The first meeting of the working group set up by the Organisation for Economic Co-operation and Development -- OECD -- took place in London this week to try to clarify the position of so-called tax havens and potentially harmful tax practices.

At this meeting the tax havens tried to remove the dual threats of deadline and sanctions that the OECD is seeking to impose on them if they do not produce a political commitment to comply with recommended tax practices.

Bermuda has already given an advance commitment in writing to the OECD to adhere to its principles of fair tax competition and transparency. A spokesman for the Island's Finance Ministry said Bermuda continued to monitor the ongoing situation closely and carefully to ensure the Island's position remained advantageous.

Having already made its commitment, and not being included in the OECD's "tax haven'' list, the Bermuda government does not feel a need to attend the current series of meetings which began in Barbados.

The working group was developed from the Barbados meeting. But careful scrutiny of the developing situation with regard to other offshore jurisdictions is required to make sure Bermuda's commitments do not remove its competitive edge in the offshore financial world.

The OECD seeks political commitment from low or no tax jurisdictions to try to eliminate what the larger countries view as unfair tax competition. Since the impetus for change is coming from the larger and more powerful member countries of the OECD, observers have commented that it is unlikely that they will withdraw their demands for what they see as changes towards more equitable international tax regimes. And the OECD certainly gave no indication of backing down at the London meeting.

Following a review by the OECD of a large number of offshore financial centres the organisation warned them that, unless they committed to amending any tax practices judged by the review to be harmful, they could face international sanctions.

The sanctions could include cancellation of international treaties or the imposition of withholding tax on companies doing business in those jurisdictions. These and other sanctions could have severely damaging economic effects on any small jurisdiction that is largely dependent on international finance for its income.

The Bermuda government, along with the governments of the Cayman Islands, Cyprus, Malta, Mauritius and San Marino, sent an advance letter of commitment to adherence to the OECD principles in May last year. Since then the Isle of Man and the Netherland Antilles have also committed in writing to the OECD.

Bermuda's letter, from Finance Minister Eugene Cox, stated: "Bermuda hereby commits to the principles of the OECD's report `Harmful Tax Competition: an Emerging Global Issue.' In fulfillment of this commitment the government of Bermuda undertakes to implement such measures as are necessary to eliminate any harmful aspects of Bermuda's regimes that relate to financial and other services.'' On July 7 last year Mr. Cox explained to the House of Assembly that an annex to the letter spelled out the commitment in three areas: effective exchange of information; transparency in business; substantial activity in respect of international businesses established in Bermuda.

He said that with regard to the first issue Government had committed to adopting further legal mechanisms, similar to the 1986 tax information exchange agreement between Bermuda and the US, that allowed tax information to be exchanged with other jurisdictions in a more timely and effective manner.

It would also adopt or enhance legislation that allowed Bermuda's regulatory bodies to exchange information relevant to tax cases, including information on beneficial ownership and bank information, and continue to permit on-site inspection by representatives of other tax authorities.

Island monitors OECD talks With regard to transparency he said the commitment was to continue to support legal mechanisms that provided access to information about beneficial owners of Bermuda entities. Government will also introduce or amend company legislation by 2003 to require the filing or auditing of international company accounts and access to accounts by appropriate Bermuda authorities.

On the issue of substantial activity Government will continue to apply the same regulations and taxes to both local and international entities.

With regard to the controversial issue of protectionism, as embodied in the 60/40 legislation, the minister said the government was committed to allowing international companies to participate in previously sheltered sectors of the economy, but subject to appropriate considerations for small business and/or considerations of a strategic or national concern.

He explained that a joint government and private sector committee had been established to review this issue and would report by June this year. Adopted recommendations relating to the finance sector will be implemented by December 2003 and for other sectors of the economy by December 2005.

Eugene Cox