EU blacklist, global ramifications: Why the EU’s listing of non-cooperative jurisdictions for tax purposes may be a step too far

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“Naming and shaming” — and putting someone in isolation from their peers — are behaviour modification techniques that typically polarize any audience. Whether the topic at hand is effective parenting or global geo-political relationship management, there will be supporters and nay-sayers. Both sides will vehemently believe they are correct.

The European Commission no doubt considered this when preparing — and then announcing, on 5 December — a new listing of “non-cooperative jurisdictions for tax purposes.” Or, as it was instantly named by everyone outside that organization, the “tax blacklist.”

Tax blacklists are not new. Spain introduced one almost twenty years ago, while the OECD used a three-tiered “black” “gray” and “white” list approach in the wake of the global financial crisis to try and drive increased transparency — but subsequently decommissioned it, due in part to widespread criticism. Brazil adopted one in 2010 and now uses it to target its anti-abuse measures at those it views as the worst offenders. And the OECD delivered a new blacklist to G20 leaders in 2017 — but couldn’t find anyone behaving badly enough to put on it.

High level impacts

The impacts of this latest European development — the delivery of a list of 17 jurisdictions1 (reduced to 9 in late January 2018) with a further 8 escaping the list in order to give them time to recover from 2017’s Caribbean hurricanes — may be widespread and serious, and will be felt by countries and taxpayers alike.

Countries may find themselves the target of reduced inbound investment due to the sheer reputation risk (the “name and shame”) attached to being listed. They may also lose access to EU funding or guarantees, a matter of great importance to many jurisdictions, as well as finding that the listing finds its way into other relevant lists, both at EU level and elsewhere.

More broadly, some jurisdictions are livid at their inclusion, feeling that they tried to work collaboratively with the Commission, only to then find themselves present in the final listing.

A second set — some 47 jurisdictions, including Hong Kong, Switzerland, Turkey and Thailand, among others — feel that although the specific words were never used by the Commission, the creation of a second listing of jurisdictions (who have all agreed to proactively make changes as a result of EU screening) represents a “gray list”, effectively tarring their reputation by association. That is unfortunate, and is seen by many as an over-bearing approach by the Commission.

Taxpayers using the 17 listed jurisdictions are likely to find themselves sanctioned too, with either drastically enhanced reporting, scrutiny and tax audits or with new legislative measures that will increase their costs and reduce net income.

The background

Work on the listing began in July 2016. Requests for information were made of each jurisdiction and, in October 2017, letters were sent to all that were potentially affected, informing them of the outcome of the work. Where necessary, jurisdictions were requested to make a political commitment to address all deficiencies within a specified timeframe. Most jurisdictions engaged with the EU, taking steps towards resolving the issues identified; progress made on those commitments will be monitored. Some did not — or at least, not to the level desired by the EU.

Commitments made

Three key elements were used by the Commission in its screening process: tax transparency, fair taxation (i.e., the absence of what are described as “harmful” tax practices) and the jurisdictions’ implementation status in regard to the OECD’s BEPS recommendations.

Alongside the 17 — each of which has been given clear and unequivocal instructions on what must be changed in order to be de-listed — the 47 jurisdictions named as “committing to implement tax good governance principles” must also deliver on promises made in either 2018 or 2019. The commitments made by these countries effectively boil down to introducing the OECD norms on automatic exchange of information, transparency, and the minimum standards on BEPS, including on harmful tax practices. They have committed to do so before the end of 2018, or in case of developing countries, 2019. In fact, many jurisdictions had to make commitments in more than one of these areas.

Defensive measures

The European Commission say that in order to ensure coordinated action against those on the blacklist, EU Member States should apply at least one administrative measure in the area of tax, although the adoption of such defensive measures is not legally required. Defensive measures include reinforced monitoring of certain transactions, increased audit risks for taxpayers benefiting from the regimes at stake, and increased audit risks for taxpayers using structures or arrangements involving the relevant jurisdictions.

Additionally, the Commission suggests that defensive measures of a legislative nature could be applied by Member States, including making certain costs non-deductible, applying enhanced Controlled Foreign Company rules, implementing new withholding tax measures, limiting any participation exemption use, putting in place switch-over rules, reversing the burden of proof, adopting special documentation requirements, and requiring the mandatory disclosure by tax intermediaries of specific tax schemes with respect to cross-border arrangements.

Member States, the Commission says, could also consider using the EU listing as a tool to facilitate the operation of relevant anti-abuse provisions, including as a basis for their own national blacklists. Many such “blacklists” are already in use in jurisdictions globally, including Belgium, Brazil, Italy, Mexico, and Spain, among others. Publication of the EU listing therefore raises the likelihood of non-EU countries also adopting the listing to supplement their own.

Other impacts

At a broad level, there may be reputation risks to companies using structures or transactions involving the 17 jurisdictions; indeed, analysis of large multinational businesses dealing with jurisdictions on the listing may occur from some quarters.

A further indirect impact is that the Commission has secured commitments from the 47 on the second listing that they will take significant action in order to be delisted. This includes implementing the spontaneous and automatic exchange of taxpayer information; securing membership of the Global Forum on Transparency and Exchange of Information for Tax Purposes (and securing a ‘satisfactory’ rating therein); amending or abolishing harmful tax regimes identified by the Commission; addressing EU concerns relating to the level of economic substance their tax benefits require in order to be secured and finally the taking up of membership of the Inclusive Framework on BEPS and, by consequence, implementing the BEPS minimum standards – though the Commission has also noted that this final commitment is not a specific requirement for delisting.

As a result of this last commitment, the Inclusive Framework on BEPS, for example, will grow by at least 12 members as a result, while at least six jurisdictions have agreed to implement the automatic exchange of information by 2018.

Looking forward

Time will tell whether any EU Member States adopt new counter-measure legislation; it should be expected that they will, although the listing is expected to further reduce in size as more jurisdictions make their best efforts to be delisted.

Furthermore, the Commission is also expected to drive additional work around the creation of a more binding, definitive approach to counter-measures in relation to the listing in 2018. This may also tie in to the European Parliament’s desire for Country-by-Country Reporting information to be made public in the future.

Moreover, it will be interesting to see what happens to the second listing of countries under close scrutiny; does that listing in fact become the new blacklist, in effect?

All things considered, the Commission may well believe that their intentions are good. But with one single document, they risk not only geo-political angst, but more tax uncertainty and higher likelihood of hastening the “global tax chaos” that we all fear looks set to occur.

1 American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates.