The EU’s Economic and Financial Affairs (Ecofin) Council updated the European Union’s list of non-cooperative jurisdictions for tax purposes on March 12. The “blacklist” has tripled in length to comprise 15 countries and now includes Barbados, Bermuda, United Arab Emirates, and Oman.
The list is part of the EU’s wider efforts to tackle tax evasion, avoidance and unfair tax competition. It was conceived to help the EU counter external threats to EU countries’ tax bases and to level the playing field between EU and non-EU countries on tax matters. The list was first published in December 2017 and is updated at least once a year, based on the Council’s monitoring of and ongoing dialogue with listed jurisdictions. The Council’s view is that this process has a direct impact on tax transparency and fairness, resulting in 60 countries taking action and over 100 harmful tax regimes being abolished.
The criteria adopted in assessing countries include transparency (such as compliance with international standards of automatic exchange of information), fair tax competition, and implementation of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) minimum standards.
Ten countries have been added to the blacklist, including Oman and the United Arab Emirates.[1] The “greylist”, comprising countries that have committed to addressing EU concerns, has been reduced to 34 countries from 63 countries.
Five countries on the list have made no commitments to address EU concerns since the first blacklist was adopted in 2017.[2]
The other 10 countries have been moved from the greylist to the blacklist, either because they did not follow up on commitments made, or they did not deliver on their commitments within the agreed timeframe.
Barbados has been moved from the greylist to the blacklist on the basis that it has replaced a harmful preferential tax regime by a measure of similar effect, and did not commit to amend or abolish it.
The Council’s concern with the UAE tax regime is that it “facilitates offshore structures and arrangements aimed at attracting profits without real economic substance”. In relation to the Omani tax regime, the concern is tax transparency, in particular the failure to sign and ratify the OECD Multilateral Convention on Mutual Administrative Assistance. Each jurisdiction had committed to taking steps to address these issues by the end of 2018.
The Council’s concern with the Bermudian tax system also relates to economic substance. Bermuda has committed to addressing this issue in the area of collective investment funds by the end of 2019.
The list is intended to “name and shame” non-EU countries into changing their tax systems to comply with EU standards. However, to ensure the list has a real impact, the European Commission has also implemented various sanctions at EU level. For example, EU money managed by international or development financial institutions, including the European Investment Bank (EIB) and the European Fund for Sustainable Development (EFSD), cannot be channeled through entities in blacklisted countries.
In addition, some EU legislative proposals refer to the list, such as the proposals for stricter reporting requirements for those with activities in blacklisted jurisdictions and increased transparency requirements for intermediaries if a tax scheme is routed through a blacklisted country. While not yet binding, it may be prudent to assume that investors in blacklisted jurisdictions who want to invest money in vehicles managed by the international bodies mentioned above would, or will in the future, be affected by these measures.
One such measure already in force is the reporting obligation under the EU’s Directive on administrative cooperation in the field of taxation (DAC 6). DAC 6 provides for mandatory disclosure of certain cross-border arrangements to domestic tax authorities, which will be required to share the information with all other EU countries by way of automatic exchange. An arrangement may be reportable under DAC 6 if it involves deductible cross-border payments from an entity in the EU to an associated enterprise in a blacklisted country, regardless of whether the arrangement results in a tax advantage.
The European Commission also encourages EU countries to adopt “defensive measures” at national level, including increased monitoring and audits, new tax rules, withholding taxes and mandatory disclosure of certain arrangements.
Countries on the greylist are not subject to these measures, but are closely monitored by the Council and risk being blacklisted if they do not deliver the promised reforms.
The European Commission has made clear that it intends to push EU countries to step up their efforts to take “strong, binding and coordinated defensive measures as soon as possible” against blacklisted countries. Time will tell which countries will respond to this pressure.
There is a chance that the list may be imported into other national tax blacklists, whether in the EU or elsewhere (some EU countries already have such lists, including Italy and Spain).
Certain overseas investors may have concerns about investing in blacklisted countries, as a result of tax changes (actual or potential) or any perceived reputational risk.
If you have activities in or involving a listed jurisdiction, you should consider the implications for your business of that country becoming listed in light of the EU’s specific concerns about the tax regime. You may also wish to follow the developments of the blacklist closely. Morgan Lewis would be happy to discuss any specific concerns you have regarding entities formed in blacklisted countries or feedback you may have received from banks or investors if your company is formed in a blacklisted jurisdiction.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Kate Habershon
Grace Tan
[2] American Samoa, Guam, Samoa, Trinidad and Tobago, US Virgin Islands