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A level playing field and the space for small states

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Abstract

While designing a project against tax competition, the Organisation for Economic Co-operation and Development has insisted on the establishment of a level playing field. The subjects of this project are predominantly small states with offshore financial centres and few alternatives available to achieve economic development. This paper interrogates the meaning embedded within the term ‘level playing field’ as used in several multilateral contexts, and most particularly in the debate over international tax competition. The conclusion reached is that a level playing field in the global political economy is a mirage with more substance for some states than for others. It also reflects the power asymmetries that remain between states. However, by introducing a greater emphasis on the level playing field as a plane of ‘fairness’, it may be possible to create a more equitable negotiating environment between large and small states.

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Notes

  1. NB — the initial OECD publication (Organisation for Economic Co-operation and Development 1998) used the phrase ‘harmful tax competition’. Conceding the argument that competition is not inherently harmful, the OECD softened the phrase to ‘harmful tax practices’ in its subsequent report (Organisation for Economic Co-operation and Development 2000).

  2. Robert Cox reminded us that ‘[t]heory is always for someone and for some purpose’. In much the same way, I argue that the meaning of the term ‘level playing field’ is qualified by the purposes and intentions of the speaker (Cox 1986: 207).

  3. But for the opposing viewpoint see Mendoza and Tesar (2005).

  4. For this OECD project see Organisation for Economic Co-operation and Development (2001b).

  5. This advantage derives from more than simply the corporate tax rate, which is treated by many as the representative measure for international tax competition. The differences in tax revenue owed by a firm also derive from differences in the legislative definitions of the tax base. For example, what qualifies as income, what forms of income are taxable and what credits or exclusions may be available to the firm.

  6. This is not to say that the underlying reality of banking regulation in Japan is fully compliant with the expectations held by foreign observers, see Walter (2006); and for similar situations of performative compliance in Indonesia, Malaysia, South Korea and Thailand, see Walter (2008).

  7. It is a situation that will change again as the global financial turmoil in 2008 results in yet another profound change in this league table.

  8. The word ‘expected’ is emphasized because tax revenue, as a percentage of gross domestic product, has not declined in recent years throughout most of the OECD according to the organization itself, see Organisation for Economic Co-operation and Development (2006b). For an analysis of OECD tax revenue data with respect to corporate taxation see Stewart and Webb (2006); research on international bank deposits and taxation includes Huizinga and Nielsen (2002), and Huizinga and Nicodème (2004).

  9. This author follows the analytical approach that governance, and in particular global governance, consists of rules, regulations, standards and best practices implemented by legislation to guide and control business, scientific and social conduct, see Scholte (2005: 140–1).

  10. Council Directive 2003/48/EC, 3 June 2004, Official Journal of the European Communities L series 157, 26 June 2003. This Directive involves the taxable interest on the savings of individual EU citizens, whereas the earlier Code of Conduct on Business Taxation is a voluntary measure to limit competition between Member States on corporate income tax rates.

  11. Both Hong Kong and Singapore are absent from the OECD tax competition project as well, for it had decided against including these two jurisdictions in its analysis. These decisions left a place for mobile capital to relocate, away from the oversight of both the EU Directive and the OECD project (Zagaris 2004b).

  12. For one analysis of the negotiations between Switzerland and the EU see Zagaris (2004a).

  13. This latter treaty, combined with similar agreements the US established with several Caribbean OFCs, might help to explain the ease with which the US could change its position regarding the OECD project in 2001. Quite simply, US domestic tax data collection needs, vis à vis offshore jurisdictions, had been satisfied through bilateral agreements. Consequently, a multilateral solution was no longer necessary. Regardless, this situation offers little solace to the smaller jurisdictions subject to US hegemonic influence, with or without a level playing field.

  14. The specific states listed by the OECD were Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, British Virgin Islands, Cook Islands, Dominica, Gibraltar, Grenada, Guernsey/Sark/Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, the Maldives, The Marshall Islands, Monaco, Montserrat, Nauru, the Netherlands Antilles, Niue, Panama, Samoa, Seychelles, St. Lucia, St. Kitts & Nevis, St. Vincent and the Grenadines, Tonga, Turks & Caicos, US Virgin Islands, Vanuatu. Absent from the OECD list were six jurisdictions that had made an advance commitment to eliminate their harmful tax practices, even if they otherwise met the OECD criteria used to determine a tax haven — Bermuda, Cayman Islands, Cyprus, Malta, Mauritius and San Marino (Organisation for Economic Co-operation and Development 2000: 17).

  15. This point of international law is also in jeopardy from the OECD Model Agreement on Exchange of Information on Tax Matters (OECD Model TIEA), see Spencer (2005b: 16–18).

  16. Further analysis of the US role in this case is contained in Vlcek (2006: Chapter 8).

  17. In fact, one conclusion in a report from the CPB Netherlands Bureau for Economic Policy Analysis was that ‘a somewhat rules-based unlevel playing field may be optimal’ among EU corporate income tax rates in order to satisfy the fiscal needs that emerge from national preferences (Appelman et al. 2003: 60, italics mine).

  18. For example, St. Vincent and the Grenadines first established the regulatory structure for an offshore financial centre in 1996. International pressure reduced the number of offshore banks to nil in 2002, while one offshore banking licence was later issued in 2004, see Vlcek (2007).

  19. The implications for small states from the legalization of those trade dispute procedures is analyzed by Moonhawk Kim. Kim concludes, in part, that it ‘has not leveled the playing field for less powerful, developing countries against more powerful, developed countries’ (Kim 2008: 658).

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Acknowledgements

The initial version for this paper was presented at Southern Voices and Global Order, University of Warwick, 7–9 July 2004. The present version has gone through a long gestation period and I must express my thanks to Eleni Tsingou, Candice Moore, Ben Kamis, and the editors and anonymous referees for their engagement with this argument and their support in its development. Any remaining fallacies of logic or belief are solely my responsibility.

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Vlcek, W. A level playing field and the space for small states. J Int Relat Dev 12, 115–136 (2009). https://doi.org/10.1057/jird.2009.3

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