One of the things to which the Reagan administration needs to wake up is the fact that its new tax reform is going to turn the U.S. into a tax haven. A top marginal rate of 30% or below will look like a veritable engraved invitation to those who work hard for their money to move it into the U.S., where it won't be taxed at the confiscatory rates prevalent in places like Europe and the more dismal parts of the Third World. This is extremely good for an America that wants and needs all the savings and investment it can get. But a plot is afoot to deny America these benefits - a plot which the Reagan administration has the power to stymie, if it starts to act. The plot is unfolding in the Organization for Economic Cooperation and Development. This normally benign organization has for several years now been drafting - in secret - a convention that would open the door to foreign tax collectors meddling in each others' countries.
... So the
U.S. collaborated in the OECD's efforts, hoping to make things easier for
its tax collectors. Now the shoe is being shifted to the other foot,
and the cash is going to be flowing - has already been flowing - to America.
It would be one thing if the convention under discussion were aimed solely
at stopping the kind of criminal tax evasion we all abhor. But the
thing for the U.S. to understand is something Europeans have understood
for years: Not only are tax rates high in Europe, but tax authorities are
often politically motivated and corrupt. So tax havens can emerge
as more than the market place's answer to onerous imposts.
They can be seen, in many cases, as redoubts where an individual
can escape real fiscal injustice. If the OECD convention is allowed
to go forward, the U.S. will have all sorts of tax collectors going on
fiscal fishing expeditions in the U.S. itself.
THE WALL STREET JOURNAL EUROPE
May 9, 1986
Not to be bested on its own
turf of extra-constitutional lawmaking by unelected technocrats, the United
Nations promptly followed suit. In December 1983, a U.N. group of
experts presented a corresponding, detailed set of "Guidelines for International
Cooperation to Combat International Tax Evasion and Avoidance."
Between these two events came an even more significant coup. Members of the Committee of Experts on Tax Law (known by the French acronym CJ-FI, not to be confused with the CJ-IT, which is secretly preparing a convention on insider trading) convinced the Council of Europe to give them the mandate to draft a "multilateral convention on mutual assistance to prevent international tax avoidance and evasion." After years of working in utmost secrecy, the CJ-Fl prided itself on offering the under-administered world a convention that goes beyond simple methods of preventing international tax avoidance and evasion. This convention provides for "extensive cooperation between tax authorities in administrative matters." What we have here is not merely arranging for help in prosecuting crimes: what we have in practice is a call for "automatic" and ''spontaneous" exchanges of taxpayer data, through the most effective means available, including "telex, telephone and exchange of magnetic tapes." It may also involve "measures taken by judicial bodies," for example, the seizure of assets, prosecution and police interventions within and beyond national borders.
Only a fey months ago the involved governments received the final version of this groupís innocent-sounding "Draft Convention on Mutual Administrative Assistance in Tax Matters." Dubbed the "INTERFIPOL Convention" - a play on Interpol, the international police force - this tightly guarded fruit of years of clandestine legislative work is scheduled to be adopted in September simultaneously by the OECD and the Council of Europe. It will then be "opened for signature" by member countries, whose parliaments may then rubber-stamp it to preserve the appearance of constitutional lawmaking.
The draft obliges signatory states to render assistance on "(a) exchange of information, including simultaneous tax examinations and participation in the tax examinations abroad; (b) assistance in recovery, including measures of conservancy; and (c) service of documents." This blanket obligation - which would mean a further bloating of fiscal bureaucracies - covers all tax matters and is not limited to suspected cases of tax fraud, tax evasion or even mere tax avoidance.
Again, this goes beyond simply setting up a framework for pursuing actual criminals. The 278-paragraph explanatory report specifically leaves that to other conventions, saying "action by judicial bodies carried out pursuant to criminal law and intended to punish criminal offenses committed in the tax fields does not . . . fall within the scope of application of the present instrument." Thus whatís going on here is a general onslaught on the fundamental principles of sovereignty and individual rights. The sole justification for this is offered in the preamble. There it is stated "that the development of international movement of persons, capital, goods and services, although highly beneficial in itself, has increased the possibilities of tax avoidance and evasion and therefore requires increasing cooperation among tax authorities."
The INTERFIPOL Convention provides that in some cases "contracting states shall automatically exchange the information." These cases include tax assessment and collection, as well as prosecution before an administrative authority or the initiation of prosecution before a judicial body. Moreover, the convention requires member states to provide upon request any information in these areas concerning particular people or particular transactions. On top of this, if the tax files do not yield the appropriate requested information, then the nation receiving the request is obligated to "take all relevant measures to provide the applicant state with the information requested."
