Dr. Gilbert Morris, principal of the Landfall Centre has claimed vindication over the Centre’s argument that forced changes in the country’s financial services legislation would not pass legal muster.  In 1999, The Landfall Centre argued that the tranche of new financial services legislation would not survive legal challenge.  This was part of an argument by the Landfall Centre that because The Bahamas is a small nation-state is no reason to capitulate without a thoughtful strategy based on law.  Last week, the American Internal Revenue Service (IRS) suffered defeat in the US courts – its third court defeat in the space of two weeks – in a case involving alleged use of abusive tax shelters.

A report on the website Tax-News.com said that in the case in question, the IRS was ordered earlier this week by Judge Stefan R. Underhill of the United States District Court of Connecticut to refund TIFD III-E Inc, a subsidiary of General Electric Corp., more than $62 million.

At the heart of the case was a complex set of transactions involving three GE subsidiaries which formed a partnership, Castle Harbour, in 1993, to which GE contributed a number of aircraft in addition to cash and stock worth more than $500 million in total.

The partnership’s three shareholders, of which TIFD III-E was one, then sold their stake to two Dutch banks and for tax purposes, the subsidiary's income was allocated to the banks, which did not pay US income taxes.

Judge Underhill disagreed that the transactions had no economic substance, as the Dutch banks had invested in Castle Harbour, and observed, “The economic reality of such a transaction is hard to dispute.” However, he also acknowledged that one of GE’s principle motives was avoidance of tax.

“In short, the transaction, though it sheltered a great deal of income from taxes, was legally permissible,” he wrote in his judgement.

However, he added: “Under such circumstances, the IRS should address its concerns to those who write the tax laws.”

The IRS was recently ordered by judges to pay $82.8 million and $57 million in tax refunds to Coltec Industries and Black & Decker respectively after similar abusive tax shelter arguments were rejected. The IRS has not indicated whether it will appeal any of the decisions.

In 2000, the Landfall Centre published an article in Tax Notes International in Washington DC, in which was said the following concerning the legal side of the financial services debate:

“In Financial Clearing Corporation v. The Attorney General (In the Bahamas Supreme Court, Common Law Side No.232 of 2001) Madam Justice Allen over-ruled certain sections of the Financial Intelligence Unit Act 2000, saying in essence: The FIU was not empowered by virtue of separation of powers to order banks to produce private information without a court order. The learned justice did not agree with counsel however that a bank account was part of the ‘intimate sphere’ of the person to be protected by law. However, in the months to come, I believe - respectfully - she will be shown to have been in error on this point. (See: Schreiber v. Canada (Attorney General) [1998] 1 S.C.R) The point is that, already, the laws were failing constitutional challenges.

“For those persons who suspect decisions of the Bahamas Supreme Court and do not believe Bahamians are capable of being the first to be right, courts in Canada, New Zealand, Australia and Bermuda have hammered Attorneys General departments on almost every aspect of tax competition and money laundering laws in the last six months. Months ago, The Landfall Centre suggested that lawyer/client privilege would not survive in the current legislation - particularly sections 14 and 44 of the Financial Transaction Act 2000. These sections, amongst others, put lawyers in direct conflict with their obligations under the Bahamas Bar Regulations insofar as the protections of their client's confidentiality is concerned.

“In Federation of Law Societies of Canada v. Attorney General of Canada and The Law Society of British Columbia v. Attorney General of Canada, 2001 BCSC 1593, the Canadian courts demolished the government's position by dis-applying the sections of their Acts which compelled lawyers to reveal client information or allowed for their offices to be inspected. In Bermuda the Supreme Court in Re an Application by Braswell and Others ITLR (2000) rejected the government's position that it could interfere with lawyer/client privilege by declaring the privilege not merely a right, but a fundamental human right.

“Lawyers who attended a meeting in Nassau with Lord Styen of the House of Lords earlier this year (2/02) will recall his proposition that in applying laws, courts must give governments room to operate, and must not define the law so narrowly as to prevent the government from achieving reasonable ends. Many lawyers left that meeting with the impression that any right given under a constitution must be balanced by the objectives of the government in passing the law. However, only a few weeks ago, the House of Lords put the matter right in law, advancing an argument long put by Mr. Maurice Glinton: ‘Legal and Professional Privilege does not involve…a balancing of interests. It is absolute and is based not merely upon the general right to privacy but also upon the right of access to justice…’ (See: Regina v Special Commissioner and Another, Ex P Morgan Grenfell & Co Ltd (2002)). This is a final judgment, which conflicts with a host of anti-money laundering/tax competition legislation that was enacted in fundamental disregard for constitutional obligations.

“We must wonder at implementing that which others design for their own purposes, whilst ignoring our better instincts and home-grown ideas.

“The effort to rationalize financial services provision does not end on the legal side.  There is a move emerging in the US Senate, which will move into high gear with the Bush re-election dealing with the OECD.  As our colleague Dr. Richard Rahn – former Reagan Chairman of the White House Economic Council – said ‘The OECD was originally created by the developed countries to collect and disseminate statistical data and to promote pro-growth, free market economic polices. However, in recent years, France and her allies have been using the OECD's Fiscal Affairs Committee to promote their tax harmonization and anti-tax competition agenda. The U.S. economy, as well as the economies of many other low tax rate nations, could be severely damaged were the OECD's Fiscal Affairs Committee to succeed in its anti-tax competition agenda. Even worse, much of the world's population would see its standards of living fall if the high tax advocates succeeded’.

“Dr. Rahn is correct. And in response to 3 years of strategic positioning by more than 30 public policy organizations (of which the Landfall Centre is one, the U.S. Senate Appropriations Committee has approved a funding bill that would prohibit the OECD from receiving U.S. taxpayer funds if OECD has tried ‘to identify, report on, or penalize any country that encourages foreign investment through tax incentives.’

Whether or not we succeed at this, it can never be argued again that small nation-states have no power or choice. We have only the sovereignty we are willing and intelligent enough to negotiate.”