The EU tax blacklist is wreaking havoc on the stability – and in some cases, the survival – of the international financial services sectors of small Caribbean jurisdictions. This article discusses the EU tax haven blacklist and the responses of CARICOM and small Caribbean international financial jurisdictions.

In 2015, the EU issued its first blacklist, only to withdraw it after criticism by the OECD, international organisations, and others. In 2016, the EU issued new criteria to determine whether governments met the standards of ‘good tax governance’.

The EU standards to determine good tax governance are tax transparency, ‘fair taxation’ and compliance with OECD Base Erosion and Profit Shifting (BEPS) requirements.

Fair taxation rule 2.2 applies five factors listed in paragraph B of the Code of Conduct to determine if a violation has occurred. The factors are: (1) whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents, (2) whether advantages are ring-fenced from domestic market, so they do not affect the national tax base, (3) whether advantages are granted even without any real economic activity and substantial economic presence with the member state offering such tax advantages, (4) whether the rules for profit determination in respect of activities within a multinational group of companies depart from internationally accepted principles, notably the rules agreed upon within the OECD, and (5) whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.

For purposes of 2.2 and criterion three, the EU Council, in its proceedings with its delegations on Dec. 5, 2017, explained that real economic activity relates to the nature of the activity that benefits from the non-taxation at issue, while substantial economic presence relates to the factual manifestations of the activity that benefits from the non-taxation at issue.

The Council provided, as examples, the following elements that are taken into account when determining if a jurisdiction has real economic activity and a substantial economic presence: (1) adequate level of employees, (2) adequate level of annual expenditure to be incurred, (3) physical offices and premises, and (4) investments or relevant types of activities to be undertaken.

The Council explained that the absence of a corporate tax or applying a nominal corporate tax rate equal to zero or almost zero cannot alone be a reason for concluding that a jurisdiction does not meet the requirements of criterion 2.2. Besides these definitions and examples, the Council’s proceeding minutes do not provide further details on the meanings of real economic activity and substantial economic presence.

As of the start of 2019, the EU has ‘grey-listed’ jurisdictions that made commitments to comply with the EU criteria, including most of the Caribbean jurisdictions. The criteria for ‘fair taxation’ is especially problematic due to its vague and constantly changing nature.

Nevertheless, the EU has exercised its power to compel small jurisdictions to revise their laws.

In particular, the EU requires that entities in specific sectors meet ‘substance’ in the form of employees, premises, and expenditure if they are incorporated, operating in, or tax resident in low or no tax countries.

On March 12, 2019, the EU finance ministers updated the EU list of non-cooperative tax jurisdictions. The list now has 15 countries and is part of the EU’s fair taxation initiative.

The Commission explained that it assessed 92 countries based on three criteria: tax transparency, good governance and real economic activity, and the existence of a zero corporate tax rate. As a result of the assessment – and pressure to avoid the blacklist – 60 countries acted and eliminated more than 100 harmful regimes.

A major issue is that even though the OECD has taken the lead in formulating the BEPS rules in 2015 and requires small Caribbean jurisdictions to meet its criteria in Action 5 of the BEPS project, the EU has decided it wants to establish an independent, more aggressive set of standards.

On March 29, 2019, the Caribbean Community (CARICOM) issued a press release, noting that the EU has issued a revised list of countries that purportedly do not meet tax good governance, including the following five CARICOM members: Barbados, Belize, Bermuda, Dominica, and Trinidad and Tobago. In addition, the statement observed that the EU has placed several other CARICOM members on a monitoring list having made commitments to undertake reforms by December 2019 and they are acting to meet the deadline. They are Antigua and Barbuda, the Bahamas, St. Kitts and Nevis, St. Lucia, Anguilla, the British Virgin Islands and the Cayman Islands.

CARICOM characterises the statement made by the EU Council in support of the inclusion of the blacklisted states as “grossly misleading” and that it misrepresents the response, in good faith, of CARICOM’s members since the initial listing in December 2017.

CARICOM expresses concern that the new listing constitutes an infringement of its sovereign right of self-determination and is starting to border on anti-competitive conduct targeting the decimation of international business and the financial services sector in the Caribbean.

In particular, CARICOM observes the EU Council has stated that Barbados “has replaced a harmful preferential tax regime by a measure of similar effect and did not commit to amend or abolish it by the end of 2019”. Yet, Barbados reviewed its corporate tax regime in 2018 and decided to undertake tax convergence, removing the alleged preference accorded the international business sector. As a result, Barbados currently applies a tax rate of 1% to 5.5% on the taxable income of all corporations registered in Barbados.

