Pacific Legal Network Publishes Article: The Pacific Islands Region: Being on the OECD (Tax Havens) Grey List

These countries are:

a)??? the Cook Islands;
b)??? the Independent State of Samoa;
c)??? the Republic of Vanuatu;
d)??? the Republic of Nauru;
e)??? Niue; and
f)???? the Republic of the Marshall Islands, (together, the Grey List Jurisdictions).

Prior to being placed on the grey list, the Marshall Islands, Nauru and Vanuatu were on the OECD black list.? This was due to their failure to give requisite commitments to the implementation of international tax standards by the OECD deadline of early 2002.? The Cook Islands, Niue and Samoa made their commitments ahead of the deadline, resulting in their inclusion on the grey list.?? Once Nauru and Vanuatu made their commitments in 2003 and the Marshall Islands in 2007, they were removed from the black list and positioned onto the grey list.

The Cook Islands, Samoa and Vanuatu currently have active offshore financial centres, allowing various entities to be established in these jurisdictions, which are prohibited from carrying on business in the jurisdiction and do not pay any taxes in the jurisdiction.? The legislation governing these entities, however, contains strict secrecy provisions meaning that details of the beneficial owners, the transactions engaged in and the general affairs of the entity cannot be identified.? Information regarding the ownership of these entities is not publicly available and consent must be obtained from a director or member of such an entity to conduct a search of such an entity.? It is generally these secrecy provisions that the OECD and the Major Players wish to circumvent through the implementation of mechanisms for transparency and exchange of information, for example through Tax Information Exchange Agreements (TIEAs).

Niue, Nauru and the Marshall Islands have all largely closed down their offshore financial centres.? The demise of these offshore financial centres tangibly highlights the impact the tightening of regulations, the associated ?stigma? of being labelled a tax haven and the effect that increased commitments required of jurisdictions considered to be tax havens is having on some of the Pacific Island jurisdictions.?

Implications for the Pacific Islands

The difficulty that the Pacific Island Grey List Jurisdictions currently face is that in order to move to the white list and beyond the tax haven label, they must begin entering into TIEAs.? To date, neither Vanuatu, Samoa, Nauru or Niue has entered into any TIEA.? The Cook Islands and the Marshall Islands have entered into one TIEA each (1).

Unlike other former tax haven nations such as the Isle of Man, Jersey, the Cayman Islands and the British Virgin Islands (2), the Pacific Island jurisdictions do not have long-established economic centres, nor do they necessarily have the political backing that the aforementioned countries do.? It remains to be seen whether the Pacific Island jurisdictions will have the diplomatic force and clout to engage with enough white list nations in order to meet the required number of TIEAs and be relieved of their tax haven tag.? It is also arguable that some jurisdictions may wish to hang onto the ?perceived? economic benefits that their offshore financial industry in its current form affords them. (3)

The Pacific Islands have in the past stepped up to the plate when required by the international community.? As an example, most Pacific Island jurisdictions now have anti-money laundering and counter-terrorist financing regimes in place.? These laws apply to both local and offshore entities and to the extent provided for, override any secrecy provisions that exist in the jurisdiction.

Additionally, the Cook Islands, Samoa and Vanuatu have all successfully cleaned up their international banking industries through the amendment of legislation to require international banks to maintain a physical presence in the jurisdiction.?

An avenue that may be more accessible for the Pacific Island Grey List Jurisdictions is the example set by the Cayman Islands in adopting unilateral legislation permitting the exchange of information.? This may be a more time and cost effective way for the Pacific Island Grey List Jurisdictions to meet the OECD International Tax Standard.

As mentioned previously, the OECD has stated that a good indication of progress for the purposes of being included on the white list, is the entering into of 12 TIEAs.? Notably, all white list countries have thus far entered into the requisite 12 TIEAs.? The OECD, however, has also stated that the entry into 12 TIEAs is not the ?exclusive? indicator of progress.

As at August 14 2009, the Cayman Islands had entered into the requisite number of TIEAs and became a white list jurisdiction.? In addition to the TIEAs, however, the Cayman Islands has enacted legislation that allows it to exchange information unilaterally, identifying 12 countries with which it is prepared to exchange such information. (4)?? The OECD is currently reviewing this legislation and whether this method of information exchange adequately addresses the OECD International Tax Standard. (5)