20 Nov 2018
EU Issues Fourth ‘Tax Haven Blacklist’ Update: Hong Kong Still in Process of Satisfying Final Good Governance Requirement
This update concerns the fourth 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 lock down on tax evasion and limit tax avoidance. In total, 20 jurisdictions were blacklisted for failing to meet EU standards for good tax governance, including South Korea and Macao SAR, of which five remain. Alongside the blacklist, a watch-list names a further 47 jurisdictions, including Switzerland, Turkey and Hong Kong, which are committed to addressing deficiencies in their tax systems and meeting the following required EU criteria for assessing principles of good governance:
1. Transparency: Compliance with international standards on automatic exchange of information and information exchange on request. In order to fulfil this criterion, jurisdictions 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 the above 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 which began in September 2016. First, national tax regimes were assessed and classified, with some jurisdictions being selected for further screening, culminating in the black- or watch-listing of certain jurisdictions based on commitments proposed in response to tax deficiencies identified in the assessment process. Since publication of the tax haven blacklist, the Council of the EU engages in a continuous review of all jurisdictions concerned, updating the lists at least once per year – although, as the present amendment demonstrates – the code of conduct group may recommend updates at any time. Hong Kong companies should also note that while the EU has yet to agree on sanctions – if any – applicable to blacklisted jurisdictions, such jurisdictions could experience reputational damage or stricter controls on future financial transactions with the EU.
In addition to Namibia’s move to a series of watch-list commitments under all three good tax governance principles, the 9 November amendment sees the Council recognise Aruba’s accession on 27 September 2018 to the Inclusive Framework on BEPS as sufficient to satisfy its BEPS implementation commitments. With this, Aruba joins Hong Kong in the growing list of jurisdictions on the fair taxation watch-list whose sole remaining commitment is to the abolition or amendment of existing harmful tax regimes by 31 December 2018 at the latest.
Looking to Hong Kong specifically, the Secretary for Financial Services and the Treasury committed, on 16 November 2017, to introduce legislative amendments to revise the harmful tax regimes identified. Indeed, the Inland Revenue (Amendment) (No. 6) Bill 2017, passed on 13 July 2018, makes significant amendments to three Hong Kong tax regimes in order to “meet Hong Kong’s commitments made to the OECD and EU”. The EU Council’s code of conduct group may recommend Hong Kong for removal from the watch-list entirely, once it is compliant with good governance tax standards, and deficiencies in its tax system are adequately addressed.
With this in mind, a series of criticisms have been levied against the EU’s tax haven blacklist itself, and against the assessment and commitments procedures surrounding it. Specifically, fair tax advocacy groups and EU lawmakers have taken issue with the speed at which the blacklist has been reduced, with four amendments in less than one year, moving a total of 15 jurisdictions from the blacklist to the so-called “watch-list”. The troublesome nature of the speed at which jurisdictions are delisted is compounded by the opacity of the overall delisting process.
Furthermore, members of the European Parliament and Oxfam have raised concerns as to whether the blacklist and watch-list present a complete or accurate picture of the wide range of jurisdictions facilitating tax avoidance practices. Notably, the EU’s failure to investigate and list such EU Member States as Luxembourg, Malta, Ireland and the Netherlands has reinforced the perception on the part of developing countries that the Union is unfairly targeting third countries in order to maintain its economic influence.