The OECD sanctioned this policy and has continued to take the position that a low tax rate does not constitute an unfair tax regime. In addition, Barbados asked for clarification on the areas of variance in the requirements for a low-tax jurisdiction as established by the OECD Forum on Harmful Tax Practices (FHTP) and the EU’s fair taxation criteria. The EU finally responded to Barbados’s request on the day after the issuance of the revised blacklist.

On March 11, Barbados Prime Minister Mia Mottley wrote a letter to Pierre Moscovici, Commissioner of Economic and Financial Affairs, Taxation and Customs, explaining that the EU has not yet stated what enhanced spontaneous exchange of information it wants, or what the higher evidentiary threshold for high-risk intellectual property should be. Additional safeguards for detailed reports by companies on outsourced activities and detailed reported by service providers in terms of work undertaken on behalf of companies, inclusive of keeping time sheets, requires clarity. The EU request for unfettered access to beneficial ownership may violate the Barbados Data Protection Act, which was done to comply with the EU General Data Protection, and it may breach the EU’s international human rights laws. In addition, Barbados has learned that in the future divergence may occur between the OECD Forum on Harmful Tax Practices and EU Criterion 2.2. Prime Minister Mottley said blacklisting for not making open-ended commitments on matters not yet resolved by the EU would not be in good faith.

CARICOM also raises the fact the EU has changed its practice in the case of placing Belize and Bermuda on the grey list in order to monitor them once they gave high-level commitments to address alleged deficiencies.

With respect to Belize, the EU Council alleges Belize “has not yet amended or abolished one harmful preferential tax regime”, notwithstanding the legislative, administrative and tax reforms undertaken by Dec. 31, 2018, which the OECD blessed. The EU also states that Belize introduced a “new and preferential tax measure” in its 2018 tax reforms.

Belize argues that the mentioned tax rates of 1.75% to 3.35% on taxable income of international business companies and entities operating in Belize’s special processing areas are consistent with Belize’s actual income and business tax regime. Still, Belize acquiesced and provided, as the EU demanded, an undertaking to amend this so-called “new preferential tax measure” by Dec. 31, 2019. The EU said it would monitor this and an additional high-level political commitment to address any other concerns of the EU. Notwithstanding its commitments, the EU included Belize on the blacklist.

On March 15, 2019, Belizean Prime Minister Dean Barrow in his administration’s national budget address to Parliament said, “This is outrageous”, recalling that in October 2017, Belize was cited in an OECD FHTP Report because its International Business Companies (IBC) Regime contained potentially harmful tax features.

In response, Belize undertook to amend the regime. In December 2018, the Parliament passed a number of amendments to the IBC Act, the Income and Business Tax Act, and Stamp Duty Act. Simultaneously, it also passed a new Designated Business Processing Act to replace the Export Processing Zone Act about which the OECD had also complained.

Barrow said subsequently that the FHTP, after reviewing the action taken by Belize, reached a new conclusion that the Caribbean country’s IBC regime was no longer harmful.

Barrow said that the EU demanded more action by Belize. “Now it must be stressed that all this was despite the fact that EU Code of Conduct Group is itself a senior member of the OECD Forum. The same OECD Forum that just a few weeks before, with the full involvement of the Code of Conduct Group, had given Belize a “clean bill of health’,” Barrow said. Barrow properly explained that the power disparity in international relations is all that counts.

Bermuda’s inclusion on the list arises as a result of an omission which it corrected after the revised commitment date.

CARICOM underscores how the Dominican case demonstrates the insensitivity of the EU Council to a country that was devastated by two natural disasters – one in 2015 and another in 2017 – and lost its largest investor. Nevertheless, Dominica finished all the mandated legislative and administrative reforms to which the government had committed in mid-2018 to undertake. However, the EU has included Dominica in the revised blacklist because it “does not apply any automatic exchange of financial information, has not signed and ratified the OECD multilateral convention on mutual administrative assistance in tax matters as amended, and has not yet resolved these issues”. Yet, Dominica has signed the OECD multilateral convention and the OECD controls whether to accept its signature.

A press release by the Ministry of Finance in Dominica confirmed that the reasons for listing are unfair and misleading, insofar as, despite severe effects of hurricane Maria in September 2017, Dominica has tried to join the Convention, but received many questions and then the OECD has not responded to its communications.

Trinidad and Tobago faces the challenge in which the government does not have the parliamentary majority under the country’s constitution to provide the legislative reforms required to comply with the tax good governance standards. Nevertheless, the EU has kept Trinidad and Tobago on the blacklist because of the ‘non-compliant’ rating by the Global Forum on Transparency and Exchange of Information for Tax Purposes for the exchange of information on request.

