The criteria for identifying potentially harmful measures include:

– an effective level of taxation which is significantly lower than the general level of taxation in the country concerned;

– tax benefits reserved for non-residents;

– tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;

– granting of tax advantages even in the absence of any real economic activity;

– the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD;

– lack of transparency52.

In 1998, the OECD published the report «Harmful Tax Competition: An Emerging Global Issue». The report distinguishes between preferential tax regimes and harmful tax competition. Preferential regimes «generally provide a favourable location for holding passive investments or for booking paper profits. In many cases, the regime may have been designed specifically to act as a conduit for routing capital flows across borders. These regimes may be found in the general tax code or in administrative practices, or they may have been established by special tax and non-tax legislation outside the framework of the general tax system». Further on, the OECD defines «four key factors assist in identifying harmful preferential tax regimes:

(a) the regime imposes a low or zero effective tax rate on the relevant income;

(b) the regime is «ring-fenced»;

(c) the operation of the regime is nontransparent;

(d) the jurisdiction operating the regime does not effectively exchange information with other countries»53.

The Report contains guidelines for dealing with harmful preferential tax regimes in member countries, similar to those of EU’s Code of Conduct, including:

1. To refrain from adopting new measures, or extending the scope of, or strengthening existing measures, in the form of legislative provisions or administrative practices related to taxation, that constitute harmful tax practices;

2. To review their existing measures for the purpose of identifying those measures, in the form of legislative provisions or administrative practices related to taxation, that constitute harmful tax practices;

3. To remove, before the end of 5 years starting from the date on which the Guidelines are approved by the OECD Council, the harmful features of their preferential tax regimes etc.54.

The turning point occurred in the middle of 2000, when two international organizations – the Financial Action Task Force on Money Laundering (FATF) and the OECD – almost simultaneously published reports about offshore jurisdictions. The FATF published its Review to Identify Non-Cooperative Countries (June 22, 2000) based upon 25 Criteria promulgated by the FATF’s Report on Non-cooperative Countries and Territories (February, 2000). The OECD published the Report on Progress in Identifying and Eliminating Harmful Tax Practices (June 26, 2000) prepared by the Forum on Harmful Tax Practices. From June 2000, the FATF and the OECD had started issuing «black» and «gray» lists of «non-cooperative» jurisdictions.

The OECD acknowledged as a huge problem the practice of double non-taxation, as well as cases of no or low taxation resulting in multinational enterprises paying global corporate tax rates of just 1 or 2% due to sophisticated tax schemes including offshores. The OECD presumes that, «when reporting their global earnings, too many multinational companies can artificially (and legally) move their profits around in search of the lowest tax rates, often undermining the tax bases of the jurisdictions where the real economic activities take place and where value is created»