The European Union believes its inaugural list of noncooperative tax jurisdictions worldwide will help boost transparency and fairness. But some believe the list itself is neither transparent nor fair.
When the European Union (EU) in December issued its first-ever list of “noncooperative jurisdictions for tax purposes”, EU Commissioner for Economic and Financial Affairs Pierre Moscovici called it “a key victory for transparency and fairness.”
"If governments are going to reform their systems, you’ve got to know the effect the changes will have on your organization and communicate concerns to governments if you believe the effect is unreasonable."
Mat Mealey, EY EMEIA International Tax Services Leader
But not everyone viewed the so-called blacklist in the same positive light. Some governments objected to their presence on the list of noncooperative tax jurisdictions, while critics called it a politicized response that picks on weaker states and ignores EU Member States’ own harmful tax practices worldwide.
Still in flux
The EU list of noncooperative tax jurisdictions contained 17 jurisdictions upon launch, including Panama, the United Arab Emirates (UAE) and Barbados. The list is still in a state of flux, however. The EU has removed some jurisdictions from the list including the three countries above, after they made commitments “to address deficiencies identified by the EU,” according to a statement from the EU Council. Three new countries were added to the list in March 2018.
The countries removed from the first list were added to a larger, secondary list of countries that have agreed to work toward meeting criteria set by Brussels by the end of 2018 or 2019 (the latter deadline is for certain developing countries without financial centers). If they fail to meet these goals — as well as abandoning what the EU considers their harmful tax practices (such as not charging any tax at all or offering lower rates to foreign companies than domestic ones without ensuring they don’t encourage artificial offshore structures that lack real economic activity) — they too could find themselves on the blacklist.
A new approach
Some EU Member States previously maintained their own list of blacklists determined by their own criteria. The new EU list replaces that patchwork system. It follows in the footsteps of another tax-fairness plan that has amounted to the biggest global overhaul of tax practices in decades.
In 2012, members of the G20 asked the Paris-based Organisation for Economic Co-operation and Development (OECD) to come up with a plan to combat harmful tax practices. The OECD in 2015 presented its base erosion and profit shifting (BEPS) Action Plan, which contains 15 actions to address gaps in country-level tax laws that the OECD says lead to tax revenue losses of as much as USD240 billion each year.
The BEPS plan has grown into a global movement with 111 countries now pledged to implement some or all of its reforms. Its aim is to tax corporate profits where real economic activity occurs instead of in low-/no-tax environments where companies have insufficient workers, assets or sales to support the business being reported.
The EU list took more than a year to develop, with the process kicking off in September 2016 with the selection of 92 countries for review after an initial preselection process. The EU used an existing peer-review mechanism, in which tax professionals from EU countries used a suite of predetermined criteria to evaluate tax systems elsewhere.
Just 20 of the 92 countries selected were deemed to have satisfactory tax practices, while the rest were contacted with follow-up questions and to encourage reforms. The EU held bilateral meetings with country representatives to inform them of the findings and allow for rebuttals or the presentation of reform plans for consideration.
Requested reforms include the following: increasing transparency through another OECD program in which information regarding taxpayers is exchanged between countries; a substantive economic activity requirement for companies instead of on-paper arrangements that shift profits to low-tax environments that were generated by real economic activity elsewhere; the elimination of other harmful tax practices; and the implementation of the BEPS plan.
Among the jurisdictions put on notice and subject to close monitoring by the EU on the secondary list are Switzerland, Lichtenstein, Mauritius and Hong Kong, and British territories including Cayman Islands, Bermuda, Isle of Man, Guernsey and Jersey.
The UAE, Tunisia and Bahrain are among countries that have pledged to implement reforms, according to reports from Reuters and the Financial Times — which in part has resulted in the UAE, Tunisia and Bahrain also being moved to the second listing.
“With its removal of some jurisdictions, the EU has shown that it is willing to move quickly,” says Rob Thomas, a Washington, DC-based director in our tax policy practice.
Those jurisdictions that remain on the noncooperative jurisdiction blacklist could face consequences in terms of EU-country relationships, as well as bilateral moves by EU members. Countries on the list lose eligibility for development funding through the EU’s European Fund for Sustainable Development (EFSD), European Fund for Strategic Investment (EFSI) and External Lending Mandate (ELM).
The European Commission is considering other potential consequences, encouraging members to agree on coordinated sanctions and suggesting defensive measures to protect their tax bases, such as demanding extra documentation and withholdings from companies who operate in countries on the list.
New risks for companies
For companies, the EU’s move creates several new risks. Multinationals with operations in the countries on the blacklist could see EU jurisdictions apply more scrutiny and withholding, and that may mean a reexamination of financial flows and the development of plans to move some operations from countries that are likely to remain on the list.
