Reports enumerated the harms
potentially caused by ‘tax havens or harmful preferential regimes that drive the effective tax
rate levied on income from the mobile activities significantly below rates in other countries.’
Tax systems that “redirect capital and financial flows and the corresponding revenue from”
other countries were condemned as ‘poaching’ the rightful tax base of the other countries,
even though such systems provide a more attractive investment climate without facilitating
noncompliance with the tax laws of any other country.20
As a result of the Bush Administration’s efforts, the OECD backed away from its efforts to target
“harmful tax practices” and shifted the scope of its efforts to improving exchanges of tax
information between member countries. In his statement, Secretary O’Neill stated that he was
“troubled by the notion that any country, or group of countries, should interfere in any other
country’s decisions about how to structure its own tax system.21
Financial Action Task Force
Following the terrorist attacks of September 11, 2001, the Financial Action Task Force on Money
Laundering (FATF),22 the body within the OECD that had pursued the tax haven issue, redirected
its efforts to focus on terrorist financing. In addition to its two main efforts on money laundering
and terrorist financing, the FATF in 2007 revised its mandate to respond to such new and
emerging threats as proliferation financing and vulnerabilities in new technologies that could
destabilize the international financial system.23
The FATF is comprised of 31 member countries and territories and two international
organizations24 and was organized to develop and promote policies to combat money laundering
18 Treasury Secretary Welcomes OECD Report on Harmful Tax Competition Havens, U.S. Department of the Treasury,
June 26, 2000.
19 Harmful Tax Competition: An Emerging Global Issue, the Organization for Economic Cooperation and
Development, 1998.
20 Statement of Paul H. O’Neill Before the Senate Committee on Governmental Affairs Permanent Subcommittee on
Investigations: OECD Harmful Tax Practices Initiative, July 18, 2001.
21 Ibid., p. 4.
22 For additional information, see CRS Report RS21904, The Financial Action Task Force: An Overview, by James K.
Jackson.
23 FATF Annual Report: 2007-2008, The Financial Action Task Force, June 20, 2008. P. 19.
24 The FATF members are Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France,
Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand,
(continued...)
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and terrorist financing.25 In 2008, China and South Korea were granted observer status, the first
step in the process toward full membership in FATF. The FATF relies on a combination of annual
self-assessments and periodic mutual evaluations that are completed by a team of FATF experts to
provide information and to assess the compliance of its members to the FATF guidelines. FATF
has no enforcement capability, but can suspend member countries that fail to comply on a timely
basis with its guidelines. The FATF is housed at the headquarters of the Organization for
Economic Cooperation and Development in Paris and occasionally uses some OECD staff, but
the FATF is not part of the OECD. The Presidency of the FATF is a one-year appointed position,
currently held by Mr. Antonio Gustavo Rodriguez of Brazil, who is to serve through June 30,
2009. The FATF has operated under a five-year mandate. At the Ministerial meeting on May 14,
2004, the member countries renewed the FATF’s mandate for an unprecedented eight years.
When it was established in 1989, the FATF was charged with examining money laundering
techniques and trends, reviewing the actions which had already been taken, and setting out the
measures that still needed to be taken to combat money laundering. In 1990, the FATF issued a
report containing a set of Forty Recommendations, which provided a comprehensive plan of
action to fight against money laundering. In 2003, the FATF adopted the second revision to its
original Forty Recommendations, which now apply to money laundering and terrorist financing.26
On October 31, 2001, the FATF issued a new set of guidelines and a set of eight Special
Recommendations on terrorist financing.27 At that time, the FATF indicated that it had broadened
its mission beyond money laundering to focus on combating terrorist financing and that it was
encouraging all countries to abide by the new set of guidelines. A ninth Special Recommendation
was added in 2005. In 2005, the United Nations Security Council adopted Resolution 1617 urging
all U.N. Member States to implement the FATF Forty Recommendations on money laundering
and the Nine Special Recommendations on terrorist financing.
The FATF completed a review of its mandate and proposed changes that were adopted at the May
2004 Ministerial meeting. The new mandate provides for the following five objectives: (1)
continue to establish the international standards for combating money laundering and terrorist
financing; (2) support global action to combat money laundering and terrorist financing,
including stronger cooperation with the IMF and the World Bank; (3) increase membership in the
(...continued)
Norway, Portugal, Russian Federation, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United
Kingdom, United States; the two international organizations are: the European Commission, and the Gulf Cooperation
Council. The following organizations have observer status: Asia/Pacific Group on Money Laundering; Caribbean
Financial Action Task Force; Council of Europe Select Committee of Experts on the Evaluation of Anti-Money
Laundering Measures; Eastern and Southern Africa Anti-Money Laundering Group; Financial Action Task Force on
Money Laundering in South America; other international organizations including the African Development Bank; Asia
Development Bank; European Central Bank; International Monetary Fund; Organization of American States,
Organization for Economic Cooperation and Development; United Nations Office on Drugs and Crime; and the World
Bank.
