The European Union Black List Of Non-Cooperative Tax Jurisdictions
21 March, 2018
The European Union's black list of non-cooperative jurisdictions in the area of taxation was a long time in arriving. However, since it finally emerged from the European Commission last December, a number of changes have already been made to its composition. The EU black list is explored in depth in this article.
How Did the Black List Come About?
The idea of an EU black list was endorsed by EU finance ministers in May 2016, and they subsequently agreed common criteria to assess selected jurisdictions. The Code of Conduct Group, the body comprising member state tax experts in the Council, was asked to manage the process and to present a first EU list by the end of 2017.
The list was compiled through a three-step process as follows: in September 2016, the Commission pre-assessed 213 countries using over 1,600 different indicators; then, all jurisdictions chosen for screening were formally contacted, to explain the process and invite them to engage with the EU; finally, once the experts had finished the screening stage, they delivered their findings to the Code of Conduct Group.
The Code of Conduct Group drafted the first EU list and submitted it to EU finance ministers to endorse at their monthly meeting. Having taken note of the commitments made by various jurisdictions, the Council agreed on a general approach to sanctions for the listed countries. On December 5, 2017, the two-tier list was published.
What's the Listing Criteria?
Three broad "tax good governance criteria" were used to screen jurisdictions for the purposes of compiling the list under the headings of tax transparency, fair taxation, and commitments under the OECD base erosion and profit shifting (BEPS) project.
Criteria that a jurisdiction should fulfil in order to be considered compliant on tax transparency:
1.1. Initial criterion with respect to the OECD Automatic Exchange of Information (AEOI) standard (the Common Reporting Standard – CRS): the jurisdiction, should have committed to and started the legislative process to implement effectively the CRS, with first exchanges in 2018 (with respect to the year 2017) at the latest and have arrangements in place to be able to exchange information with all Member States, by the end of 2017, either by signing the Multilateral Competent Authority Agreement (MCAA) or through bilateral agreements;
Future criterion with respect to the CRS as from 2018: the jurisdiction, should possess at least a "Largely Compliant" rating by the Global Forum with respect to the AEOI CRS, and
1.2. the jurisdiction should possess at least a "Largely Compliant" rating by the Global Forum with respect to the OECD Exchange of Information on Request (EOIR) standard, with due regard to the fast track procedure, and
1.3. (for sovereign states) the jurisdiction should have either:
i) ratified, agreed to ratify, be in the process of ratifying, or committed to the entry into force, within a reasonable time frame, of the OECD Multilateral Convention on Mutual Administrative Assistance (MCMAA) in Tax Matters, as amended, or
ii) a network of exchange arrangements in force by 31 December 2018 which is sufficiently broad to cover all Member States, effectively allowing both EOIR and AEOI;
(for non-sovereign jurisdictions) the jurisdiction should either:
i) participate in the MCMAA, as amended, which is either already in force or expected to enter into force for them within a reasonable timeframe, or
ii) have a network of exchange arrangements in force, or have taken the necessary steps to bring such exchange agreements into force within a reasonable timeframe, which is sufficiently broad to cover all Member States, allowing both EOIR and AEOI.
1.4. Future criterion: in view of the initiative for future global exchange of beneficial ownership information, the aspect of beneficial ownership will be incorporated at a later stage as a fourth transparency criterion for screening.
Until June 30, 2019, the following exception should apply:
A jurisdiction could be regarded as compliant on tax transparency, if it fulfils at least two of the criteria 1.1, 1.2 or 1.3.
This exception does not apply to the jurisdictions which are rated "Non Compliant" on criterion 1.2 or which have not obtained at least "Largely Compliant" rating on that criterion by June 30, 2018.
Countries and jurisdictions which will feature in the list of non-cooperative jurisdictions currently being prepared by the OECD and G20 members will be considered for inclusion in the EU list, regardless of whether they have been selected for the screening exercise.
2. Fair taxation
Criteria that a jurisdiction should fulfil in order to be considered compliant on fair taxation:
2.1. the jurisdiction should have no preferential tax measures that could be regarded as harmful according to the criteria set out in the Resolution of the Council and the Representatives of the Governments of the Member States, meeting within the Council of 1 December 1997 on a code of conduct for business taxation, and
2.2. The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.
3. Implementation of anti-BEPS measures
3.1. Initial criterion that a jurisdiction should fulfil in order to be considered compliant as regards the implementation of anti-BEPS measures:
– the jurisdiction, should commit, by the end of 2017, to the agreed OECD anti-BEPS minimum standards and their consistent implementation.
3.2. Future criterion that a jurisdiction should fulfil in order to be considered compliant as regards the implementation of anti-BEPS measures (to be applied once the reviews by the Inclusive Framework of the agreed minimum standards are completed):
– the jurisdiction should receive a positive assessment for the effective implementation of the agreed OECD anti-BEPS minimum standards
Criterion 1.3 (the duration of the reasonable timeframe)
1. In line with point 13 of the Guidelines for the process of screening of jurisdictions annexed to the Council Conclusions, the Code of Conduct Group should define, based on objective criteria the duration of the reasonable timeframe, referred to in criterion 1.3.
2. For the purposes of application of criterion 1.3, the duration of the reasonable timeframe, referred to in criterion 1.3, will be construed as follows:
3. With respect to criterion 1.3(i) (sub-point relating to sovereign states), "within a reasonable timeframe" refers to the entry into force of the OECD Multilateral Convention on Mutual Administrative Assistance (MCMAA), as amended, for a given jurisdiction and not to the commitment.
4. With respect to criteria 1.3(i) and 1.3(ii) (sub-points relating to non-sovereign jurisdictions), "within a reasonable timeframe" refers, respectively, to the entry into force of the MCMAA, as amended, for the jurisdiction, and to the entry into force for the jurisdiction of a network of exchange agreements sufficiently broad to cover all Member States.