CARICOM and its members have complained that the blacklisting has caused severe reputational harm to the small and vulnerable small jurisdictions. CARICOM complains that the EU is not abiding by the principles underlying the UN Addis Ababa Action, which require shared responsibility, mutual accountability, fairness, solidarity, and different and evolving capacities concerning the mobilisation of resources to achieve the 2030 Agenda for Sustainable Development. In this regard, the EU has not taken into account the limited capacities of small jurisdictions and the many demands on their resources by international organisations.

CARICOM laments that since the latter part of 2018 until now, the EU has regressed to the colonial days when the EU countries dictated policies. With respect to the ECOFIN Council’s allegation of “harmful tax regimes”, the allegation has lacked supporting empirical evidence. In some cases, such as Dominica and Trinidad and Tobago, the EU has selectively relied on the OECD tax governance process. In other cases, such as Barbados and Belize, the EU has ignored the conclusions of the OECD FHTP. CARICOM and other observers believe the ECOFIN council is trying to destroy the financial sector in CARICOM member states even as they try to develop resilience in their economic areas to mitigate their inherent vulnerabilities of small size, limited resources, exposure to natural disasters, and limited political power.

A criticism of the EU listing initiative is that it does not include the many EU countries with international financial services, such as Ireland, Luxembourg, the Netherlands, Cyprus, Austria, Hungary, and the UK. A continuing criticism is that, notwithstanding the EU’s statements of open and vigorous engagement, the targeted countries have complained about ever-shifting and obscure standards, as well as insufficient communication over the standards and the expectations from the EU.

While CARICOM says it will continue to resist the EU’s retrograde approach, its comparative lack of political power requires that it enlist support from other countries with comparatively more political power, such as those in the G7 and G20, and international organisations, including the OECD, the World Bank Group, and the United Nations, as well as from the business community. To develop such support will require establishing that the use of proliferating standards and blacklists undermines normal commerce and the stability of small jurisdictions with international financial sectors. They will need to show that more blacklisting will result in de-risking and further marginalisation of their international financial sectors and their ways of life. They will have to show that blacklisting will cause more unemployment and instability in their jurisdictions, leaving them vulnerable to anti-democratic forces inimical to the EU. The education of the EU and the stakeholders should be broad-based. Already to some extent the small jurisdictions are fighting an uphill battle.

The small Caribbean international financial jurisdictions that survive are likely to be the ones that continue to quickly innovate. Cayman, in particular, has achieved success in innovating due to the comparatively large size and sophistication of its financial sector, including professionals from around the world. In addition, the close collaboration between the private sector and the government has enabled Cayman to anticipate and quickly respond to international regulatory developments, such as the EU listing exercise.

Small Caribbean international financial jurisdictions may want to enlist in their cause some of the other black- and grey-listed countries. The non-Caribbean jurisdictions blacklisted include American Samoa, Fiji, Guam, Oman, Samoa, the US Virgin Islands, the United Arab Emirates, the Marshall Islands and Vanuatu.

The non-Caribbean countries on the grey list are Albania, Armenia, Australia, Bosnia and Herzegovina, Botswana, Cape Verde, Costa Rica, Cook Islands, Eswatini, Jordan, Maldives, Mauritius, Morocco, Mongolia, Montenegro, Namibia, North Macedonia, Nauru, Niue, Palau, Serbia, Seychelles, Switzerland, Thailand, Turkey and Vietnam.

A potential key actor is the United States government since the blacklisted jurisdictions include three US territories. On Feb. 13, 2019, the same day the EU announced its Anti-Money Laundering blacklist, the US Treasury issued a statement, criticising the list of “purportedly” high-risk jurisdictions “posing significant threats” to the EU’s financial system.

Treasury said it “has significant concerns about the substance of the list and the flawed process” used to develop it. Until now, the Trump administration has not prioritised tax transparency and has had tensions with the EU over trade matters. However, as of April 3, 2019, the Trump administration has remained silent on the EU tax haven blacklist.

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Bruce Zagaris

Bruce concentrates his practice in tax controversy and international criminal law. His tax controversy work has included representing individuals on voluntary disclosures, audits, and litigation as well as consulting and serving as an expert witness in criminal trials for defendants and the U.S. Government. Since 1981, he has also represented foreign governments in international tax and financial services, including advising and helping negotiate income tax and tax information exchange agreements. He has also written a number of books and articles, and is an adjunct professor. Bruce is founder and editor of the International Enforcement Law Reporter.
 

Bruce Zagaris
Partner
Berliner Corcoran & Rowe LLP
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: +1 (202) 293-2371            
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