The European Union is drawing up a “blacklist” of “tax havens” and is proposing measures for its member governments to use to attack them.This is the EU’s latest effort to prop up its member governments’ collapsing finances.

Europe’s out of control public spending, bloated bureaucracies, expanding welfare states and massive unfunded pension liabilities have led to 21 of the EU’s 28 member governments running budget deficits. Spain has already breached the Eurozone’s maximum annual deficit of 3 percent of GDP, France and Romania are very close at 2.98 percent, and five other countries were thought to be at risk of “non-compliance” this year.

But with politicians unwilling to control their spending or rein in their welfare states, not surprisingly they are trying to squeeze more money out of businesses and investors. To try to deflect the responsibility for their economic problems, politicians are increasingly using offshore finance centers as a scapegoat, blaming “aggressive tax avoidance” rather than overspending for their budget deficits.

The current proposal is for a “common EU listing” of “non-co-operative tax jurisdictions” and a list of measures for EU member governments to apply to them.The first stage in the process was drawing up a preliminary “scoreboard” of countries that the EU thought needed investigation. This was based on six factors; three “selection indicators” to decide whether they were important enough financial centers (to European businesses and investors) to be worth examining, then three “risk indicators” to see whether they might be regarded as “tax havens.”

Selection indicators

The EU’s “selection indicators” identify the potential finance centers that they are most interested in challenging; they examine:

  • Strength of economic ties with the EU (e.g. trade data, companies controlled by EU residents; bilateral FDI flows);
  • Financial services exports as a proportion of the local economy; and
  • Stability factors, “to see if the jurisdiction would be considered by tax avoiders as a safe place to place their money”.

This shows the problem of trying to appease the EU.

For years the European Commission, and its friends in the OECD and high-tax campaigning groups, complained that offshore finance centers did not have proper regulatory systems. Many jurisdictions have worked hard to resolve this, and with great success: The EU’s Scoreboard listed Cayman and Jersey as having a better regulatory regime than South Korea and Israel, which are both OECD members. Indeed, several offshore centers now have better regulatory systems than some EU member states.

But where is the incentive to comply if having a stable economy and a well-functioning regulatory regime, as demanded by the EU and its friends, now marks a jurisdiction out as a potential tax haven? This shows the hypocrisy of the high-tax governments’ position; although they say this is about improving the global economy and preventing illegal activity, their actions show that their main objective is actually to collect more tax money.

By the way, the Cayman Islands can pat themselves on the back. In the EU’s scoreboard of finance centers, it comes third for the proportionate size of its finance sector and joint second for the strength of its ties with the EU. But since the prize for this competition is to become the target of the regulatory firepower of the European Union, perhaps it was not a good one to win.

What the “selection indicators” do is largely to identify successful finance centers that are stable democracies with efficient, effective regulatory regimes. No wonder the European Union wants to stamp them out; their good example shows up the gross deficiencies of the EU’s own member governments.

Risk indicators

The EU’s “risk indicators” are an attempt to make it look as if they have objective criteria for directing their attacks on more successful jurisdictions. The three indicators that show which jurisdictions they may consider to be “tax havens” are:

  • Lack of transparency (particularly in meeting international standards on exchange of information on request and automatic exchange of information);
  • Preferential tax regimes; and
  • No corporate income tax, or a zero rate.

Again, look how they shift the goalposts when it suits them.

For years, right back to the early days of the OECD “Harmful Tax Competition” initiative, we have been told that jurisdictions have the right to choose their own tax rates, including zero, and that all the EU and its allies want to stop is “harmful” tax practices – secrecy and distortionary systems that tax some activities but not others.

Offshore finance centers have worked hard over recent decades to change their systems to comply with the EU and OECD demands. The old “offshore regimes” that used to be seen in some jurisdictions, where on-Island businesses were taxed but “offshore” business or “international finance corporations” were tax-free, have been dismantled. I was involved in that process more than ten years ago, working in Jersey on making their corporate tax system compliant with the EU and OECD requirements. It was a lot of work, and it was done not for the benefit of the finance centers or their clients but at the insistence of the EU and its allies. But now that the EU have achieved their stated goals, and removed discriminatory practices, they now reveal what they really want – to stamp out tax competition and prevent more efficient jurisdictions from embarrassing the failing, high-tax big European governments.

A whiff of hypocrisy

The European Commission says that its process is designed to identify those jurisdictions which ”refuse to comply with international tax good governance standards.” But is it really? When one of its criteria for inclusion is having a stable and well-regulated economy, what the European Commission is actually doing is identifying those jurisdictions which do “comply with international tax good governance standards”. Nauru, for example, escapes inclusion in the primary list not because of its transparency (it has previously been judged “non-compliant” on information exchange by the OECD) but simply because it is not regarded as having a sufficiently stable political, economic and regulatory regime to be a viable threat to the EU’s way of doing things.

And the second “selection indicator,” of having a proportionately large financial sector, primarily identifies those finance centers which are successful. We see the same story on the “risk factors.” Some of the most successful, well-regulated offshore finance jurisdictions are given a clean bill of health on transparency and not having distortionary preferential regimes, but are still included on the EU’s list purely for choosing not to levy a corporate income tax. Cayman is in that category, as are Bermuda, the BVI, and the Crown Dependencies of Jersey, Guernsey and the Isle of Man.