25 To be admitted to the FATF, a country must (1) be fully committed at the political level to implement the Forty
Recommendations within a reasonable time frame (three years) and to undergo annual self-assessment exercises and
two rounds of mutual evaluations; (2) be a full and active member of the relevant FATF-style regional body; (3) be a
strategically important country; (4) have already made the laundering of the proceeds of drug trafficking and other
serious crimes a criminal offense; and (5) have already made it mandatory for financial institutions to identify their
customers and to report unusual or suspicious transactions.
26 For the Forty Recommendations, see http://www1.oecd.org/fatf/pdf/40Recs-2003_en.pdf.
27 FATF Cracks Down on Terrorist Financing. Washington, FATF, October 31, 2001, p. 1.
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FATF; (4) enhance relationships between FATF and regional bodies and non-member countries;
and 5) intensify its study of the techniques and trends in money laundering and terrorist
financing.28
Model Tax Convention on Income and Capital
The United States, as an OECD member country, recognizes and abides by the provisions of the
OECD model tax convention. Nevertheless, the United States has its own model income tax
convention, last updated in 2006, that is used as the basis for U.S. negotiations. These two models
are compatible, but the United States does reserve the right to have substantive differences.
According to the U.S. Department of the Treasury, the United States has reservations with the
first 12 articles in the OECD model tax convention that deal with taxes on income. In general
terms, the U.S. reservations focus on differences between the U.S. and OECD tax conventions
with the way certain terms are identified and the way certain taxes are applied to various forms of
income, such as royalties, certain types of deferred payments, taxes on branch profits, and state
and local taxes among other items.
Currently, the United States has signed bilateral tax treaties with nearly 70 other countries. Tax
treaties, protocols (amendments to existing treaties) and information exchange agreements that
have been signed but not yet ratified by the Senate include those with France, Luxembourg,
Liechtenstein, Malta, New Zealand, and Switzerland.
In general terms, the OECD’s model tax convention attempts to provide a common set of rules
that national tax jurisdictions can follow to avoid the double taxation of income and capital. The
convention establishes the respective rights to tax of the State of source and of the State of
residence for both income and capital. As a rule, the exclusive right to tax in a number of cases of
items of income and capital is conferred on the State of residence. The other contracting State is
thereby prevented from taxing those items.29 The current version of the OECD’s model tax
convention contains 31 articles, most of which apply to taxes on income.
Article 26 of the Model Tax Convention is broadly considered to be the most widely accepted
legal basis for bilateral exchanges of information for tax purposes. According to the OECD, more
than 3,600 bilateral treaties are based on the Model Tax Convention. Prior to March 2009, four
countries—Austria, Belgium, Luxembourg, and Switzerland—had expressed reservations about
complying with Article 26. Those four countries have since notified the OECD that they were
withdrawing their reservations. The Article has five provisions, which include the following:
1. The Contracting states agree to exchange such information as is “foreseeably
relevant” for carrying out the provisions of the Model Tax Convention or to the
administration of the domestic laws “concerning taxes of every kind and
description imposed on behalf of the Contracting States.”
2. Information that is received is agreed to be treated as secret in the same manner
as information obtained under domestic laws.
28 http://www1.oecd.org/fatf/pdf/PR-20040514_en.pdf.
29 For additional information, see CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion, by Jane
G. Gravelle.
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3. This Article does not obligate the Contracting States to: a) carry out
administrative measures that are at variance with the laws and administrative
practice of the contracting States; b) supply information which is not obtainable
under the laws or in the normal course of the administration of the contracting
States; c) supply information which would disclose any trade, business,
industrial, commercial, or professional secret or trade process, or information the
disclosure of which would be contrary to public policy.
4. The Contracting State is obligated to use its information gathering measures to
obtain the requested information, even though the State itself may not need the
information.
5. The provisions of part 3 above cannot be used to permit a State to decline to
supply information solely because the information is held by a bank, other
financial institution, or agency because it relates to an ownership interest.
One critique of the Article is that it obligates countries to make available information that
is obtained using the jurisdiction’s “information gathering measures,” which assumes that
all jurisdictions collect the same types of data. In concept, jurisdictions could evade
providing information simply by not erecting the procedures necessary to collect such
data.
Global Forum on Taxation
The Global Forum on Taxation is a multilateral framework the OECD uses to engage with non-
OECD economies on tax issues. As a result of the attention given by the FATF on tax practices,
the Forum focused increased attention on the issue of tax havens. As a measure of its success, the
OECD indicated that by 2004 all but one of the preferential tax regimes it had identified in its
1998 report on harmful tax practices had been abolished, amended, or found not to be harmful.
