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Aiming at the wrong target?20/07/2001. Source: SJ Berwin. 
Moves on harmful tax competition by the OECD could affect offshore private equity fund structures. SJ Berwin analyses the latest developments in this saga. Tax havens are commonly used in private equity fund structures for legitimate commercial reasons. But recent international moves against "harmful tax competition" have put pressure on them to change their regimes.
Of these, the OECD's initiative appeared to be bearing most fruit. Its report - published just over a year ago - contained a list of 35 jurisdictions considered to be tax havens, and gave them until the end of this month to demonstrate compliance with the OECD's three principles: transparency, non-discrimination and effective exchange of information.
It appeared that at least some tax havens were taking the threat seriously. However, a spanner was thrown in the works when the US Treasury secretary said in May that ‘the US does not support efforts to dictate to any country what its own tax rates or tax system should be, and will not participate in any initiative to harmonise world tax systems'. In fact, the OECD says that its underlying objective is not tax harmonization. Its objective is the effective exchange of information and a climate of transparency.
The OECD remains positive, saying that the US change of heart will have little effect on its initiative (notwithstanding its principle of unanimity), because it is individual member countries and not the OECD that would impose sanctions. But even if some OECD countries went ahead and imposed sanctions on their own, the initiative is weakened - particularly as Switzerland and Luxembourg have stated that they too will not participate.
The way forward is therefore unclear. Some have commented that the 31 July deadline was beginning to look unrealistic anyway, and it would be sensible to extend the deadline while exploring other possibilities; as would adopting a narrower focus that concentrates on the European Union. Indeed, the European Commission itself is continuing its drive against certain corporate tax schemes, which it denounced last week as possible examples of illegal state aid.
Interestingly, an emerging international trend is discernible - successful businesses are increasingly focusing on earning profits in locations giving high post tax returns, and more countries are using tax systems as a way of encouraging foreign investment. You only need to look at Ireland, where dramatic reductions in tax have fuelled the economic boom of recent years. Perhaps international bodies such as the OECD will be driven to the conclusion that tax havens have a role in the world economy and that initiatives should target tax evasion rather than legitimate competition.
This is an extract from a weekly bulletin produced by SJ Berwin providing an update of legal and tax developments that relevant to the European private equity community. If you would like to be added to their mailing list please send an e-mail to sjbnetworks@sjberwin.com
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Jonathan Blake or Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com
Copyright © 2001 SJ Berwin
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