But thatís not all. The proposed convention even covers the transfer of information that had not been requested. Under its terms a nation would be obligated to send information if it believes that the other state may be losing tax money, that someone is using its laws to avoid paying taxes in his own country and thus increase the tax burden there, that business has been conducted in a way to take advantage of tax laws, or that artificial transfers of profits within groups or enterprises are being made to save on taxes.
Finally, the document virtually eliminates national borders. Upon request, one nation may allow tax authorities of another nation to be present during any tax investigation. Lest the ultimate aim of all this be missed, the document's drafters spell it out unequivocably: Under the terms of the agreement, a state must "take the necessary steps to recover tax claims" of the state requesting help "as if they were its own claims" (my italics).
The INTERFIPOL Convention also gives binding definitions of various terms, even including under the category of taxes "compulsory social security contributions payable to general government or to social security institutions established under public law." Yet it remains tellingly and purposefully silent on the key terms "tax avoidance" and "tax evasion," saying only that both require "increasing cooperation among tax authorities." It is but a short step from this to an invitation to "legally" discriminate, pressure and subdue any businessman who has the bad luck to fall into disfavor with the government of the day. For there appear to be no limits and no redress mechanisms to prevent a witch hunt or fishing expedition against people engaged in perfectly legitimate international commerce.
The convention's authors
didnít completely forget their basic obligation toward their taxpayers,
which is to protect them against foreign taxations in return for their
tax payments. Accordingly, the preamble calls for states "to protect
the legitimate interests of taxpayers, including appropriate protection
against discrimination and double taxation." There are even articles
purportedly serving that noble aim. At least, they carry the assuring
titles: "Protection of Persons and Limits to the Obligation to Provide
Assistance" and "Secrecy." But on closer analysis, these
safeguards turn out to be fakes, for they give little more than
lip service to the principles invoked. They fail to mask the police
and fiscal mentality that gave birth to this assault on enterprising
humans in the first place.
Fortunately, all this has not gone entirely unnoticed; it's receiving what is doubtless unwanted attention in the more enlightened circles of OECD member countries. True, the White House representative to the OECD last July still didn't take kindly to the Swiss governmentís commendable side-tracking of the ill-advised OECD ''recommendation" to lift banking secrecy for tax authorities. But in the wake of some resounding popular votes, the Swiss government seems more than ever intent to speak up for the embattled taxpayers. The governments of Ireland, Italy, Liechtenstein, Luxembourg and Portugal have already voiced their support for opposing this convention. Will other principled parliamentarians and government leaders also rally around in time to force an end to this alarming piece of self-serving, bureaucratic lawmaking?
Mr. Keller is secretary of the Swiss Investors Protection Association
THE WALL STREET JOURNAL EUROPE
May 9, 1986
ago we had a particularly pleasant lunch in Paris at he home of the American
ambassador to the Organization for Economic Cooperation and Development.
One thing that made it so was the enthusiasm the U.S. mission is bringing
to awakening the OECD to supply-side approaches to European problems.
Suddenly, the OECD's reports seem full of talk about tax cuts and free
So it's all the more reason to view with alarm the report, appearing in he adjacent columns, of a campaign against tax avoidance thus is quietly gathering steam within the OECD bureaucracy. The idea is not merely or governments to cooperate in going after real tax criminals who fraudulently evade imposts. The OECD seems to want to target individuals who only seek to avoid taxes by working, banking or investing in low-tax countries.
The net result of a campaign against tax avoidance would be to subject corporations and individuals to endless investigation and harassment by high-tax states, whose confiscatory fiscal nets millions seek to avoid by entirely legal means. This is particularly true in Europe, where tax rates vary so widely. The author of the adjacent-article, H.Anton Keller, has a bird's eye view of this problem from his perch in Switzerland. Lots of people work, live, or bank in Switzerland to take advantage of its favorable fiscal climate.
Switzerland is an interesting case. It helps foreign governments go after suspects and evidence in Switzerland, if the individuals are suspected of doing things that both Switzerland and the foreign government deem to be criminal. But Switzerland doesn't help foreign governments go after information and individuals in Switzerland if no crime is suspected or alleged under Swiss law. What the OECD is hatching is a set of principles that would allow governments to pry even when no crime is being investigated.
Proponents of administrative cooperation in tax matters argue that honest earnings wouldn't be jeopardized. But that assurance is subject to some considerable doubt. The agenda here is to end the perfectly legal practice of tax avoidance, and it's distressing that Switzerland is practically alone in sounding the alarm. The problem that confronts the OECD member countries is not that governments are chary of sharing tax information. It's that many of them - France, Italy, Ireland, Belgium, the Netherlands, Denmark, Sweden, to name a few - have tax rate schedules that extract outrageously high percentages of earnings above certain levels: thereby discouraging work effort and encouraging avoidance. The way for the OECD to help is not to work at expanding government regulation but to press on with the supply-side case for tax reform.