What the European Union are objecting to now is not discrimination, distortion or disguising profits, but the embarrassing (to EU governments) fact that some jurisdictions can run a stable, successful economy without corporate taxes.

Common EU list of non-cooperative tax jurisdictions

The preliminary long-list was drawn up a year ago, in September 2016, and contained scores of jurisdictions that fell foul of the European Union’s six tests.But in order to whittle that down to a useable blacklist, for the last few months the jurisdictions on the long-list have been under examination by the EU’s Code of Conduct Group, a non-statutory body described by the EU Observer as “one of Brussels’ most secretive groups.” Their task is to look at those jurisdictions on the initial list of 92, identified by the “selection indicators” and “risk indicators” above, and from it produce a “common list” of “non-cooperative tax jurisdictions” that will be subject to targeted attacks by all EU member governments.

As I write this in September 2017, that shortlist is expected soon, and the European Commission’s aim is to have it agreed by the member states’ governments by the end of December. The Code of Conduct Group was set up to prevent EU member states from themselves engaging in “harmful tax competition,” offering preferential regimes to tempt businesses and investors to move to them from elsewhere in the EU. But its focus has now shifted to trying to regulate non-EU jurisdictions. Operating in an absolute secrecy that is rare for an EU body, the group has been busy examining those 92 non-EU tax systems to identify the ones to be blacklisted. An insider, reported in the EU Observer, said “it’s a very big task,” and “we don’t have time to do our usual work anymore.” So rather than put its own house in order, preventing discriminatory practices in its own members, the EU’s efforts have now been diverted into putting the blame for its economic failures onto non-EU countries.

As I wrote above, the Cayman Islands is on the long list, not because it is discriminatory or harmful but merely because it has an effective, well-regulated low-tax economy. Jersey, the BVI and other leading offshore centers join Cayman on the list for the same reason. Some of the other offshore centers are also on the long list for the more traditional reasons of being non-transparent or having preferential tax regimes; Antigua, Curacao, the Maldives, St Kitts, Singapore and so on.

In addition, several non-EU European countries also make the list, mostly for non-transparency and having close economic ties with the EU (due to their geographic proximity); Armenia, Bosnia, Georgia, Montenegro and others.

EU members are exempt from these attacks, as are a handful of European countries with close ties to the EU, such as Switzerland. Although there is still much tax competition between EU countries, that is not the focus of this work; this is an attempt to blame non-EU jurisdictions for the European countries’ economic problems. Also sanctions generally cannot be applied against EU member governments, who are protected by the EU’s free trade and free movement rules.

But there are some interesting countries on the long list, including China and South Africa (for having preferential tax regimes), and the United States (for both preferential regimes and lack of transparency, the U.S. believing that, under FATCA, information “exchange” only goes one way). If the U.S. appears on the final blacklist, life will get very interesting.

Zero tax

There is some argument within the EU as to whether merely having a low or zero corporate tax rate should put a jurisdiction on the blacklist. Certainly, it was one of the criteria in producing the long list last year, and several jurisdictions that were otherwise fully compliant were put on the long list for that reason alone, including Cayman.

Technically a zero rate was not included in the EU’s official criteria for drawing up the final blacklist, so Cayman ought to be removed from the list. However, the zero tax test seems to have sneaked in by the back door. One of the tests is that “the jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction,” which sounds similar to the old OECD rules against harmful tax practices.

However, the EU Council’s official guidelines for drawing up the blacklist, adopted in November 2016, say that, when applying that test, the Code of Conduct Group should consider “the absence of a corporate tax system or applying a nominal corporate tax rate equal to zero or almost zero” to be “a possible indicator” that the jurisdiction is “facilitating offshore structures … aimed at attracting profits.”

Will Cayman be included?

With the Code of Conduct Group supposedly close to finalizing the draft shortlist, and an agreed list expected by the end of the year, it will be very interesting to see which of these countries is on the shortlist for sanctions. In particular, what of jurisdictions such as the Cayman Islands, that have met all of the EU and OECD requirements for transparency and non-discrimination? Will they be on the final blacklist or will their compliance be accepted? That will depend on how far the EU pushes the definition of “facilitating offshore structures,” and the weighting they give to “a nominal corporate tax rate equal to zero or almost zero.”
If they do feature on the blacklist, despite having worked hard to make their tax systems comply with EU and OECD demands, the EU will find it much harder in future to persuade jurisdictions to voluntarily comply with its requests. But do not expect much fairness or objectivity; Bermuda has already said that the EU’s process appears to be “designed to lead to a predetermined conclusion.”

We shall know soon whether the EU is applying objective tests or if this is a mere self-interested attack on successful non-EU finance centers.

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Richard Teather
Richard acts as a tax policy consultant, including advising the Jersey parliament on their recent tax reforms, is a Fellow of the Adam Smith Institute. and is an editor or member of the editorial board of various journals. His book, "The Benefits of Tax Competition", is published by the London-based Institute for Economic Affairs. His work has been the subject of a debate in the UK Parliament and quoted in government studies in the UK, EU and Australia, and hit the national press when the UK government tried to suppress its own civil servants favourable comments on it.Richard TeatherSenior Lecturer Tax LawBournemouth UniversityChristchurch House C206Poole, BH12 5BBUKT: 01202 961870E: [email protected]W:   


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