5. The duration of the reasonable timeframe, for these three points will be identical to the deadline applied in criterion 1.3(ii) in relation to sovereign states: December 31, 2018 (i.e. the same deadline which applies to the entry into force for a sovereign third jurisdiction of a network of exchange arrangements, which is sufficiently broad to cover all Member States).
6. Without prejudice to the deadline of December 31, 2018, the reasonable timeframe should not extend beyond the time required for:
a) the completion of the procedural steps according to national law,
b) adoption and entry into force of any required amendments to national law; and
c) any other objective deadlines that formal commitment could entail (for example: for a jurisdiction which expresses its consent to be bound by the MCMAA, it enters into force on the first day of the month following the expiration of a period of three months after the date of the deposit of the instrument of ratification, acceptance or approval).
7. The duration of the reasonable timeframe can only be extended by a consensus of a Code of Conduct Group for a specific non-sovereign jurisdiction, only in duly justified cases.
Who Was on The Original Black List?
Initially, 17 jurisdictions were placed on the black list. They included: American Samoa, Bahrain, Barbados, Grenada, Guam, Macao, the Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, South Korea, Trinidad and Tobago, Tunisia, and the United Arab Emirates.
A further 47 countries appeared on a theoretical "gray list" along with a list of commitments to address deficiencies in their tax systems and to meet the required criteria.
What Changes to the Blacklist Have There Been?
After representations from the Caribbean territories in particular, as well as from South Korea and other jurisdictions, on January 23, the European Council agreed to delist Barbados, Grenada, South Korea, Macao, Mongolia, Panama, Tunisia, and the United Arab Emirates. These jurisdictions were moved to the "gray list," and will be subject to close monitoring.
The Council said that delisting was justified in the light of an expert assessment of the commitments made by these jurisdictions to address deficiencies identified by the EU. The Council added that the commitments were in each case backed by letters signed at a high political level.
Vladislav Goranov, representing Bulgaria, which currently holds the EU Council presidency, said: "Our listing process is already proving its worth. Jurisdictions around the world have worked hard to make commitments to reform their tax policies. Our aim is to promote good tax governance globally."
Additional changes to the composition of the black list were made by the European Council on March 13. On this occasion, Bahrain, the Marshall Islands, and Saint Lucia were removed from the list after making commitments at a high political level to remedy the EU's concerns.
However, on the same day, the Council added to the list the Bahamas, Saint Kitts and Nevis, and the US Virgin Islands.
When it first published the list, the Council agreed to put on hold a screening of the tax systems of the Caribbean jurisdictions that were affected by hurricanes in September 2017. This process was restarted in January 2018, when the EU sent letters requesting commitments from the countries involved that they would take steps to allay EU concerns. According to the Council, the Bahamas, Saint Kitts and Nevis, and the US Virgin Islands have been added to the list because they failed to make commitments at a high political level in response to all of the EU's concerns.
The Council also decided to add Anguilla, Antigua and Barbuda, the British Virgin Islands, and Dominica to annex II of the list.
Commenting on the latest move, Goranov said: "I am glad to see more jurisdictions that we listed in December committing themselves to reforming their tax policies in a manner that will remedy our concerns. We call on all jurisdictions on the list to do likewise, and on all those that have already made commitments to implement them in a timely manner. Our aim is to achieve optimal tax transparency worldwide."
How Are Jurisdictions Removed From the Black List
The Commission says that a country will be removed from the list "once it has addressed the issues of concern for the EU and has brought its tax system fully into line with the required good governance criteria." The Code of Conduct will be responsible for updating the EU list, and recommending countries for de-listing to the Council. It is intended that the list will be updated on an annual basis.
Does The Black list Have Teeth?
According to the European Commission, the black list will have a "real impact" on the countries concerned, thanks to new EU legislation.
Following Commission proposals, the EU list is linked to EU funding in the context of the European Fund for Sustainable Development, the European Fund for Strategic Investment, and the External Lending Mandate. Funds from these instruments cannot be channeled through entities in listed countries. Only direct investment in these countries (i.e. funding for projects on the ground) will be allowed.
The Commission has also referred to the list in other relevant legislative proposals. For example, the public Country-by-Country reporting proposal includes stricter reporting requirements for multinationals with activities in listed jurisdictions. In the proposed transparency requirements for intermediaries, a tax scheme routed through an EU listed country will be automatically reportable to tax authorities. The Commission is also examining legislation in other policy areas, to see where further consequences for listed countries can be introduced.
Furthermore, EU member states have agreed on a set of countermeasures which they can choose to apply against the listed countries. These include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The Commission intends to support member states' work to develop a more binding and definitive approach to sanctions for the EU list in 2018.
The black list also of course has a certain amount of "soft" power, in the sense that blacklisted jurisdictions could suffer some reputations damage, and lower inward investment as a result.
Criticisms of the Black List
The EU seems to have pleased few people with the publication of this black list. On the one hand, it has been accused of double standards by excluding EU member states from the both lists, and unfairly including several jurisdictions which have either fallen into line international standards, exceeded them, or have committed to fall into line with them, just because they are perceived as "tax havens."
However, on the other hand, the EU has been criticized by tax justice campaigners for not going nearly far enough with its black list, with some arguing that it will make little difference to overall levels of cross-border tax avoidance and fraud. They say the EU is keen to be seen to be doing something about the problem of tax avoidance with its black list, but this measure falls well short of the sort of action needed to tackle avoidance and evasion it effectively.
Ultimately, time will tell whether the black list will achieve the EU's goals, damage the economies of blacklisted jurisdictions, or have absolutely no effect.
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