As with any contentious issue with differing opinions between member states, the EU non-cooperative jurisdictions (black) list had a difficult birthing process. It was rigorously discussed for two years prior to the 1st February 2017 when EU member states finally sent letters to 92 jurisdictions informing them of their screening for potential inclusion on the blacklist. This was a major step in finalising a long list for inclusion, previously held up by discord between member states.
The process excluded EU member states which were not assessed. The listing criteria are in line with international standards and are broadly:
- Transparency - automatic exchange and (a) ratification of OECD multilateral convention or (b) signed bilateral agreements with EU member states;
- Fair Tax Competition – no harmful tax regimes; and
- BEPS – commitment to implement OECD Base Erosion and Profit Sharing.
The catalyst for the creation of the black list was the visibility of ‘tax havens’ and offshore schemes created by the Panama Papers scandal, investigated by the European Parliament enquiry committee. However, the acceleration of agreement between the European Parliament and Commission leading to the publication of the list must be viewed in light of the publication of the OECD list of “non-cooperative jurisdictions” on tax in June 2017. The OECD’s list reflects the organisation’s aim to create a global consensus in the fight against tax evasion. However, it was widely criticised when it published a black list identifying only one jurisdiction, Trinidad and Tobago. In drafting its own list the EU faced pressure to make sure the exercise was more than merely the “meaningless gesture” made by the OECD.
The EU Commission was very critical of member states’ perceived lacklustre approach to screening, during which they took a year to assess third countries’ tax systems and start a dialogue, however, EU finance ministers were finally able to publish the 17 strong nationally backed blacklist of ‘tax havens’ in December 2017, highlighting those countries such as, inter alia, Bahrain, Barbados and the UAE, not doing enough to thwart offshore avoidance schemes. The list was short compared to a previously published (and scrapped) list and was instead accompanied by a grey list containing 47 jurisdictions (named tax havens) who pledged to toe the line of EU expectation on fiscal matters.
Commissioner Pierre Moscovici commented: “The…blacklist… is a living document and more countries will be added if they don’t live up to the commitments they have made to improve their tax systems”.
Letters and Sanctions
At the stage of publication of the list, the sanctions attached to publication were just that; publicity. As part of the open dialogue between jurisdictions and the General Secretariat of the Council of the EU, the Code of Conduct Business Group (Business Taxation) published all letters seeking commitments on the Council website. These naturally range in tone, severity and required response, but include demands made to Switzerland, USA and the Isle of Man. It is worth noting that due to a
mixture of commitments received by the EU (and in some cases a bad hurricane season) the list was updated in March 2018.
The EU Commission then adopted guidelines to stop the transit of EU funds through non-cooperative tax jurisdictions. They provide information on how partners should assess projects that involve entities in such jurisdictions, including checks that should pinpoint a risk of tax avoidance with a business entity (i.e. providing sound business reasons for the structuring of a project prior to channelling funding through an entity). To back this up, the Commission also requested international financial institutions (and other bodies related to the EU budget) to review their internal policies on non-cooperative jurisdictions during the course of 2018. In addition to the above, the Commission encouraged EU Member States to agree on coordinated sanctions to apply at national level. Countermeasures, which member states can choose to apply, such as, inter alia, increased monitoring and withholding taxes, and anti-abuse provisions have been agreed on at a national level.
Sanctioning such a list is a difficult task, with a name and shame approach and trade pressure being weapons in a very limited arsenal available to the EU. Transparency will be the key going forward in dealing with other jurisdictions and aforementioned discussions with Switzerland and the USA continue an EU push on tax transparency which has already seen the end of Swiss banking secrecy for EU residents through the signature of a tax transparency agreement.
As a prospective third country, the UK can expect this attention to focus across the Channel in the near future, the beginnings of which have already been seen in the remit for the newly established TAXE 3, established as a direct response to the Paradise Papers and taking aim at the UK and its Crown Dependencies (Guernsey, Jersey, Isle of Man and Bermuda).
In the wake of the publication of the list (a naturally outward looking initiative), Oxfam commissioned a report applying the same criteria to EU member states. The report found that Ireland, Netherlands, Malta and Luxembourg met the applied criteria for classification as tax havens, with Malta’s FDI being 650% of GDP and Luxembourg’s sitting at 450% of GDP. The EU noted that “different tools are used to ensure fair and transparent taxation” within the bloc, citing far reaching transparency rules and anti-avoidance measures as examples. Country reports provide an insight into the bloc’s view and 2017 saw a report on aggressive tax planning indicators which listed Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands as falling foul of various aggressive tax planning schemes.
Tax is naturally a divisive issue and not easily separated from politics, particularly in an institution such as the European Parliament. The focus on tax reforms in the European Union will intensify over the coming years, driven as it is by the Greens-European Free Alliance, Nordic Green Left and ALDE (Liberal) parties. However, the work required is likely to create problems in terms of a unified policy. The EU tax list targets external risks posed by countries that refuse to respect tax good governance standards. It has different objectives, different criteria, a different compilation process and different consequences to the AML list and was relatively easy in terms of agreement. Expect more issues in conception and implementation of forthcoming tax legislation such as the Common Consolidated Corporate Tax Base and Digital Taxation.