Is the EU tax blacklist more political than technical?

Mr Benjamin Angel, Director for direct taxation, tax coordination, economic analysis and evaluation, European Commission

The European Union holds itself to very high standards when it comes to tax good governance and has made the fight against tax evasion and tax avoidance one of its top priorities.

Globalisation, digitalisation and the changing nature of business in the past decade led EU Member States to step up their efforts to ensure sustainable revenues and a level-playing field for all taxpayers.

The EU list of non-cooperative jurisdictions for tax purposes (EU list) has brought a new level of cooperation between the European Union and countries around the globe on tax issues since 2017.

The EU list is still relatively young and evolving, but has already made an impact. Since 2017 we have screened 95 countries, putting many on the path to improve their transparency standards and to address the artificial shifting of profits. To fulfill commitments under the EU list, 27 jurisdictions have joined the Convention on Mutual Administrative Assistance on tax matters, 28 jurisdictions have become members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), and 13 jurisdictions applying very low or no corporate taxation have introduced economic substance requirements to curb offshore taxation. The EU list also led to reforms of over 130 harmful tax regimes.

The EU list has therefore contributed to curbing tax evasion and tax avoidance effectively by leading jurisdictions to align to international tax standards and exchange tax information on request and automatically – on financial accounts, as well as country-by-country reports - on equal footing with hundreds of other countries around the world. As such, the EU list has helped to bring to light significant financial flows that previously flew under the radar.

The EU list is objective and fair. It does not target specific countries, but loopholes in tax good governance that enable abusive tax practices. The criteria are public and clear – they echo the international standards on transparency and exchange of tax information, fair taxation and the minimum standards against BEPS, as set by the Global Forum and the BEPS Inclusive Framework.

Going forward, we are working to develop fully the potential of the EU list to bring positive change on tax good governance on a global scale, in line with international developments in this field.

Alex Cobham, Chief Executive, Tax Justice Network

The ‘non-cooperative jurisdictions’ list is an unjust and ineffective instrument that shames the European Union.

First, the EU refuses to assess its own members transparently against the criteria used. Second, the criteria are wide open to political manipulation. In part, the list relies on OECD assessments. Since the OECD can never identify its own most powerful member as noncompliant, even in the laughable situation where the US has openly refused to join the Common Reporting Standard, this is baked into the EU list.

The EU criteria also include opaque assessments carried out behind closed doors, which magnifies the scope for lobbying influence. Compare Cayman’s swift delisting in 2020 (when ranked #1 on the Financial Secrecy Index and #3 on the Corporate Tax Haven Index), with the continuing listing of Trinidad and Tobago (currently #130 on the Financial Secrecy Index, and not even assessed on the Corporate Tax Haven Index).

Worst, the flaws of the list are not arbitrary but reflect the structural racism of international tax rule-setting. As the Prime Minister of the Bahamas, Philip Davis, recently told the UN General Assembly, the EU list targets small, vulnerable, former colonies of European states, due to ‘darker issues of prejudged discriminatory perceptions’ - [but] ‘Black-governed countries also matter.’

The EU currently lists as ‘non-cooperative’, jurisdictions responsible for less than 5 per cent of the global risk assessed by the Financial Secrecy Index – but the EU-27 account for fully 20 per cent of the global risk. The list fails to protect EU countries from financial secrecy; fails to raise standards in the EU; and inflicts discriminatory punishment on others.

Martin Kenney, Managing Partner, Martin Kenney & Co (MKS), British Virgin Islands

The EU Tax Blacklist: Political Sleight-of-Hand or Effective Deterrent?

The EU sees itself as policing the globe to prevent tax evasion and resultant money laundering. I see it slightly differently.

Politically, tax evasion is a hot topic. Highlighted in high-profile leaks such as the Panama Papers, tax evasion has invoked public fury. In response to these leaks, governments clambered to reassure voters. They have created “blacklists” of those states which purportedly have ineffective frameworks for preventing tax evasion and money laundering.

The issues with the EU’s blacklist are twofold. First, the blacklist and its accompanying review process seem to have done little to prevent tax evasion. In many cases, review neither spurs major improvements in tax governance outcomes, nor deters listed countries by reducing investment flows.

Second, the global policeman doesn’t police itself. EU member states are exempt from the blacklist review process, making small island nations such as the BVI and Cayman Islands bear the burden of a “do-as-I-say, not-as-I-do” power structure. By turning a blind eye to member states which facilitate global tax evasion, the EU is bringing the blacklist into disrepute.

Yes, the EU blacklist is having some limited effect, but until the EU gets its own house in order, smaller states will always perceive the blacklist as a politically-motivated weapon to appease European voters.

Marla Dukharan, Caribbean Economist and Advisor, Barbados

The EU has taken hard and soft measures against tax evasion everywhere except where it matters most. OECD members are responsible for over 2/3 of the world’s corporate tax abuse, and EU countries are responsible for 36 per cent of tax havens. The Netherlands alone is the largest corporate tax haven in the EU and the world’s eight biggest suppliers of financial secrecy are the USA, Switzerland, Singapore, Hong Kong, Luxembourg, Japan, Germany and UAE, according to the Tax Justice Network. EU Blacklisted countries however, account for less than 2 per cent of worldwide tax revenue losses, demonstrating unambiguously that the EU’s measures against tax evasion are grossly misplaced and therefore embarrassingly ineffective. This was deliciously highlighted by the European Parliament, and furthermore, the top European Court ruled that the EU’s mandate of public “registers containing the personal details of the owners of a company and accessible to the general public is an infringement of fundamental rights of privacy and personal data protection.” This now-condemned standard of unnecessarily public registers is being forced by the EU on everyone except the EU’s own member states. But bright lights are finally being shone on Brussels, and increasingly from within the bowels of Europe’s bureaucracy.