The only outstanding tax regime was the Luxembourg 1929 holding company regime, which
Luxembourg agreed to fully abolish by the end of 2010. The OECD continues to monitor
developments in this area to ensure that participants comply with their stated agreements. In
addition to the issue of tax havens, the OECD has also worked to build international support for a
set of standards for transparency and the exchange of information in tax matters. The principles of
transparency and exchange of information are believed to be essential to ensure that economic
activity is conducted in a fair and transparent manner by combating tax fraud and tax evasion.
Both OECD and non-OECD countries jointly produced the 2002 Model Agreement on Exchange
of Information on Tax Matters. The standards of transparency and exchange of information that
comprise the basis for the Model Agreement on Exchange of Information on Tax Matters
subsequently were adopted by the G-20 Finance Ministers in 2004 and by the UN Committee of
Experts on International Cooperation in Tax Matters in October 2008. The standards are the same
as those specified in Article 26 of the OECD’s Model Tax Convention.
Despite the progress made to date, the OECD has indicated that it will continue to focus on a
number of issues relevant to transparency and exchange of information. Looking ahead, the
OECD has indicated that it will focus on the following issues:
• Strengthening the Global Forum on Transparency and Exchange of Information
by:
• establishing a robust peer mechanism;
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• monitoring the implementation of the agreed tax standards;
• expanding the countries’ participation in the Global Forum, including
developing countries;
• speeding up the process of negotiating Tax Information Exchange
Agreements and Tax Treaties, including developing multilateral instruments.
• Developing further its toolbox of countermeasures against non-cooperative
jurisdictions and assessing their effectiveness.
• Continuing work on the design of voluntary compliance programs.
• Working together with the Financial Action Task Force to establish a coherent
framework between tax and FATF transparency standards.30
Tax Information Exchange Agreements (TIEAS)
Tax Information Exchange Agreements (TIEAS) are agreements between members of the OECD
and parties that are not members of the OECD as a way to promote international cooperation on
tax matters through the exchange of information. According to the OECD, the lack of effective
exchange of basic tax information is one of the key criteria it uses to determine harmful tax
practices. The TIEAS were first released in 2002 and represent a non-binding agreement that
contains a multilateral instrument and a model for bilateral agreements. The agreement is
multilateral in the sense that it provides the basis for an integrated bundle of bilateral agreements.
A party to the multilateral Agreement is bound only by the Agreement to the specific parties it
wishes to be bound.
On October 30, 2008, the OECD announced that 16 new exchange of information agreements had
been signed, bringing to 44 the number of such arrangements that have been put in place since
2000. In addition, OECD Secretary General Angel Gurria called for a new drive to raise standards
and performance in the area of corporate governance. At the heart of this campaign were moves
to strengthen implementation of the OECD Principles of Corporate Governance,31 first launched
in 1999 and adopted by the Financial Stability Forum (now the Financial Stability Board)32 as one
of its 12 core standards for sound financial systems on March 26, 2000. According to Gurria, the
30 Overview of the OECD’s Work on Countering International Tax Evasion, Organization for Economic Cooperation
and Development, July 16, 2009, p. 6.
31 The OECD Principles of Corporate Governance are a voluntary set of standards that were endorsed by OECD
Ministers in 1999. They are a non-binding set of standards that are not intended to substitute for government, semi-
government or private sector initiatives to develop more detailed “best practice” in corporate governance. The
Principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal,
institutional and regulatory framework for corporate governance in their countries, and to provide guidance and
suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing
good corporate governance. Available at http://www.oecd.org/DATAOECD/32/18/31557724.pdf
32 The Financial Stability Forum is a group of about a dozen nations who participate through their central banks and
financial ministries and departments, including Japan, Canada, Germany, France, Italy, the United States, the United
Kingdom, and many other industrialized economies. It also includes several international economic organizations.
consisting of major national financial authorities such as finance ministries, central bankers, and international financial
bodies. The Forum was founded in 1999 to promote international financial stability. It facilitates discussion and
cooperation in supervision and surveillance of financial institutions, transactions and events. The Financial Stability
Forum was renamed the Financial Stability Board at the G-20 summit in April 2009, when its membership and its
mandate were enlarged.
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global financial crisis and tax evasion scandals have strengthened governments’ determination to
fight tax evasion and to bring increased transparency to cross-border transactions. The attention
being directed at tax havens spurred a surge in TIAS being signed in 2009. In the first half of
2009, 40 more agreements had been signed, as indicated in Table 2, mostly by jurisdictions that
are attempting to reach the important threshold of 12 signed agreements in order to be considered
in compliance.
Some observers have questioned the effect of many of the recently signed agreements, since they
include jurisdictions that collect minimal amounts of data on bank accounts and, therefore, may
contribute little to the overall effort to improve transparency and to the exchange of information.