Reputational risk may intensify for all companies in those countries, even domestic ones that have nothing to do with the type of aggressive tax planning targeted.
“It’s important to know where your company stands on the risk spectrum,” says Mat Mealey, our EMEIA International Tax Services Leader. “If governments are going to reform their systems, you’ve got to know the effect the changes will have on your organization and communicate concerns to governments if you believe the effect is unreasonable. Companies’ audit risk might be much higher.”
No free pass
Excluded from review were EU countries — a point of criticism — as well as 48 “lesser developed” countries.
Domestic opposition to the list came from multiple sources in Europe, including civil society groups and politicians who noted that some EU countries and dependencies fit the criteria for the blacklist even if the EU didn’t consider them. Sven Giegold, a member of the European Parliament, called the list “not worth the paper it is written on.”
“The blacklist does not include any western country, even though accountants, lawyers, banks and much of the infrastructure that lubricates global tax avoidance are located in the West,” Prem Sikka, University of Sheffield Accounting Professor, wrote in The Guardian newspaper in December.
According to a statement from the European Commission, EU countries were omitted because their membership in the group already exposes them to sufficient levels of peer review and scrutiny, and they are already adopting the OECD’s BEPS reforms. It considers the list “a tool to deal with external threats to Member States’ tax bases.”
While the hope is that unified approach will encourage countries to act against them, this isn’t the first time a country or global body attempted to name and shame jurisdictions, according to Thomas. Spain has maintained a blacklist for roughly two decades, and Belgium, Italy, Brazil, Argentina and Mexico have also compiled lists, according to Thomas. The OECD has also created several lists since the global financial crisis — including one in 2017 with no entries as jurisdictions previously listed as non-cooperative made important progress.
The EU list, however, was created with the OECD’s BEPS plan in mind, and the two moves could prove complementary by making BEPS compliance a condition for removal from the list.
 “Fair Taxation: EU publishes list of non-cooperative tax jurisdictions,” European Commission website, europa.eu/rapid/press-release_IP-17-5121_en.htm, 5 December 2017.
 See endnote 1.
 “Taxation: Eight jurisdictions removed from EU list,” European Council website, http://www.consilium.europa.eu/en/press/press-releases/2018/01/23/taxation-eight-jurisdictions-removed-from-eu-list/, 23 January 2018.
 “Taxation: 3 jurisdictions removed, 3 added to EU list of non-cooperative jurisdictions,” European Council website, www.consilium.europa.eu/en/press/press-releases/2018/03/13/taxation-3-jurisdictions-removed-3-added-to-eu-list-of-non-cooperative-jurisdictions, 13 March 2018.
 “Council conclusions on the EU list of non-cooperative jurisdictions,” European Council website, http://www.consilium.europa.eu/media/31945/st15429en17.pdf, 5 December 2017.
 “OECD presents outputs of OECD/G20 BEPS Project for discussion at G20 Finance Ministers meeting,” OECD website, www.oecd.org/ctp/oecd-presents-outputs-of-oecd-g20-beps-project-for-discussion-at-g20-finance-ministers-meeting.htm, 5 October 2015.
 “Questions and Answers on the EU list of non-cooperative tax jurisdictions,” European Commission website, 5 December 2017.
 “UAE, Bahrain say they’ll act to get off EU’s tax blacklist,” Reuters website, www.reuters.com/article/us-eu-emirates-tax/uae-bahrain-say-theyll-act-to-get-off-eus-tax-blacklist-idUSKBN1E1103, 7 December 2017.
 “Tunisia joins states pushing to escape EU tax haven blacklist,” Financial Times website, www.ft.com/content/d24a15ce-e733-11e7-97e2-916d4fbac0da, 2 January 2018.
 “Questions and Answers on the EU list of non-cooperative tax jurisdictions,” European Commission, 5 December, 2017.
 “Tax Havens: EU Finance Ministers agree on whitewashed Blacklist,” Sven Giegold website, www.sven-giegold.de/2017/tax-havens-eu-finance-ministers-agree-on-whitewashed-blacklist, 5 December 2017.
 “A tax haven blacklist without the UK is a whitewash,” The Guardian website, www.theguardian.com/commentisfree/2017/dec/07/eu-tax-haven-blacklist-whitewash-west-imperialism-tackle-avoidance, 7 December 2017.
 See footnote 10.
 “G20 leaders communique demonstrates continued support on tax issues, highlights new developments,” EY, http://taxinsights.ey.com/archive/archive-articles/g20-leaders-show-continued-support-on-tax-issues.aspx, 11 July, 2017.