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EU Establishes First Ever Tax Havens Blacklist, While Hong Kong is Placed on a Watchlist

On 5 December 2017, finance ministers from the 28 EU Member States reached an agreement 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.

In addition, 47 countries 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. This second list, being referred to by some as a grey list or watchlist, includes Switzerland, Turkey and Hong Kong.

According to the Council of the EU, this unprecedented exercise should raise the level of good tax governance and help prevent the large-scale tax abuse exposed in recent scandals such as the “Paradise Papers” or the “Panama Papers”. These came to light after a massive leak of financial documents that threw light on politicians, multinationals, celebrities and high-net-worth individuals using complex structures to protect their cash from higher taxes.

The tax havens blacklist is part of the EU's initiative to clamp down on tax evasion, and avoidance which is deemed to be unfair. Its establishment is intended to deal more robustly with external threats being faced by Member States’ tax bases, and to tackle non-EU countries that are deemed to consistently abstain from fair play on tax matters.

Up to now, Member States have had a patchwork approach to dealing with tax havens. Hong Kong businesses following these international tax-related developments may recall that the “pan-EU list” of 2015 was simply a compilation of Member States’ individual lists. The Commission had published this consolidated version of national lists in June 2015, as a first step towards a more coordinated EU approach.

The pan-EU list highlighted the sheer divergence in Member States’ lists, and the confusion this created for businesses and non-EU countries. Moreover, that list had only a limited impact. It was then suggested that a common EU list could be a more effective way of tackling countries that are believed to encourage abusive tax practices. Member States agreed that a single EU list would hold much more weight than a medley of national lists, and would have a more weighty dissuasive effect on third countries that were felt to be abusive tax havens.

The list was compiled by means of a three-step process. First, in September 2016, the Commission pre-assessed 213 countries, classifying countries according to, e.g., their economic ties with the EU, and good tax governance levels. This data was compiled in a scoreboard, leading to a narrower list of countries to screen in more depth. At the screening stage, the countries chosen were formally contacted and invited to engage with the EU. Member State experts then assessed the selected jurisdictions’ tax systems in-depth, using an agreed set of criteria. Finally, in the listing stage (one year ago), a letter was sent to each jurisdiction, either confirming that they complied with the criteria, or highlighting deficiencies in their tax systems. Jurisdictions were asked to make high level commitments to address identified deficiencies within a set time period. Those that did not do so were put forward for placement on the blacklist.

A fourth stage, monitoring, will mean a continuous review of all jurisdictions, leading to the list being updated at least once a year. Jurisdictions on the blacklist are also informed about the actions that are expected of them, individually, in order to be de-listed. Unless these actions are taken, they will remain on the list. Thus, while there does not appear to be an appeals procedure (or at least one that has been made public), a removal from the blacklist is certainly possible when the tax related criteria that are felt to be lacking are actually met.

As for the 47 countries on the watchlist such as Hong Kong, they will have to strive to meet the relevant EU criteria which they are currently deemed to be lacking, by the end of 2018, so as to avoid being blacklisted. This is delayed by one year (to end-2019) for developing countries without financial centres. Once again, there does not appear to be an appeals procedure to be removed from the watchlist. However, meeting (and then maintaining) the currently lacking criteria will, one would logically assume, be enough to be de-listed from the watchlist. The EU tax related criteria are as follows:

  • Transparency: The country should comply with international standards on automatic exchange of information and information exchange on request. It should also have ratified the OECD's multilateral convention, or signed bilateral agreements with all Member States, to facilitate this information exchange. Until June 2019, the EU only requires two out of three of the transparency criteria. After that, countries will have to meet all three transparency requirements to avoid being listed.
  • Fair Tax Competition: The country should not have harmful tax regimes, which go against the principles of the EU's Code of Conduct or the OECD's Forum on Harmful Tax Practices. Those that choose to have no or zero-rate corporate taxation should ensure that this does not encourage artificial offshore structures without real economic activity.
  • BEPS implementation: The country must have committed to implementing the OECD's Base Erosion and Profit Shifting (BEPS) minimum standards.

The large majority of jurisdictions have decided to introduce the relevant changes in their tax legislation in order to comply with the EU screening criteria by the end of 2018 (or 2019 for certain developing countries). In the case of Hong Kong, it is said to be committed to implementing the automatic exchange of information. This can be done by either signing the Multilateral Competent Authority Agreement or through bilateral agreements. In addition, Hong Kong has committed to signing and ratifying the OECD Multilateral Convention on Mutual Administrative Assistance or network of agreements covering all EU Member States. As for the existence of harmful tax regimes, Hong Kong is said to be committed to amending or abolishing the identified regime(s).

As for the sanctions that could be applied to countries on the blacklist, it is first of all felt that their very placement is expected to have a dissuasive effect, encouraging them to comply with the established criteria. The EU will not impose withholding taxes on transactions to tax havens or other financial sanctions. Instead, the Commission could withhold certain EU funding to the countries concerned, while Member States are actively encouraged to take defensive measures. These include increased audit risks for taxpayers benefiting from the regimes at stake; non-deductibility of costs; withholding tax measures; reversal of the burden of proof; and special documentation requirements. Once a country is de-listed, the Member States’ defensive measures would, it is expected, cease to apply.

It is noteworthy that EU Member States have not been included in the blacklist. Some members of the European Parliament and the international confederation Oxfam claim that Luxembourg, Malta, Ireland and the Netherlands should, for example, have been investigated and listed, as they do not respect European rules. Be that as it may, finance ministers chose not to include these. The Commission has also explicitly announced that EU Member States, all of whose laws have been put into conformity with global standards, are bound by far-reaching new transparency rules. In respect of the EU list criteria, all Member States are claimed by the Commission to be compliant.

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