In order to address these concerns, the G-8 heads of government agreed on July 8, 2009, to
support a set of measures adopted by the G-20 that would serve as a framework to follow up on
the exchange of information agreements in order to ensure that the intended benefits would be
realized. The measures include the following:
• The OECD Forum on Transparency and Exchange of Information must
implement a peer-review process that assesses the implementation of
international standards by all jurisdictions and provides an objective and credible
basis for further action.
• Since all of the countries monitored by the Global Forum on Taxation have
committed to implementing the international standards on the exchange of tax
information, efforts should now concentrate on implementing actual information
exchange and increasing the number, quality, and relevance of the agreements
that adhere to these standards.
• Participation in the Global Forum on Taxation should be expanded.
• Concrete progress needs to be made towards enabling developing countries to
benefit from the new cooperative tax agreement, including through enhanced
participation in the Global Forum on Taxation and the consideration of a
multilateral approach for the exchange the information.
• Criteria that were used to define jurisdictions that had not yet substantially
implemented the internationally agreed standards on tax information exchange
and transparency should be revised as part of the peer review assessment process
to ensure that there is an effective implementation of international standards.
• Participants should discuss and agree upon a toolbox of effective
countermeasures they can use against countries that do not meet the international
standards on tax transparency.33
Table 2. Bilateral Tax Information Exchange Agreements Signed in 2009
Country Partner
Date
Netherlands
Cayman Islands
July 8, 2009
Germany Bermuda
July
3,
2009
Ireland
Gibraltar
June 24, 2009
33 Countering Offshore Tax Evasion, Organization for Economic Cooperation and Development, July 16, 2009, p. 17.
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Country Partner
Date
Ireland
Cayman Islands
June 23, 2009
France
British Virgin Islands
June 17, 2009
Australia
Jersey
June 10, 2009
Netherlands Bermuda
June
8,
2009
Denmark
British Virgin Islands
May 19, 2009
Faroe Islands
British Virgin Islands
May 19, 2009
Finland
British Virgin Islands
May 19, 2009
Greenland
British Virgin Islands
May 19, 2009
Iceland
British Virgin Islands
May 19, 2009
Norway
British Virgin Islands
May 19, 2009
Sweden
British Virgin Islands
May 19, 2009
New Zealand
Bermuda
April 17, 2009
Denmark Bermuda
April
16,
2009
Faroe Islands
Bermuda
April 16, 2009
Finland Bermuda April
16,
2009
Greenland Bermuda
April
16,
2009
Iceland Bermuda April
16,
2009
Norway Bermuda
April
16,
2009
Sweden Bermuda
April
16,
2009
Denmark
Cayman Islands
April 1, 2009
Faroe Islands
Cayman Islands
April 1, 2009
Finland
Cayman Islands
April 1, 2009
Greenland
Cayman Islands
April 1, 2009
Iceland
Cayman Islands
April 1, 2009
Norway
Cayman Islands
April 1, 2009
Sweden
Cayman Islands
April 1, 2009
USA Gibraltar March
31,
2009
France
Isle of Man
March 26, 2009
Ireland Jersey
March
26,
2009
Ireland Guernsey March
26,
2009
Germany Guernsey
March
26,
2009
France Guernsey March
24,
2009
France Jersey
March
23,
2009
United Kingdom
Jersey
March 10, 2009
Germany
Isle of Man
March 2, 2009
Australia
Isle of Man
January 29, 2009
United Kingdom
Guernsey
January 20, 2009
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Source: Organization for Economic Cooperation and Development.
Legislation
Congress has expressed a continuing interest in the issue of tax havens. In the 111th Congress,
companion bills were introduced in the House (H.R. 1265) by Representative Doggett and the
Senate (S. 506) by Senator Levin. Titled the “Stop Tax Haven Abuse Act,” the measures aim to
restrict the use of offshore tax havens and abusive tax shelters to “inappropriately avoid Federal
taxation, and for other purposes.” Among other provisions, the measures would amend Internal
Revenue Code provisions relating to tax shelter activities to (1) establish legal presumptions
against the validity of transactions involving offshore secrecy jurisdictions (i.e., foreign tax
havens identified in the act and by the Commissioner of the Internal Revenue Service); (2)
impose restrictions on foreign jurisdictions, financial institutions, or international transactions that
are of primary money laundering concern or that impede U.S. tax enforcement; (3) increase the
period for Internal Revenue Service review of tax returns involving offshore secrecy jurisdictions;
(4) require tax withholding agents and financial institutions to report certain information about
beneficial owners of foreign-owned financial accounts and accounts established in offshore
secrecy jurisdictions; and (5) disallow tax advisor opinions validating transactions in offshore
secrecy jurisdictions.
Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
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