The Organization for Economic Cooperation and Development (OECD) continues to work on its list of acceptable tax havens.

While countries are looking to get off the "grey list," industry players said that the impact of status could affect business for those countries unable to comply with the guidelines.

Offshore tax havens have felt the repercussions of the financial crisis, and they have been targeted by political bodies that don't necessarily understand their function.

The G-20 had also suggested that tax havens have had a large part to play in the collapse of the banking system and the economic woes of the developed nations.

New regulations, industry sources said, have not differentiated between tax haven and tax avoidance. "There is a difference between being tax efficient and avoiding tax, and I think that the current persecution by the OECD doesn't really take that into account," a market source said.

The OECD has published three lists of countries that do not yet fully comply with its rules. The first "black list" names countries that have not yet made any progress toward bringing their rules in line with OECD standards. Switzerland, Liechtenstein and the three European Union countries find themselves on a second "grey list," which names 38 territories that have committed to OECD standards but have yet to fully implement the required changes. China is on a "white list" of countries that have substantially implemented the tax rules. China has been placed on the list for its slow progress on implementing the rules in the Chinese-controlled regions of Hong Kong and Macau. Austria, Belgium and Luxembourg have voiced their displeasure at being placed on the OECD's "grey list" of countries that are not yet compliant with OECD tax cooperation rules.

On June 8, Bermuda finalized a bilateral tax information exchange agreement with the Netherlands, bringing its total number of such agreements to 12, the required threshold for the country's removal from the OECD is grey list of tax havens. This development has no direct rating implications for Bermuda-domiciled insurers or reinsurers, but the promotion of Bermuda to the OECD is white list removes some uncertainty regarding the island's ability to maintain its position as a key global insurance and reinsurance hub.

According to Moody's Investors Service, if Bermuda had not complied, there may have been some deterioration in business prospects over time, and therefore, risks to creditors, as the international community might create obstacles to "offshore" reinsurers. Institutional investors have also felt severe pressure not to buy structures issued by SPVs on the OECD "grey list", which could create problems for these offshore jurisdictions.

"The renewed emphasis among the G-20 countries on targeting tax evasion and avoidance made possible by the existence of tax havens could result in significant adverse economic consequences for jurisdictions that remain noncompliant with OECD guidelines," Moody's analysts said. "Recently, there have been proposals to change the U.S. tax code to target the tax treatment of reinsurance on U.S. affiliate-sourced business by offshore-based insurance and reinsurance groups, particularly those located in designated tax havens."

One potentially interesting and dangerous development will be whether recent rumors of the central bank of Portugal moving to discount any paper that comes from offshore locations have any truth to them. "This is a central government saying it is prepared to take a stand and alone it may not seem like an issue, but if other jurisdictions follow this could create a potentially dangerous trend," a market source said.

Another market source said that the move by European regulatory bodies persuading people to bring business back onshore is not because of tax avoidance concerns but because it makes it easier to regulate the structure. There is legislation going on, particularly in Germany, that makes it easier to bring them onshore.

TSI in Germany is the state-backed initiative that exempts true sale structures from trade tax and also makes securitization SPVs non-regulated entities. As a result, market sources said that more structures are opting for the German SPV, particularly since these are eligible for the ECB programs.

At the moment, the industry said that with many jurisdictions gearing up to become compliant with the new OECD guidelines, it's likely that the new environment will have minimal impact on written business going forward. "There are some deals that have not been done in Jersey that may have otherwise been done in Jersey, and we are seeing this as part of a reduction in overall volume," a market source said.

On the Cayman side of the business, the story is much the same. One source said that the jurisdiction was the place of choice for CDOs. "We aren't going to see those again," said the source.

The industry, in response, says they are lobbying politicians and keeping them informed of the legislative changes that potentially threaten the viability of offshore SPVs.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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