“Havens can wait” by Jules E. Riego (October 5, 2009)

Business World (10/05/2009)

Early this year, much to the consternation of everyone, the Philippines was branded as an “uncooperative tax haven” and was placed on the “blacklist” of the Organization for Economic Cooperation and Development (OECD), along with Costa Rica, Malaysia, and Uruguay.

The list was drawn up by the G20 countries which are mostly developed countries and considered high tax jurisdictions.

It came as a complete surprise because other jurisdictions that are commonly known as tax havens like Isle of Man, Guernsey, Jersey, Bermuda, Macau, and Netherlands Antilles are nowhere on the list.

The G20 also came up with another list — the “grey list” — which includes countries that had agreed to improve their transparency policies but which have yet to implement them. Included here are Switzerland, British Virgin Islands, Cayman Islands, Belgium, Luxembourg, Liechtenstein and Singapore.

Surprised, Switzerland actually protested its inclusion in the list (even if everyone knows that it has one of the toughest bank secrecy laws in the world).

To be removed from the grey list, a country must have at least 12 tax information exchange agreements (TIEAs) with different countries. There is no set standard as to the quality of the TIEA; it seems that number is more important. BVI, Cayman Islands, Singapore and Luxembourg recently reached the so-called OECD “white list” when they were able to ink their twelfth TIEA last August.

What is a tax haven?
Unfortunately, there is no one common definition of a tax haven. The OECD simply laid down criteria that describe what a tax haven is, namely:

it practically imposes no tax or imposes a very low tax;

there is no transparency, or the country’s administrative practices prevent effective exchange of information on tax matters; and

it does not require companies to have genuine or substantial activity in their jurisdiction.

It does not help that each criterion is relative and subject to different interpretations. It is also unclear whether all three factors should be met before a jurisdiction may be considered as a tax haven, and yet the impression that one gets from the OECD grey list is that it is enough that you meet even just one of the criteria.

It seems, though, that transparency is the most important criterion since the Philippines was included in the grey list even if we have one of the highest effective tax rates in Asia, around 52% according to a World Bank study.

Why should the Philippines be concerned?
Like it or not, justified or not, we are on the OECD grey list. We were removed from the blacklist, but only provisionally, subject to our compliance with the internationally agreed tax standard.

This certainly does not speak well of the Philippines because we are now perceived as a jurisdiction that condones tax evasion, graft and corruption, and maybe even money-laundering.

Apart from this, no one knows what the sanctions will be if we do not comply with the internationally agreed tax standard.

It should also be noted, however, that there is now a move by the US to exclude financial institutions originating from tax havens or “international financial centers” from participating in their economy. The same is being done by Italy, Russia and Spain. The European Union has an even better approach; that is, it now disregards entities from tax havens if they are proven to be without substantial economic activity.

What measures have we taken?
This renewed focus against perceived tax havens has one benefit to us. Congress felt compelled to come up with a law that it hopes will persuade the OECD to permanently remove us from the grey list. House Bill 6330 (or the “Exchange of Information on Tax Matters Act of 2009”) is now with the House of Representatives Ways and Means Committee being chaired by Antique Rep. Exequiel B. Javier.

When enacted, HB 6330 will essentially empower the Commissioner of Internal Revenue to compel financial institutions to disclose financial information, including bank deposits of a specific taxpayer, upon the request for tax information from a foreign government pursuant to tax treaty to which the Philippines is a signatory. Under HB 6330, any bank officer who will willfully refuse to comply with the required information will be punished by a fine of not less than P50,000 but not more than P100,000 or by imprisonment of not less than two years but not more than five years.

The Joint Foreign Chambers (JFC) of the Philippines made the observation that the penalty appears to be a slap on the wrist, noting that the proposed penalty is nothing compared to losing a client who is maintaining P100 million of unexplained wealth in the bank. The JFC’s proposal is to increase the penalty and that the culpable bank itself should be fined and not just its officer or employee.

This bill, coupled with the multiplier effect of the required dozen TIEA per OECD-member country, would seem to choke the use of tax havens.

I used to think of the Bahamas and Mauritius as paradise vacation destinations and places where one can comfortably park his income. With these developments, I guess this is not the case anymore. Maybe these (tax) havens can wait.

Jules E. Riego is a tax principal of SGV & Co.