Golden Links on Tax Information Exchange Initiatives vs Human Rights (update 4/30/02)

The Cambridge International Symposium on Economic Crime
Jesus College, University of Cambridge, September 13, 2001, rev. 9/10/02

Workshop "Human Rights Issues Arising from Highly Intrusive Investigative Provisions"
directed by Anton Keller, The Secretary, Swiss Investors Protection Association,
and Dr. Dan Mitchell, Mc Kenna Fellow in Political Economy, Heritage Foundation
and Chairman of the Board, Center for Freedom and Prosperity

KEY ITEMS

the principles of state formulated centuries ago not least by Adam Smith and Whately, namely: the state may legitimately impose financial or blood sacrifices on its citizens and foreigners - which may seek refuge on its territory for themselves and/or for their wealth - only "in return for the protection afforded by the Sovereign." (as quoted in The Oxford English Dictionary, Second Edition, vol. XVII, 1989, p.679);

"The Saint Louis Declaration" of June 2001 on "the fundamental human right for individuals" "to flee political and economic oppression ... and ... to move themselves and their property to nations of other political jurisdictions with levels of taxation and public services compatible with their individual tastes and preferences", World Taxpayers Association, National Taxpayers Union & 31 US and foreign taxpayer organizations, http://www.ntu.org;

Bruce Zagaris' latest paper "Exchange of Tax Information Policies at the Millennium: Balancing Enforcement with Due Process and International Human Rights", International Platform Association, Washington 9 August 2001 (http://www.solami.com/Zagaris.htm);

Gilbert Morris' latest paper "Signs and Sovereignty - The Growth of Supervenient Authority in the United Nations", Competitive Enterprise Institute, Washington August 2001 (http://www.solami.com/MorrisUN.doc); and

Richard Rahn's speech of today "Taxation, Money Laundering and Liberty" (http://www.solami.com/RR13Sep.doc).

UPCOMING EVENTS

On 10 September 2002 an OECD-blacklist workshop at the Cambridge International Symposium on Economic Crime, coached by Andrew Quinlan and carried by Anton Keller, Daniel Mitchell, Gilbert Morris and Richard Rahn.
18 November 2002, Global Workshop on the Final Regulations of the Patriot Act, Landfall Centre Nassau, Bahamas

OTHER USEFUL LINKS

John Berlau, "Tax Collector for the World", InsightMag.com, http://www.insightmag.com/archive/200107308.shtml
Stephen J. Entin, "Treasury's Qualified Intermediary Regulations and the OECD Tax Haven Initiative: Threats to International Capital Mobility and Investment", IRET Congressional Advisory, #116, 28 June 2001 ftp://ftp.iret.org/pub/ADVS-116.PDF
Mike Godfrey, "US Treasury To Review Proposed Information Exchange Rules", Tax-News.com, 3 July 2001, http://www.tax-news.com/asp/story/story.asp?storyname=4289
Jeremy Hetherington-Gore, "O'Neill v the OECD: It's Only Round One", Tax-News.com, 21 May 2001, http://www.tax-news.com/asp/story/story.asp?storyname=3633
Marshal Langer, “Who are the Real Tax Havens?”, http://www.freedomandprosperity.org/Articles/tni12-18-00.pdf
Lawrence B. Lindsey, "The Money-Laundering Conundrum: Mugging Privacy in the Assault on Crime?", in "The Future of Financial Privacy", Competitive Enterprise Institute, September 2000, http://www.cei.org/PDFs/lindsey.pdf
Ulrika Lomas, "European Think Tank Recommends International Tax Privacy Code", Tax-News.com, Brussels, 15 May 2001, http://www.tax-news.com/asp/story/story_print.asp?storyname=3550
Daniel J. Mitchell, "Proposed IRS Regulation Flouts Congress and Would Harm the Economy", Heritage Foundation Study #757, 5 July 2001, http://www.heritage.org/library/execmemo/em757.html
Daniel J. Mitchell, "United Nations Seeks Global Tax Authority", CFP Foundations Study Prosperitas Vol. I, Issue II, August 2001, http://www.freedomandprosperity.org/Papers/un-report/un-report.shtml
Gilbert Morris, "Kalorama Letter Concerning the Bahamas, the Blacklist & Creative Diplomacy", Security Policy Group International (SPGI), http://www.spgi.org, http://www.Bahamasb2b.com
Gilbert Morris, "Preliminary Briefing on Recent International Financial Regulations", Nassau Institute, http://www.solami.com/morris9.doc
Gilbert Morris, "The Future of Off-shore Private Banking Understanding the Affects of the OECD/FATF & IRS Initiatives on International Finance", SPGI, http://www.spgi.org/speeches/morris_harvard.shtml
Richard W. Rahn, "The Future of Money and Financial Privacy", in: "The Future of Financial Privacy", Competitive Enterprise Institute, September 2000, http://www.cei.org/PDFs/rahn.pdf
Richard W. Rahn, "WHY THE WAR ON MONEY LAUNDERING IS COUNTERPRODUCTIVE", Discovery Institute, February 2001, http://www.freedomandprosperity.org/Papers/rahn01-30-01/rahn01-30-01.shtml
Richard W. Rahn, "Economic Growth Options", Washington Times, 9 August 2001, http://www.solami.com/RR9Aug.htm; "Report on Financial Privacy, Law Enforcement, and Terrorism", Prosperity Institute, http://www.prosperity-institute.org/projects/PI-TF-Report.pdf
Fred Smith, et al., "The Future of Financial Privacy", "New Threats to Financial Privacy Could Affect Foreign Investment in the U.S. and Hurt Economy", Competitive Enterprise Institute, September 2000, http://www.cei.org/gencon/026,02262.cfm, http://www.cei.org/gencon/003,02432.cfm
Lawrence R. Uhlick, "Urgent Need for Transitional Relief Regarding Implementation of New Withholding and Reportung Rules for Payments to Non-US Persons", Institute of International Bankers, November 2000, http://www.IIB.org
Bruce Zagaris, "Application of OECD Harmful Tax Practices Criteria to the OECD Countries Shows Potential Danger for the US Sovereignty", Berliner Corcoran & Rowe, 25 April 2001, http://www.solami.com/zagaris.PDF,

