26 Jan 2018
EU Tax Haven Lists Highlight International Disagreement Over Tax Avoidance: Developing Countries Criticise Double Standards
As reported in Regulatory Alert-EU Issue 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 ‘grey list’ 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. This second list features 47 countries, including Switzerland, Turkey and Hong Kong.
The EU had hoped that the lists would encourage “good governance around the world [and] maximise preventive efforts against fraud and tax evasion”. The response, however, has been less than positive. Despite it being an attempt by finance ministers to prove their toughness in clamping down on tax evasion and avoidance, for many the lists merely increase the international community’s divide on tax while prompting a backlash from developing countries and transparency NGOs. They also highlight the internal divisions within the EU over tax transparency.
Some criticism accused the EU of holding double standards. 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. Furthermore, the failure to include any of the (non-EU) British Crown Dependencies or Overseas Territories, such as Jersey and Bermuda, was also heavily criticised. Many of these jurisdictions have featured prominently 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 perception that the EU and other developed economies have unfairly used international rules to maintain their economic influence has led to a growing sense of dissatisfaction on the part of developing economies. The G77 has, for many years, called for a greater role for the UN’s committee of tax experts. It has renewed calls to formalise this committee and give it rule-making powers. The European Commission, along with most EU Member States, the US and Japan, have consistently opposed this. They argue that the OECD is a more suitable body, despite none of the G77 being members.
The OECD has focused its efforts on base erosion and profit-shifting (BEPS), issuing a series of directives in the period 2013-15 aimed at preventing firms from re-routing profits through shell companies and providing for the automatic exchange of tax payments information between governments.
Other regional and international bodies have also begun to take notice. In November 2017, for example, the six member countries of the East African Community agreed their own model tax treaty and tax treaty policy. This initiative aims to harmonise fiscal priorities throughout the Great Lakes region. According to the Global Alliance for Tax Justice, an NGO campaigning for greater fiscal transparency and wealth redistribution, the African Union has also gradually increased the political focus on tax transparency. This is particularly relevant in light of the fact that many European governments are currently renegotiating decolonisation-era bilateral tax treaties with developing countries. Many of these draft treaties feature a ‘principal purpose test’ which obliges host countries to prove that a company is avoiding tax. This, say NGOs, is likely to impose additional obligations on developing countries without offering useful or practical rules for their particular fiscal situation.
This points to distinct criticism of the EU’s blacklist as being unfair and unhelpful. Namibia, for example, condemned the list as “unjust, prejudiced, partisan, discriminatory and biased” claiming that it would do little to help countries which had experienced the “illicit outflow of cash, as has been revealed in the recently published Paradise Papers”. Similarly, the African, Caribbean and Pacific (ACP) community described the lists as “unilateral and discriminatory” and in breach of the 2000 Cotonou Agreement which underpins EU-ACP relations.
There are, however, positive movements for the EU. Of the blacklisted countries, Barbados, Grenada, South Korea, Macao SAR, Mongolia, Panama, Tunisia and the UAE are to be transferred to the grey list after committing to improving their tax policies. The large majority of grey listed jurisdictions have already 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.
The European Council’s finance ministers are due to officially recognise the revised blacklist and hold further discussions at their upcoming meeting later in January.