Matt Damsker

After months of consternation, Bermuda isn't on the so-called "black list" of tax havens compiled by the OECD (Organization for Economic Cooperation and Development). When the 29nation OECD council met in June in Paris, it approved Bermuda's letter of commitment promising to end or refrain from any practices that would place it among what the OECD considers harmful tax jurisdictions.

"As a result," Bermuda finance minister Eugene Cox told the press, "I am delighted to be able to say that Bermuda is not included in the OECD list of tax havens, and companies can continue to grow and plan for the future without any threat of coordinated defensive measures by the OECD." For Bermuda, the news affords some happy closure to an investigation by the OECD into tax avoidance regimes and business secrecy contained in its report "Harmful Tax Competition: An Emerging Global Issue."

Bermuda's letter echoed commitments from five other offshore domiciles--the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino (an enclave within Italy)--to avoid inclusion on a list of jurisdictions identified as places that offer laws "to be used by nonresidents to escape taxation" in their home countries.

The OECD black list could eventually be used as the basis for international sanctions or other punitive action against identified tax havens and private companies operating in them. The six letters pledge that by the end of 2005 harmful tax practices will be eliminated, that international standards for fair tax competition, transparency and disclosure will be adopted and that no new harmful tax regime will be imposed.

Specifically, Bermuda's letter promised to refrain from "introducing any new regime that would constitute a harmful tax practice under the OECD report." As for any existing regime related to financial and other services that currently does not constitute a harmful tax practice under the OECD report, Bermuda vowed not to modify the regime in such away that, after the modifications, it would constitute a harmful tax practice under the OECD report. It also promised to refrain from "strengthening or extending the scope of any existing measure that currently constitutes a harmful tax practice under the OECD report." There is also an "annex" to the letter spelling out in further detail how Bermuda would comply, but so far that annex hasn't been released to the press.

It's an open question whether such apparent vindication will have any influence on the bill now before the U.S. Congress, H.R. 4192, aimed at closing the alleged tax loophole enjoyed by Bermuda-based companies--mainly, Ace Ltd. and XL Capital Ltd.--which pay no tax on the growth of the reserves of their U.S. business that they reinsure via their Bermuda affiliates. This controversial measure seems unlikely to be voted on before the November election, but the clean bill of health granted Bermuda by the OECD takes a certain amount of wind out of the bill's sails.

And yet all is not sunny on the same front. The same week that Bermuda escaped OECD's wrath, it found itself in the crosshairs of another international report by the Financial Stability Forum, a group set up last year by the Group of Seven (G7) industrial nations. The report placed Bermuda in the "grade II" category, among nations that fell short in business practices and regulatory systems, along with Gibraltar, Barbados, Bahrain, Malta, and Monaco.

The report said this second group should be looked at by the International Monetary Fund. The ranking put Bermuda behind some of the Island's key competitors, such as Dublin, Hong Kong, and Jersey, but still ahead of the third and lowest rung, which also includes Bermuda's key competitors, such as Caymans, British Virgin Isles, Aruba, and Netherlands Antilles.

Bermuda's business and government leaders were quick to react with outrage. The Bermuda International Business Association (BIBA) said it was "compelled to question the methodology and potential level of subjectivity inherent in the Financial Stability Forum's survey." And finance minister Cox insisted in the House of Assembly that Bermuda did not deserve the grade II rating and has asked for an explanation. Some of the offshore domiciles suspect that the big countries conducting the ratings are operating partly out of fear of competition from smaller financial centers. For its part, the Financial Stability Forum has denied any suggestions that politics has played a role in the ranking.

"The publication of the listing... was based on a survey process that has been challenged by the Offshore Group of Banking Supervisors due, in part, to the largely subjective nature of the survey process," said Cox. Indeed, one insider on the island described the Financial Stability Forum's rankings as "something of a red herring. The process by which we were judged was the equivalent of reading a few magazine articles about Bermuda, then drawing conclusions."

If it's any comfort, though, it was recently been announced that Bermuda is not on the Group of Seven's Financial Action Task Force (FATF) which identifies offshore financial centers engaged in money laundering. The Cayman Islands and the Bahamas were among the 15 countries on that list.

COPYRIGHT 2000 Axon Group

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