EXCHANGE OF TAX INFORMATION POLICIES AT THE MILLENNIUM:
BALANCING ENFORCEMENT
WITH DUE PROCESS AND INTERNATIONAL HUMAN RIGHTS

by Bruce Zagaris, Berliner, Corcoran & Rowe
1101 17th St., NW - Washington, DC 20036 - (202) 293-5555 - bzagaris@bcr-dc.com

full paper at: http://www.solami.com/Zagaris.htm

All addenda in cornered brackets are those of the editor,
and the hyperlinks are the editor's choice.
These complements do not necessarily reflect the author's opinion
but have been added for the reader's convenience.

CONTENTS

I INTRODUCTION         §§ 1 - 3
II CONSTITUTION OF THE OECD        §§ 4 - 15
III OECD HARMFUL TAX COMPETITION INITIATIVE        §§ 16 - 28
    A Overview        §§ 16 - 23
    B Remaining Issues over Exchange of Information        §§ 24 - 28
IV THE CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS        §§ 29 - 84
    A Background        §§ 29 - 30
    B Contents        §§ 31 - 72
        1. Coverage and Goals        §§ 32 - 36
        2. Forms of Assistance        §§ 37 - 51
        3. Service of Documents        §§ 52 - 53
        4. Procedural Requirements of Requesting Assistance       §§ 54 - 65
        5. Implementation and Special Provisions        §§ 66 - 72
    C Ratification Process        §§ 73 - 84
V NEED FOR IMPROVED PRIVACY AND HUMAN RIGHTS PROTECTION        §§ 85 - 113
    A Tax Information Exchange        §§ 86 - 107
        1. Need for International Provisions on Taxpayers Rights        §§ 87 - 89
        2. Current Taxpayer Rights in Bilateral Tax Treaties        §§ 90 - 91
        3. Examples of Challenges to Exchange of Information on Human Rights Grounds        §§ 92 - 97
        4. Other Expressions of Human Rights Concerns        §§ 98 - 107
    B Mutual Legal Assistance in Criminal Matters        §§ 108 - 113
VI SUMMARY AND CONCLUSION        §§ 114 - 124

I INTRODUCTION

1 On July 18, 2001, at a hearing of the U.S. Senate Permanent Investigative Subcommittee, U.S. Treasury Secretary Paul O'Neill promised the Subcommittee chair Carl Levin that within one year the U.S. Government will have concluded tax information exchange agreements with at least one half of the so called tax havens of the Organization for Economic Cooperation and Development (OECD) harmful tax competition initiative.⁽¹⁾ Secretary O'Neill's promise, although obviously naively hyperbolic, underscores the increasing importance of this instrument.

2 This paper discusses exchange of tax information policies at the millennium. It will discuss the Constitution of the OECD, which has been the principal initiator of the effort to develop better international tax cooperation and particularly improved exchange of information policies. The OECD's Constitution will be considered in the context of its decision to undertake and prioritize as a project the harmful tax competition initiative. The salient remaining issues over exchange of information in the OECD harmful tax competition initiative will be considered. The paper will discuss the Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters. The need for improved privacy and human rights protection will be examined in the context of the new enforcement initiatives. Concluding remarks reflect on the need for democracy in the preparation and elaboration of mechanisms by international organizations in order to give them sufficient legitimacy and self-sustainability.

3 Clearly, the rise of new enforcement conventions and initiatives require enhanced protection for taxpayers, third parties, such as fiduciaries, and financial intermediaries. The enhanced protection will guarantee the ability to conduct normal commercial relations in the face of increased enforcement measures and will ensure the fairness and integrity, without which the new enforcement initiatives will not have the confidence and support of the private sector.
...

