Council removes eight countries from EU tax haven blacklist

The EU list of non-cooperative jurisdictions for tax purposes adopted on December 5, 2017 was defined by the Council of Europe as based on the criteria proposed by the European Commission. The decision by the Council resulted in a set of criteria largely based on OECD recommendations. With the OECD being an international organisation made up of rich countries – with some extras – what could have been an anti-tax avoidance tool for Europe has given way to an EU-led manipulation tool and get developing countries to follow the OECD recommendations.

The underlying context is that the UN has lost power in relation to its role in international tax issues over the last decades due to pressure exercised by the OECD. In 2013, the OECD launched its BEPS (Base erosion and profit shifting) Action Plan with a mandate from the G20 to address these issues and include in the discussions all G20 members even if they were not part of the OECD. Non-G20 countries were excluded from the discussion. As this resulted in a lot of criticism from around the globe, the G20/OECD came up with an inclusive framework – open to all countries -to supervise the implementation of the BEPS project outcomes. However, such an inclusive framework does not allow for an ’inclusive’ discussion of international tax rules.

In the meantime, the call for an international tax body – empowered and fully-funded under the guise of the UN, made by Ecuador in 2017 – as the chair of the G77s to the UN – is still awaiting for the central countries to support it.

In addition to being a tool for extortion, the criteria used for the EU list of non-cooperative tax jurisdictions is completely discretional, as it is based only on the countries’ ‘commitment’ to amend, abolish or implement. Commissioner Moscovici has already publicly mentioned in a recent ICIJ interview that the exchanges of letters with the countries that were on the list or off the list would be made public. This is not enough! A commitment is not a legislation, and often, legislations are also insufficient. As an example, The Netherlands may commit to all the criteria (although it was not requested to, as it is an EU member state) but it will soon remove its taxes on dividends, a measure that will indeed lure companies to come up with new creative tax planning to get their shareholders (fake or real, who knows?) to collect dividends in The Netherlands.

Let’s have a quick look at the criteria point by point:

  • 1.1 Commitment to implement the automatic exchange of information, either by signing the Multilateral Competent Authority Agreement or through bilateral agreements.

There are some poorer countries, like Namibia, which are on the list but will not be able to automatically exchange information as they do not have an informatisation of their tax system in place. Central countries then respond that there should be a waiting/ window period for poorer countries. However, it may still not be amongst Namibia’s priorities to put efforts into this, as it will most probably not receive any information from any other countries that had not committed to exchange.

  • 1.2 Membership of the Global Forum on transparency and exchange of information for tax purposes and satisfactory rating.

The Global Forum on Transparency and Exchange of Information for Tax Purposes is an OECD multilateral framework within which work on transparency and exchange of information for tax purposes has been carried out by both OECD and non-OECD economies since 2000. Developing countries are forced to pay a fee to participate in the Global Forum, and the Global Forum only discusses how to implement OECD recommendations. Again, it is not a place where developing country can participate as decision makers, they can only participate as obedient implementers of OECD’s recommendations.

  • 1.3 Signatory and ratification of the OECD Multilateral Convention on Mutual Administrative Assistance or network of agreements covering all EU Member States.

This does not mean anything, as the Multilateral Convention requires a separate and specific memorandum of understanding (MOU) – also called Competent Authority Agreement (CAA) – before automatic exchange of information becomes operational. Again, signing all these conventions does not guarantee that Namibia will ever receive any information.

  • 2.1 Existence of harmful tax regimes: commitment to amend or abolish the identified regimes by 2018.

Definition of harmful tax regimes is based on the 5 criteria decided by the Code of Conduct Group on Business Taxation in 1997: 1) whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents, or; 2) whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base, or; 3) whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages, or; 4) whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD, or; 5) whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way. Even when the criteria is good, it is limited in 2.2 underneath.

  • 2.2 Existence of tax regimes that facilitate offshore structures, which attract profits without real economic activity: commitment to addressing the concerns relating to economic substance by 2018:

The attraction of profits from companies that do not have economic substance or real economic activity is the specialty of Luxembourg, The Netherlands, but also the UK, and Hungary, amongst others. Are they on the list? No.

Moreover, the Council explicitly indicates that absence of a corporate tax or applying a nominal corporate tax rate equal to zero or almost zero can not alone be a reason for concluding that a jurisdiction does not meet the requirements of criterion 2.2.

  • 3.1 Membership of the Inclusive Framework on BEPS or implementation of BEPS minimum standards: commitment to implement.

BEPS Action plan was decided by the OECD and its minimum standards are requested to be implemented by developing countries, who did not participate in the decision-making process.

