That is why the Islands are perceived potentially to their detriment as centres of

That is why the Islands are perceived, potentially to their detriment, as centres of tax evasion rather than successful low- tax economies in the Hong Kong or Singapore mould.Where will the OECD inquiry lead? It is far too early to say, but the global forces driving taxes on savings down towards zero are extremely powerful. Secondly, pensions are all fully funded and the islands enjoy full employment, so there is no need for a huge social security budget. There are three main reasons for this: the islanders have run their affairs extremely prudently in the past, so that taxpayers are not lumbered, as they are in the UK, with a debt interest burden. The really interesting question to ask about any tax jurisdiction is whether it is engaging in fair or unfair competition Low tax rates do not constitute unfair competition. Helping people in other jurisdictions to evade tax, or outright money laundering, does.Do the Channel Islands, for example, engage in unfair competition? Certainly their tax rates are much lower than in the UK, but this is because public spending takes a much lower share of GDP. That line of thinking has long governed the tax treatment of pensions. More recently, we have witnessed the invention of new savings instruments such as PEPs and Tessas, which offer tax-exempt savings opportunities.So it is far from clear that the authorities, who have been busy inventing tax havens inside their own jurisdiction, are in a strong position to attack the tax havens in other jurisdictions.

For there is another respectable strand of tax theory which says the returns on savings (out of income which has already been taxed) should not be taxed at all. If you want to avoid tax by getting paid interest gross and not declaring the income, you can achieve this result as easily by opening a bank account in Germany as in Guernsey.Global industries, like financial services, which do not have to be close to their customers, find it very attractive to locate themselves in these low-tax jurisdictions, and finance ministries in other jurisdictions are becoming increasingly concerned about the resulting revenue loss.However it must be said that the official word is somewhat schizophrenic on this issue. It is incumbent on the non-resident to declare the income from another jurisdiction in his or her own jurisdiction – and there are many large and respectable countries that do not apply withholding taxes to non-residents. This laudable concern for tax neutrality also fits in very well with the natural desire of finance ministries around the world to get in revenue from every possible source.

SERB FORCES overran the last stronghold of the rebel Kosovo Liberation Army (KLA) at Junik yesterday, in what appeared to be the culmination of a military offensive launched last month against ethnic Albanian separatists. Junik, near the border with Albania, was the organisational, logistical and weapons distribution centre for the KLA, which is fighting for independence from Serbia.
The Yugoslav news agency Tanjug announced the fall of Junik, 50 miles west of the regional capital Pristina, after almost two weeks under siege. So it is not at all surprising that the OECD has, with their blessing, launched an inquiry into “harmful tax competition” and is looking particularly closely at the so-called tax havens.There is no official definition of a tax haven, though the large accounting firms produce lists of countries which have two key characteristics: low rates of tax on residents and a willingness to pay dividends and interest to non-residents free of tax Nothing wrong with that. Lower tax rates thus lead to higher tax revenue – until competing jurisdictions react by cutting their own rates.Hoping to get an unfair share of the world supply of savings by cutting tax rates on savings is a bit like standing up at an all-seater football match. You’ll get a good view for a while, but if you persist eventually everybody else stands up and all are worse off – same view, aching feet.Tax competition between jurisdictions has been driving down tax rates on capital around the world from the early 1980s. The two most important taxes on the returns to capital are corporation tax, which taxes profits, and the income tax which bears on dividends and interest.International organisations, such as the European Commission and the OECD, worry about the loss of revenue from these taxes because the lower the taxes on capital income, the higher the taxes have to be on employment and consumption.This concern of the EU and the OECD reflects a very respectable strand in tax thinking: it is better to tax many things lightly than a few things heavily owing to the distortion to economic activity being less.