28 Oct 2016
European Commission Completes First Step in the Three-Step Process for the Adoption of a Common EU List of Third Country Tax Havens
On 14 September 2016, the Commission unveiled a “Scoreboard” of third countries whose tax policies may facilitate tax avoidance. This marks the completion of the first step, out of three, towards the adoption of a common EU list of “non-cooperative tax jurisdictions”, i.e. a list of third countries that do not respect tax good governance principles and thereby facilitate tax avoidance to the detriment of the tax base of the EU Member States.
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 tax havens.
The establishment of the common EU list is designed to ensure that profits generated in the EU by persons or companies are effectively taxed within the EU. It follows calls from EU Member States to develop a common EU approach to prevent outbound profit-shifting to third countries, which these Member States see as external threats to their tax bases.
By way of background, in June 2015, the European Commissioner for Taxation and Customs, Pierre Moscovici, revealed a pan-EU list of the “top 30” non-cooperative countries, equivalent to a ‘blacklist of tax havens’ which represented a threat to Member States’ tax bases. This pan-EU list was based on the national “blacklists” drawn up by the EU Member States and it included those countries or territories that feature on at least ten Member States’ national blacklists. The pan-EU list of June 2015 also included Hong Kong.
Building on this list, in January 2016, as part of its External Strategy for Effective Taxation, the European Commission launched the process for establishing a common EU list of third countries that refuse to comply with tax good governance standards. Unlike the pan-EU list, which was compiled from Member States’ independent national blacklists, this common EU list of tax havens is based on a screening of third countries’ tax standards. The European Commission in cooperation with Member State experts will carry out this screening. Being listed on a common EU list of tax havens may have implications for bilateral investment. Consequently, it is considered that third countries will have a good incentive to address any of the EU’s tax good governance concerns in order to avoid being put on this list.
It is the Commission’s intention to base the establishment of the EU list of tax havens on a three-step process with the following steps:
Step 1: Producing a Scoreboard: The Commission produces a scoreboard of indicators to help determine the potential risk level of each third country's tax system in facilitating tax avoidance. The Commission presents the findings of this Scoreboard to Member State experts.
Step 2: Screening of relevant third countries: The EU Member States decide which third countries should be formally screened by the EU. This screening will include a dialogue with the third countries in question, to allow them to react to the concerns raised.
Step 3: Inclusion in a common EU list: Once the screening process is complete, third countries which have refused to cooperate or engage with the EU regarding tax good governance concerns should be put on the common EU list of tax havens.
On 14 September 2016, the Commission has completed Step 1 towards the common EU list by unveiling the Scoreboard of third countries in relation to their tax policies. The Scoreboard shows the results of an analysis carried out by the Commission, under which third countries were evaluated based on economic, financial, stability and tax good governance indicators. 160 third country jurisdictions were assessed for potential further screening (to be carried out under Step 2) based on selection indicators that are grouped into the following three dimensions:
1) Strength of economic ties with the EU: To see how strong the economic ties are between the third country and the EU, indicators such as trade data, affiliates controlled by EU residents and bilateral FDI flows were examined.
2) Financial activity: To determine if the third country had a disproportionately high level of financial services exports, or a disconnection between its financial activity and the real economy, indicators such as total FDI, specific financial income flows and statistics on foreign affiliates were used.
3) Stability factors: To see if the third country would be considered by tax avoiders as a safe place to place their money, general governance indicators such as corruption and regulatory quality were examined.
Hong Kong SAR ranked above the minimum threshold in all three of the dimensions, and was therefore considered as economically relevant for possible further screening. It was listed in Table I among dozens of other third country jurisdictions that also rank highly in all selection indicators.
For each of the jurisdictions that were identified as economically relevant based on the selection indicators, the European Commission also carried out a basic assessment of the potential risk that the jurisdiction facilitates tax avoidance. The risk indicators used for this assessment were: (i) the jurisdiction’s status with regard to the international transparency standards, (ii) the existence of potential preferential tax regimes and (iii) the existence of a tax system with no corporate income tax or a zero corporate tax rate.
In the Commission’s Scoreboard, the risk indicators (i) and (ii) above are indicated as being relevant with regard to Hong Kong SAR.
The findings of the Scoreboard will now serve as a basis for EU Member States to decide whether Hong Kong SAR, and other jurisdictions, should be screened in more detail under Step 2 of the process. If it is selected, it may be included in the common EU list of tax havens. This could have negative implications for bilateral investments in the jurisdiction so Hong Kong SAR may decide to modify its tax rules.
The common EU list of non-cooperative tax jurisdictions is expected to be drawn up by the end of 2017.