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EU-wide Tax Havens Blacklist Expected by End of 2017

On 7 November 2017, European Union finance ministers demanded that a common blacklist of tax havens be drawn up for approval by December, due to what they see as tax avoidance by the so-called rich and famous. The ministers are said to have made this matter the main topic of their monthly gathering, ever since the release of the “Paradise Papers”. It may be recalled that these papers are actually a number of financial documents, mainly from an offshore law firm. The papers publicly disclosed the tax affairs of numerous corporate entities and private investors.

To reduce the appeal of jurisdictions that charge little or no taxes, EU ministers discussed a common EU list of non-cooperative third countries in taxation matters which would place such countries under a spotlight. However, ministers still remain divided over whether and how to impose sanctions on countries which help tax avoidance, which is often legal. This highlights the difficulty of such an approach, since proposals on tax matters need to be unanimously approved by representatives from all EU Member States. The release of the “Panama Papers” last year prompted a wave of legislative proposals by the Commission, most of which are still stuck in talks among EU countries.

By way of background, in September 2016 the European Commission launched the process for the adoption of a common EU list of “non-cooperative tax jurisdictions”. This is intended to comprise a list of third countries that are felt not to respect good tax governance principles and, as a result, encourage tax avoidance to the detriment of the tax base of the EU Member States. Being listed on a common EU list of tax havens may have negative implications for bilateral investment. Consequently, it is considered that third countries will have a good incentive to address any of the EU’s good tax governance concerns in order to avoid being put on this list.

Last year, as the first step for the adoption of the common EU list of tax havens, the Commission published a “Scoreboard” of third countries whose tax policies may facilitate tax avoidance. Hong Kong SAR is included in Table I of the Scoreboard, which means that it is among those jurisdictions that the Commission deems necessary to screen further in order to decide whether it should be included in the common EU list of non-cooperative tax jurisdictions.

One year ago, the EU Council of Ministers for Economic and Financial Affairs (“Ecofin”), agreed on the broad lines of the criteria to be applied for the screening and selection of third countries for the purpose of establishing the blacklist. States that charge no corporate tax are not automatically considered at risk of breaching EU tax criteria, but they are subject to screening if they also facilitate the creation of shell companies and other structures that might help tax avoidance.

According to the Council’s definition of fair tax rules, countries can avoid being labelled as tax havens if:

  • jurisdictions do not offer preferential tax measures or arrangements which enable companies to move profits to avoid tax; and
  • countries meet transparency standards and implement anti-profit-shifting guidelines set by the OECD. 

Countries which fail to meet the Council’s criteria can still avoid being blacklisted if they provide a political commitment and a specific plan to comply.

The second step of the process consisted in the screening of the relevant third countries, carried out by the European Commission in cooperation with Member State experts. According to press reports, around 92 jurisdictions had been sent letters earlier this year, as an initial screening to evaluate whether they comply with the rules.

However, the screening process includes a dialogue with the third countries at issue, so as to allow them to react to and address the concerns raised by the Commission. The final common EU blacklist will not be published until negotiations with these countries have been carried out. Third countries which refuse to cooperate or engage with the EU regarding good tax governance concerns will be put on the common EU blacklist of tax havens.

Of the screened countries, some 53 countries and territories have recently been warned to clean up their tax code or risk being on the blacklist, according to press reports. The next step is the report of the Code of Conduct Group (COCG) to the Council, on the basis of which the EU list of non-cooperative jurisdictions could be endorsed by the Council in December 2017.

As tax policy is a national issue, the matter is highly politicised. Whilst the initiative to establish a common EU blacklist of tax havens has been broadly welcomed, several NGOs have already criticised a number of shortcomings. One point of criticism is the fact that the blacklist will only include third countries and no EU countries, so that it will not help improve the situation within the EU.

The NGO “Oxfam” has identified, in its view, several EU Member States as tax havens, such as the Netherlands, Belgium, Ireland and Luxembourg. In addition, it has been criticised that some of the EU’s close partners, including Switzerland and the United States, have questionable tax regimes, but that, for political reasons, these countries are unlikely to be included on the final EU blacklist.

Content provided by Picture: HKTDC Research
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