Despite all that, it is not surprising that on January 12th, Panama and the United Arab Emirates (UAE) – the latter ranked 10th in TJN’s recently published FSI 2018 – were taken off the list along with 7 other countries (Barbados, Grenada, Korea, Macao SAR, Mongolia, Tunisia). As it is not surprising either that Namibia, a country which has never been among the world’s biggest suspected tax havens, is still there.

The OECD itself had by June 2017 compiled a list of non-cooperative tax jurisdictions that consisted of only one country: Trinidad and Tobago. This is so because the criteria is largely based on compliance to cooperate with information exchange. Therefore, even when tax cooperation, tax transparency, and automatic exchange of information are valuable concepts that should be demanded from all governments, no practical tax haven list can be based solely upon these criteria. It may include such parameters but should not be based solely on transparency.

It is interesting to note that some countries such as Ecuador and Brazil have found a way to have tax haven lists or even just lists of low and zero tax jurisdictions that trigger anti-tax avoidance rules. This works in practice because they include not only non-cooperative tax jurisdictions for tax purposes but also ‘low and zero tax jurisdictions’ and jurisdictions with special tax regimes.

For all of the above reasons, the ‘Panama Papers’ Committee Recommendations of December 2017 – as adopted in Plenary – include several paragraphs questioning  the criteria used for the EU tax haven blacklist:

  1. Stresses the urgent need for a common international definition of what constitutes an offshore financial centre (OFC), a tax haven, a secrecy jurisdiction, a non-cooperative tax jurisdiction and a high-risk country in terms of money laundering; calls for these definitions to be internationally agreed without prejudice to the immediate publication of the EU common blacklist; stresses that these definitions presuppose the establishment of clear and objective criteria;
  2. Welcomes the leading role of the Commission in drawing up criteria for a common EU list of non-cooperative tax jurisdictions; regrets the excessive amount of time taken up by this process; calls on the Council not to dilute, but rather to increase the level of ambition in relation to the criteria of the aforementioned list; insists that all of the criteria proposed by the Commission be taken into consideration including, but not limited to, the absence of corporate tax or a close‑to‑zero corporate tax rate, and stresses their importance for the list to be effective and non-arbitrary; considers that the transparency criteria should be fully applied and that the criteria should also adequately take into consideration implementation and enforcement; calls on the Council, in order for this list to be effective and credible, to put in place strong, proportionate and deterrent common sanctions against listed countries, and underlines that the assessments of individual countries should be carried out in a transparent manner; calls on the Council and the Commission to put in place a transparent and objective review mechanism, including the involvement of Parliament, to update the list in the future; recalls that the goal of such a list is to change the behaviour of such a jurisdiction with respect to money laundering and the facilitation of tax fraud;
  3. Regrets that the EU list of non-cooperative tax jurisdictions approved and published by the Council focuses only on jurisdictions outside the EU, omitting countries within the EU that have played a systematic role in promoting and enabling harmful tax practices and that do not meet the fair taxation criterion; emphasises that at least four Member States would be included on the list if screened according to the same EU criteria, as demonstrated in a simulation carried out by Oxfam; is concerned that the a priori exclusion of EU countries from scrutiny affects the legitimacy, credibility and effectiveness of the entire process;
  4. Takes the view that once the EU list, of non-cooperative tax jurisdictions is in place, the Commission should propose accompanying legislation determining harmonised obligations for the tax authorities in every Member State to annually disclose data containing the total value and destination of the money transfers from each Member State to each jurisdiction on the list;

Why is all this relevant? As Moscovici himself pointed out: Blacklisted jurisdictions must face consequences in the form of dissuasive sanctions, while those that have made commitments must follow up on them quickly and credibly. And with this list, the countries which will be the object of such sanctions will not be the 10 biggest financial secrecy jurisdictions as defined by Tax Justice Network (Switzerland, USA, Caiman Islands, Hong Kong, Singapore, Luxembourg, Germany, Taiwan, United Arab Emirates) but rather, these:

  • American Samoa (not listed in FSI 2018),
  • Bahrain (17 in FSI 2018 ranking),
  • Guam (not listed in FSI 2018),
  • Marshall Islands (39 in FSI 2018 ranking),
  • Namibia (not listed in FSI 2018),
  • Palau (not listed in FSI 2018),
  • Saint Lucia (110 in FSI 2018 ranking),
  • Samoa (81 in FSI 2018 ranking),
  • Trinidad and Tobago (107 in FSI 2018 ranking)

Bahrain, Guam, Palau and Trinidad and Tobago were among the 35 countries identified by Oxfam in November 2017 using the criteria defined by the Council in February 2017; but so were the UAE, Bermuda, British Virgin Islands, Caiman Islands, Gibraltar, Hong Kong, Switzerland, Singapore, etc.; and Ireland, Luxembourg, Malta and The Netherlands, in the EU.