The Organisation for Economic Cooperation and Development (OECD) drive to wipe out the advantages of tax havens hinges on a report produced and voted on at a OECD council meeting in April.

Titled "Harmful Tax competition: An Emerging Global Issue'' the report has sent tremors of worry throughout Bermuda's international business community.

They're worried that the OECD may eventually move to destroy the advantages Bermuda's businesses enjoy in being located on an Island where there is no corporate tax on profits. Bermuda also does not tax income from investments.

The OECD stated that the impetus for the campaign against tax havens was prompted by successful efforts to reduce double taxation among its members so as to increase the flow of cross-border trade.

"The OECD has spent considerable efforts to eliminate double taxation, which is an obstacle to cross-border activities, and is prepared to undertake similar efforts to curb harmful tax practices which have detrimental effects on world economic growth,'' an extract from the OECD communique on the report stated.

The efforts, coupled with the globalisation and the liberalisation of financial markets, have allowed the benefits of a freer flow of capital around the world.

"But it has also widened opportunities for tax evasion and avoidance,'' the OECD continued. "In this new environment, tax havens have thrived and some governments have adopted preferential tax regimes specifically targeted at attracting mobile activities. If nothing is done, governments may increasingly be forced to engage in competitive tax bidding to attract or retain mobile activities.'' The OECD estimates direct investment by the G7 in a number of Caribbean jurisdictions and South island states had increased five-fold to $200 billion in the ten years to 1994.

Until now members have acted independently to protect their tax bases. The OECD is calling for a more concerted effort.

"Developments within the G7, the EU, and the OECD and beyond suggest that the political climate is now ripe for a common approach against harmful tax practices,'' the communique stated.

The OECD identifies two main situations in which it would consider a country to be a tax haven and therefore subject to unstated measures against it.

The first targets will be countries which generally impose no or only nominal tax on income from financial and other service activities. Other targets will be countries with a system that specifically excludes the international sector from taxation.

Bermuda has taken succour from the fact that the OECD stated it was not targeting countries that collect significant taxes on income from individuals and corporations even though the tax rate is lower than that of its members.

The key for Bermuda is the exclusion seems to refer to countries that do not exempt international businesses from the taxes paid by businesses engaged in the local economy.

"Thus the Report is careful not to suggest that there is some general minimum effective tax rate on income below which a country would be considered to be engaging in harmful tax practices,'' the communique continued. "the focus of this Report is instead on tax havens and harmful preferential tax regimes.'' Bermuda is arguing it should be excluded from the OECD target list as the Island's local and international businesses pay essentially the same levels of taxes.

The communique goes on to make 19 recommendations on how the organisation will deal with addressing tax competition from other countries. The first step to implementing action was the decision to draw up a list of tax havens by next year based on the criteria outlined in the report.

After the hit list is made, the report recommends putting pressure on those blacklisted to impose taxes and provide financial information when required.

The report also recommends an end to tax treaties.

Key to Bermuda's effort will be to ensure it doesn't get on the list in the first place. The Island is due to submit its case to the OECD later this month.

The danger is that Bermuda gets classified as a jurisdiction with no or only nominal tax. Bermuda will also have to justify its tax position to the EU.

BUSINESS BUC