Caribbean countries under attack

Once again, Commonwealth Caribbean countries are under attack as “tax havens”, even though they are nothing of the sort. This time it is not only the usual countries which have been listed. Trinidad and Tobago has been included, and we can bet that Jamaica and Guyana will be added unless immediate action
is taken.

The so-called “tax havens” lists are unfair, unjust and downright wrong. Yet, they have been produced by the Commission of the European Union (EU) and now, completely inappropriately, by individual state governments within the United States, and even by the District of Columbia.

I use the words “completely inappropriately” to describe the naming of sovereign nations by individual state governments of the United States, because these nations conduct their relations with the federal government of America and not with its individual states. It is the federal government that has responsibility for, and authority over, the external relations of the United States. By naming foreign countries as “tax havens”, the state governments in the United States have exceeded their power.

They also create confusion among sovereign states and erode confidence in the United States federal government with which they expect to conduct their relations.

Normally, there may be an inclination to ignore the tax haven lists produced by states such as Oregon and Montana, particularly as similar lists formulated by Kentucky, New Hampshire and Maine never made it into law. But there are dangerous consequences in simply turning a blind eye to the lists of these states.

The first is the reputational damage that they do to the countries named. There is more than a whiff of unpleasantness that attaches to the term tax haven. People and organizations doing legitimate business shy away from anything that might taint them. Hence, the branded Caribbean countries could lose much needed business and revenues. And, here it may be worth detailing the Commonwealth Caribbean jurisdictions that appear on the these state government lists: Anguilla, Antigua and Barbuda, Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Dominica, St Lucia, St Kitts-Nevis, St Lucia, Montserrat and Trinidad and Tobago.

A second and potentially more dangerous consequence of the tax haven lists is that banks in the United States and Europe might choose to end correspondent relations with financial institutions in all these Caribbean jurisdictions. If they did so, the offshore banking sector and the local indigenous banks in all these countries could collapse, with detrimental effects
on their economies.

This notion is by no means far-fetched. The penalties for United States and European Union banks are draconian should they be found to have facilitated money laundering and tax evasion –– even if they did so unknowingly. Therefore the United States and European Union banks now weigh the risks they run against the rewards they get from providing correspondent relations to Caribbean financial institutions.

Since the totality of Caribbean banking transactions for offshore and local indigenous banks is small in comparison with their total income, the United States and European Union banks could choose to avoid the risk by not doing business with banks in listed tax havens.

In the case of the tax havens list produced by the European Union Commission, that list was formulated on the basis that at least ten European Union nations identified a jurisdiction as a tax haven. So, even though a number of Commonwealth Caribbean countries, such as Antigua and Barbuda, Bahamas and Barbados, have tax information exchange agreements with 18 of the 28 European Union nations, they were unfairly and wrongly branded by the European Union Commission.

Remarkably, one European Union government that the European Union Commission identified as among the ten that named Caribbean jurisdictions has indicated that it was not consulted in the formulation of the tax havens list and it has disavowed it. Nonetheless, the damage has been done, and the Caribbean’s task is now to expose the wrongfulness of the branding and to seek immediate correction.

With regard to the state governments of the United States that have branded Caribbean jurisdictions, one of them has stated that it based its listing on “criteria originally established by the Organization For Economic Cooperation And Development (OECD) in 1998”. But, the world, including the OECD, has long since gone past the erroneous criteria used 17 years ago. The principal criterion applied back then for determining a tax haven was two-fold: is there no tax or low tax by the jurisdiction, and is payable tax hidden?

The Caribbean fought the OECD’s notion of “harmful tax competition”, and eventually it was agreed that tax competition is a legitimate form of competition and that sovereign states have the right to set their own rate of tax. Indeed European Union countries, the United States and many other nations openly compete with each other
for investment and in production costs through tax rates.

Further, within the United States individual states also compete with each other through the tax rates they set. Therefore, no country can be defined as a tax haven because it has no or low tax.

Now, if the country hides payable taxes from other countries that is arguable ground for saying it is a tax haven. But no Commonwealth country hides payable tax from the United States or from the European Union. Tax information exchange agreements exist and are enforced.

And, even now Commonwealth Caribbean countries are working with the United States government and its Internal Revenue Service to implement FATCA –– United States law requiring financial institutions to report all American persons and companies that have accounts with them. Clearly, payable taxes are not hidden in these jurisdictions.

Caribbean countries are defending themselves against these outrageous slings and arrows, including by pointing out that the two internationally recognized bodies, the Financial Action Task Force and the OECD’s Global Tax Forum, have found them compliant with the standards they set.

The statement by Antigua and Barbuda’s Prime Minister Gaston Browne, himself a former banker, to the United Nations General Assembly about the tax havens list resonate with a compelling truth: “International principles, to which small states readily adhere, should not be overturned by bigger countries that seek to impose their will on smaller ones. It is not fair; it is not just; it is not democratic; and it is patently wrong.”