WALL STREET JOURNAL EUROPE
July 11, 1986
... When we suggest the OECD
is operating in secret on this [INTERFIPOL]
tax convention, we don't mean secrecy in the benign sense. We mean
secrecy in the fundamental sense of anti-democratic behavior that governments
turn to when they want to do something behind the backs of the voters.
To be fair here, a lot of the blame rests with the member governments, including the U.S., whose State Department hasn't - and won't - recognize the blunder that's involved in this tax convention. That won't be apparent until the document hits the U.S. political level, namely the White House or the Congress where there are people who understand about taxes. Then there'll be a flap and the funding of the OECD itself will come up in the discussion. The thing will probably drag on for a few months or weeks. But the momentum that has been built up within the OECD and the State Department, which have invested five years of secret work on the treaty, will likely carry the day. And one day the American people will wake up with an Italian, say, or a Greek or French tax collector poking through their bank accounts.
WALL STREET JOURNAL EUROPE
August 1, 1986
... First is the violation
of the principle of tax secrecy. ... The second flaw is that the [INTERFIPOL]
convention gives too much power to the state. ...
Next is what the [Swiss] statement calls "the absence of essential legal institutions." ... Fourth, the professional organizations object to the multilaleral character of the convention, which they say wouldn't work in the absence of "extensive legal harmonization."
... From such sound advice it follows quickly that this ill-advised convention deserves to be stopped cold. We'd have tought the Reagan administration would be taking the lead, particularly as the U.S. is about to pass a tax bill that will make it a major haven from wrongful and excessive taxation. ...
WALL STREET JOURNAL EUROPE
December 3, 1986
. . . The [INTERFIPOL]
convention empowers tax officials in all the signatory states to go on
fishing expeditions in other countries - even where no crime has been alleged.
Consideration of the tax convention had been delayed until today for technical
reasons. In between, however, the International Chamber of Commerce
sounded the alarm, and it would be a prudent move were the ministers to
delay action on the proposed convention until a later date. In the
time gained, it would pay all Council of Europe members and those of the
OECD, particularly the U.S., to take a hard new look at the treaty - a
relic that should have been disposed of years ago.
The OECD proposal would grant extensive new powers to state tax officials, giving them the right to request information on an individual or business firm that merely chose to bank, invest or work in an area where the tax laws were more favorable. This is not the same as tax fraud, which even states like Switzerland recognize as a crime and pierce their banking secrecy law for. The legal and economic nightmares such a pact would unleash by allowing state officials to poke into anyone's finances are enormous. ...
It's not only big businessmen and Swiss bankers who have reservations. Even high-tax countries like Britain and France reportedly are having second thoughts about subjecting their citizens to the grasp of tax collectors of Greece, say, or Germany. ...
According to article 30, no other reservation may be made aside from those listed. So governments are going to have to take it or leave it as the document stands. With any chance for moderation eliminated by the document itself, what is left is a proposal too rigid and regulatory even for Europe's tax-happy governments.
WALL STREET JOURNAL EUROPE
January 8, 1987
... Tax avoidance is one
of those phrases that has a negative sound. The concept is particularly
irksome to socialist governments that enforce high marginal tax rates and
want to trap potential taxpayers. But avoiding taxes is perfectly
legal, if fraud isn't involved. Tax avoidance is actually a fundamental
process of any market system. It is the process by which the participants
in a market economy, be they individuals or corporations, go price-shopping
for government services. No one has a greater stake than the U.S.
in ensuring that this process be allowed to continue throughout the Free
World - particularly now that the U.S. has enacted the lowest marginal
rates in the OECD.
Word that the Reagan administration is fumbling the ball comes in the form of a U.S. State Department telegram. ... The proposed [INTERFIPOL] treaty covers three areas of mutual assistance: the exchange of information, the service of documents, and the collection of actual taxes. The U.S. Treasury, the Shultz cable suggests, is nursing reservations on the latter two areas of potential assistance - but not, it appears, over any effort to protect the right of Europeans and Americans legally to avoid taxes. ...
It is a principle of the laws of extradition that one country will not extradite to another for something that is a crime in only one of them. A parallel argument could be made that the U.S., say, need not serve up to the tax collectors of foreign powers funds the U.S. itself wouldn't tax. Europe has long understood this. ... The energy directed at this effort, in all countries, would be far better spent addressing the real root problem here - high marginal tax rates in Europe, arbitrary and politically motivated collection of taxes in some countries, and unjust exchange controls that cause so many people to try to shelter their money in other jurisdictions. When these problems are addressed the OECD's treaty won't be needed.