The British Virgin Islands is stalling on signing a tax information exchange agreement with Australia because it is believed to be holding out for special consideration.

BVI would be the second offshore financial sector after Bermuda to sign an agreement, which Australia hopes to use to identify tax evaders.

Bermuda, described as the top tax haven for Australians, signed its agreement in November and last week passed enabling legislation in Parliament to allow the agreement to take effect. The bill was criticised because MPs had not been shown the agreement.

But the Sydney Morning Herald reported yesterday that Australia?s drive has been ?thrown into disarray? by BVI?s refusal.

The newspaper said BVI had been implicated in Australia?s biggest tax fraud investigation, Operation Wickenby.

Richard Hay, a tax lawyer with the international firm Stikeman Elliott, told the Sydney Morning Herald that the OECD project had ?been thrown into disarray?.

Australian officials believe the Virgin Islands is holding out for special consideration for its banking and shipping services, or to gain Australian technical assistance. But one official said: ?We?re not going to buy an agreement.?

Dozens of Australians set up trusts or trustee companies in the Virgin Islands on the recommendation of Philip Egglishaw, who figures in the Operation Wickenby investigation.

The US has clinched some information exchange agreements with Caribbean tax havens by offering sweeteners, such as tax deductibility for Americans travelling to those jurisdictions for work ?conventions?.

Although Australia is making some progress with recognised offshore tax havens, the more established financial centres are resisting. This year Switzerland chose to impose a 15 percent withholding tax on funds transferred out of the country ? as part of a European savings directive ? to avoid lifting secrecy laws.