VI SUMMARY AND CONCLUSION

114 Increasingly intergovernmental organizations and groups, such as the OECD and FATF, have become self-elected rule-makers. In fact, the FATF is not even an organization, just an informal group. Even though the soft laws are not endorsed by legislatures, the standards, codes of conduct, recommendations, and guidance contained in soft measures can create peer group pressure on individuals and organizations to conform and provide a point of reference for negotiating settlements of disputes.⁽¹³³⁾

115 Observers have distinguished among the various rules that provide guidelines for actions. Rules can be divided into three broad categories: front-door laws enacted by Parliament; rules enacted under authority delegated by an Act of Parliament; and rules made by self-selected organizations without direct or indirect authorization by Parliament.

116 A rule is a law in the traditional sense if it is introduced through the front door of Parliament and becomes law through a democratic process. International treaties that require approval by an affirmative vote in Parliament are a special form of front door legislation.

117 Delegated regulations, whereby the legislature delegates authority to make regulations to an executive department or to an administrative agency with special responsibilities, illustrate the making of laws through the side door. Some international agreements, such as the Treaty of Rome, shift authority to make rules above the heads of national legislatures. Problems of accountability may be exacerbated in intergovernmental agencies such as the IMF. IMF staff are supervised by a governing board representing groups of countries. While national Ministry of Finance officials liaise with IMF staff, the amount of accountability is questionable.

118 Rules are made through the back door when they lack the direct or delegated authority of an Act or Parliament. In a modern society, every large organization has self-selected rules, some in its charter of incorporation or by-laws and others in codes of conduct and standards, intended to promote efficiency and consistency in its work.

119 The paper distinguishes between hard and soft enforcement. Hard enforcement occurs when courts and related agencies can decide specific disputes arising under a law, interpret laws, and can even declare a law as in violation of the constitution. Courts give individuals aggrieved by governmental actions the opportunity to challenge what government does, and judicial rules are intended to ensure due process, that is, a fair consideration of the claims and counter-claims of all participants in a legal dispute. Some international organizations, such as the EU, can enforce rules through the courts. Other international organizations must enforce through conditions attached to its loans, such as the right to suspend loan payments if a national government does not deliver policies that are a condition of the loan.

120 International organizations also use soft enforcement, such as expertise, hortatory declarations and moral suasion to promote rules for which no hard means exist to secure compliance.

121 Increasingly intergovernmental organizations are trying to expand their power by turning soft unofficial standards into hard laws.⁽¹³⁴⁾ An example is the OECD Fiscal Affairs Committee's harmful tax practices initiative. The OECD's Fiscal Affairs Committee (FAC) is composed of civil servants representing national fiscal and revenue authorities. Ministers in charge of fiscal affairs ultimately endorse its recommendations, but do not scrutinize it as a parliament could. The process whereby the OECD FAC classified certain jurisdictions as tax havens occurred without consultation with national parliaments, political consultation or due process (i.e., in obtaining and assessing evidence and/or allowing the targeted countries to participate fully). The OECD Harmful Tax Competition process illustrates the attempted creation of laws without the scrutiny to which national laws are subject, the absence of any means whereby the targeted countries can participate meaningfully in the application of the laws. In addition, the OECD HTC process is designed to apply sanctions to small non-signatory states without any right of appeal to a tribunal on findings of fact or interpretation.⁽¹³⁵⁾

122 The OECD HTC initiative and the FATF initiative against non-cooperative countries suffer from the problem of opaque adoption procedures. The initiatives do not have the transparency and democratic processes a legislature uses in enacting bills. The means by which an act of a legislature is adopted may be complex and time-consuming. The lengthy procedures ensure that bills are open to scrutiny by many groups at several stages of the legislative process. The greater the controversy, the greater the publicity and public scrutiny. The rules and processes of intergovernmental organizations, such as the OECD, are less open and their sources are foreign. The remedy is more openness. First, the process should be open from the start of the law-making to all affected states. If that is not possible, then, another intergovernmental of more universal membership, such as the U.N., should undertake the task.

123 Public notification of draft rules is another step in achieving openness. Inviting and also considering comments and objections to the draft is an important aspect. Another element is notifying the jurisdictions of proposed rules. Affected persons that believe a draft rule does not adequately take their interests into account can then address elected representatives to advance their objections. Openness does not guarantee consensus. The drafting of rules is inherently a political process. In a democratic political system persons who make objections will sometimes win and sometimes lose in open political debate.

124 In the end the legitimacy and self-sustainability of international enforcement and particularly tax information exchange mechanisms will depend on the extent of democracy in their elaboration and implementation and whether taxpayers and other affected groups perceive them as having sufficiently fair procedures. The mechanisms most clearly at issue in the context of tax information exchange mechanisms are those providing that signatories may provide notice to taxpayers and an opportunity to participate (e.g., object in whole or part to a request) in the process. Jurisdictions wanting to maintain or establish a business and human rights friendly investment environment will develop the mechanisms that provide the fairness that their governments so often claim or require of other countries.