10 Oct 2018
EU Issues ‘Tax Haven Blacklist’ Update: Hong Kong Makes Progress on Watch-list Commitments
This update concerns the third amendment to the December 2017 Council agreement reached by EU-28 Finance Ministers on the EU list of non-cooperative tax jurisdictions (the “tax haven blacklist”).
According to the Council of the European Union, the tax haven blacklist aims to raise the level of good tax governance and support the EU’s initiative to clamp down on tax evasion and limit tax avoidance. In total, 20 jurisdictions were blacklisted for failing to meet standards for good tax governance, including South Korea and Macao SAR, of which six remain. Alongside the blacklist, a watch-list names a further 47 jurisdictions, including Switzerland, Turkey and Hong Kong. The watch-list jurisdictions are committed to addressing deficiencies in their tax systems and meeting the required EU criteria for assessing good governance principles. The criteria are as follows:
1. Transparency: Compliance with international standards on automatic exchange of information and information exchange on request. In order to fulfil this criterion, jurisdictions must commit to:
a) Sign the OECD’s Multilateral Competent Authority Agreement or set up bilateral agreements;
b) Join the Global Forum on transparency and exchange of information for tax purposes, obtaining a satisfactory rating therein;
c) Sign and ratify the OECD Multilateral Convention on Mutual Administrative Assistance or set up a network of agreements covering all EU Member States.
Note that until June 2019, countries are given the choice of which two of these three sub-criteria to fulfil. However, all the sub-criteria mentioned in this paragraph will apply after that.
2. Fair tax competition: Abolition or amendment of harmful tax regimes which go against the principles of the EU Code of Conduct, or the OECD Forum on Harmful Tax Practices. Note that regimes imposing no or zero-rate corporate taxation must ensure such practice does not encourage artificial offshore structures with no real economic activity.
3. BEPS implementation: Commitment to implementing the OECD’s Base Erosion and Profit-Sharing (BEPS) minimum standards.
The tax haven blacklist and watch-list were compiled through a three-step process, beginning in September 2016 with the assessment and classification of national tax regimes. Once assessed, certain jurisdictions were selected for screening, culminating in the black- or watch-listing of countries based on the high-level commitments made in response to deficiencies identified in the process (or lack thereof). Since the lists were published, the Council of the EU engages in a continuous review of all jurisdictions concerned, updating the lists at least once per year – although the code of conduct group may recommend updates at any time.
A large majority of jurisdictions, including Hong Kong, have chosen to introduce the relevant changes to their tax regime by the end of 2018. Specifically, under the ‘transparency’ heading, Hong Kong committed to implement the automatic exchange of information – either by signing the Multilateral Competent Authority Agreement or through bilateral agreements – and to signing/ratifying the OECD Multilateral Convention on Mutual Administrative Assistance or network of agreements covering all EU Member States by 2018. In terms of ‘fair taxation’, Hong Kong further committed to amend or abolish its harmful tax regime by the end of 2018.
With respect to the 5 October 2018 Notice of the EU Council, Hong Kong’s transparency commitments are deemed to be fulfilled. However, along with 32 other countries, Hong Kong remains on the fair taxation watch-list, insofar as it is still in the process of amending or abolishing its harmful tax regimes for the 2018 deadline. Once fully compliant with good governance tax standards, and deficiencies in its tax system are addressed, the Council’s code of conduct group may recommend Hong Kong for removal from the watch-list altogether.
It is worth recalling that a series of criticisms have been levied against the tax haven blacklist. Specifically, certain members of the European Parliament and Oxfam have noted the EU’s failure to investigate and list such EU Member States as Luxembourg, Malta, Ireland and the Netherlands. Indeed, the perception that the EU (along with other developed economies) has unfairly used international rules to maintain its economic influence has led to a growing sense of dissatisfaction on the part of developing economies which shows little sign of receding.