Many Offshore Tax Havens
To Come To An End Soon
Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and San Marino give up tax haven status.
Six offshore locations popular as tax havens in the United States and Europe have promised within five years to end the practices that gave them that reputation.
Treasury Secretary Lawrence Summers called the announcements an "important milestone" in the international effort to curb use of offshore subsidiaries, bank accounts and other arrangements to avoid taxes.
"In today's global economy, it is vital that we put an end to international tax practices that encourage tax evasion and im- proper tax avoidance and that distort capital flows," Summers said in a statement Monday.
The commitments from Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and San Marino - an enclave within Italy - came in letters to the 29-nation Organization for Economic Cooperation and Development, a Paris-based body of developed countries that next week is expected to release a list of jurisdictions iden- tified as places that offer laws "to be used by nonresidents to escape taxation" in their home countries.
This list could eventually be used as the basis for international sanctions or other punitive action against identified tax havens and private companies operating there. The commitments mean these six countries won't be on that list - and Bermuda and the Cayman Islands are considered two of the "most notorious" tax havens worldwide, a senior treasury official said.
Each of the six letters pledges 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.
"The government of Bermuda shares the concerns of the OECD about the global effects of harmful tax competition and would like to associate itself with that work," wrote Bermuda Deputy Premier C. Eugene Cox to top OECD officials.
Due to their secretive nature, there are no firm estimates of U.S. tax losses caused by offshore havens. Britain estimated recently that it loses about $1.6 billion a year, and much con- cern has been raised about the $500 billion deposited by foreign financial institutions in the Cayman Islands.
Bermuda, which has no income tax, has figured prominently in several recent tax controversies, including a decision last year by the Tax Court that United Parcel Service's creation of a subsidiary there to insure packages amounted to a "sham trans- action" intended to avoid U.S. taxes. UPS was ordered to pay millions of dollars in back taxes and penalties.
More recently, some U.S. insurance companies have begun trans- ferring investment earnings to Bermuda-based operations that offer "reinsurance" services - thus avoiding the 35 percent federal corporate income tax and possibly state taxes as well. Reps. Richard Neal, D-Mass., and Nancy Johnson, R-Conn., have introduced legislation in Congress aimed at halting that practice.
"The company is simply moving money from one pocket to another pocket within the same corporate entity," Neal said in a recent House floor speech. "If we do not stop this practice, then other U.S. companies will be forced to relocate to Bermuda, or be bought by a Bermuda-based parent, in order to stay competitive."

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