20 April 2018
Commission Takes Action Against EU Funds Being Routed Through Non-cooperative Tax Jurisdictions
On 21 March 2018, the European Commission set out a range of countermeasures to back up its common list of non-cooperative tax jurisdictions. These countermeasures take the form of guidelines which will ensure that EU external development and investment funds cannot be channelled or transited through entities based in countries targeted by the EU’s common list.
As reported in Regulatory Alert-EU Issue 4-2018 (see also Issues 2-2018 and 25-2017), finance ministers from the 28 EU Member States reached an agreement last December on an EU list of non-cooperative tax jurisdictions, otherwise also known as the EU’s first tax havens blacklist. In total, the ministers listed 17 jurisdictions, including South Korea and Macao SAR, for failing to meet good governance tax standards. A further “greylist” or “watchlist” targets countries which have committed to addressing deficiencies in their tax systems and to meeting the required criteria which would continue to keep them off the blacklist, following contacts with the EU. The updated lists are available at the Commission’s website. Hong Kong features on the “greylist”, following cooperation with the European Commission to set out a timeframe for “improving transparency standards” and “improving fair taxation”.
Following on-going negotiations, jurisdictions blacklisted by the EU have entered into commitments and outlined concrete steps to improve tax transparency. As a result, the EU has removed eight of the original 17 jurisdictions, but added three. The “greylist”, moreover, has been gradually de-emphasised as more jurisdictions have made targeted commitments.
The guidelines announced by the European Commission are intended to align the EU’s efforts to address tax avoidance with rules governing the use of funds by the EU’s International Financial Institutions (IFIs). The IFIs are the main vehicle for EU financial assistance and outward investment, and include the European Investment Bank, the European Fund for Strategic Investments and the European Fund for Sustainable Development. The guidelines are intended to provide a regulatory framework to ensure that EU funding is routed and invested according to good governance standards.
The European Commission, which supervises the EU’s budget, has been concerned that EU funds could be used to contribute to global tax avoidance. These guidelines set out how EU funds should be treated in relation to financing and investment operations in non-cooperative jurisdictions. In particular, they set out criteria for assessing projects that involve businesses or other entities located in these jurisdictions.
The assessment is risk-based and includes an obligation to justify the structure of a project. For example, there must be sound business reasons for choosing certain business partners or legal structures, and these must not include taking advantage of fiscal technicalities or unfair differences in tax rates. A classic example of such practices is the creation of a new entity or shell company with the intention of circumventing tax or other legal obligations.
There is an exception for direct financing. This concerns projects which are physically implemented in a blacklisted jurisdiction. In these cases, there is a more direct link between the recipient of the funding and the IFI responsible. Nonetheless, such projects must still respect the EU’s rules on tax fraud and tax evasions, as well as on money-laundering and the financing of terrorism. The full text of the guidelines is available on the Commission’s website.
In parallel, the EU has called on its Member States to agree on a set of coordinated sanctions at national level. While still at an early stage, these sanctions will build on existing countermeasures. These countermeasures are currently being implemented and are expected to increase monitoring and audits, to implement withholding taxes and to impose special documentation requirements and anti-abuse provisions.