Dr Terry Dwyer, Dwyer Lawyers, Canberra, ACT, Australia

As the French Physiocrats realised in the 18^th century, and Adam Smith noted, a sovereign can only draw his income from three sources: the earnings of land, labour or capital – the three factors of production. Only one of those factors cannot die out, emigrate, rust out or hide out.  Thus, for years, the OECD has candidly admitted that it is preferable to tax an immobile factor of production rather than a mobile factor.

It is quite possible for a nation to fund its government from its land rents and thereby slash taxes on mobile labour or capital.  For some strange reason, EU governments do not seem to regard this as an acceptable proposition, notwithstanding the ancient maxim of mediaeval French and English law that “the King should live off his own” - that is to say, collect his land rents and leave workers, merchants, and manufacturers alone.

To try to tax mobile factors of production is to invite tax avoidance.  As Adam Smith observed, a merchant is naturally a citizen of the world: to tax him is to invite him to take up residence and conduct his business from elsewhere. If that was true in the 18^th century, how much more true is it today?

The EU folly is to assume that a tax on all income is natural.  It is not.

Oil-rich states which collect their resource rents do not much need income tax, nor do Pacific Islands which retain communal lands as a social security safety net.

A tax haven is a country which is not as greedy or stupid as you are. To blame such countries is to condemn oneself for one’s stupidity when nothing stops you from becoming a tax haven by levying a rate upon your land values.  No country has the slightest moral duty to assist another impose silly taxes.  EU blacklisted countries should wear that badge proudly as a marketing endorsement.

Oliver R. Hoor, Partner, ATOZ Tax Advisers Luxembourg

The classification of foreign jurisdictions as non-cooperative jurisdictions by the EU Council has a significant impact from a tax perspective. While EU Member States could choose between different measures (non-deductibility of costs, CFC rules, withholding tax measures), in Luxembourg the following rules have been adopted:

• First, interest and royalty payments to companies that are resident for tax purposes in non-cooperative jurisdictions are non-deductible for Luxembourg tax purposes.
• Second, the Luxembourg tax authorities will systematically review the transfer pricing of transactions entered into by Luxembourg corporate taxpayers with associated enterprises located in non-cooperative jurisdictions.

In addition, transactions with entities resident in a non-cooperative jurisdiction may trigger reporting obligations under the mandatory disclosure regime (DAC6), when a deductible payment is made by a Luxembourg company to an associated enterprise resident in a non-cooperative jurisdiction.

On 4 October 2022, the blacklist adopted by the Council is composed of very exotic jurisdictions such as American Samoa, Anguilla and Guam that virtually have no ties with the European Union. As such, the EU tax blacklist has a very limited impact when it comes to tackling tax avoidance.

However, given the severe adverse tax consequences resulting from a blacklisting of a jurisdiction, the EU Commission has a strong political bargaining position towards third states that are non-cooperative. This makes the blacklist in essence more political than technical even though a blacklisting follows an assessment of certain objective criteria.

Anthony Travers OBE, Senior Partner, Travers Thorp Alberga, Cayman Islands

In fact, the tactic of threatening OFCs with blacklists originated with the OECD in 1998 with its Harmful Tax Competition Initiative, the only legitimate point of which highlighted the need for tax transparency.  But with that secured, through the mechanism of Tax Information Exchange Agreements and reinforced through FATCA and the CRS, no sound reason exists for the use by the OECD or the EU of this sort of arbitrary and discriminatory behaviour.

In a nontransparent and wholly unconvincing attempt at justification the EU Tax Commission and the Code of Conduct Group have, at various times, accused the Cayman Islands of being non-compliant but, in a convenient fit of collective amnesia, which manages to breach every   principle of natural justice, have never specified with what. No coherent argument has yet been made as to how the Cayman Islands are involved in tax avoidance. And for good reason. They are not. With breathtaking disingenuity the EU ignores the obvious fact that tax avoidance necessarily involves the use of the flawed OECD model Double Tax Treaties and that the jurisdictions involved are all within the EU (you know who you are). 

The hope that the OECD could paper over this US$600 million a year incompetence (with no admission of its responsibility) by the introduction of the Global Minimum Tax  seems, as the deceits within that initiative become apparent, an increasingly forlorn hope.  In short, the blacklist tactic is no more than a dishonest device to enforce unnecessary and anti-competitive EU financial services legislation extra-territorially through a form of blackmail threatening reputational harm.  That is not to say that the EU will not persist as most recent statistics indicate that the financial flows in and through Cayman Islands AIF vehicles have nonetheless continued to increase to the US$6-8 trillion range which dwarfs the aggregate AIF industries in Luxembourg and Dublin.  No doubt exists that the EU blacklist threats have caused reputational damage to Cayman within the EU (although the Cayman Islands are not currently on the EU tax blacklist).

But, the absence of passporting aside, that reputational damage also creates an effective disincentive on the marketing of, but much more importantly the investment by, those Cayman Islands investment funds in the EU.  For a trading block living on quantitative easing, creating debts that can never be repaid and starved of real capital investment that, a student of irony might say, is a delightfully unintended consequence.