KYC360 Analysis

After lengthy and sometimes complex discussions, the European Union on Tuesday published lists of countries it felt had issues with tax matters.

Two key aspects of these are the grey list and blacklist. Here’s what it’s all about:

What is the EU blacklist?

This is the list of non-cooperative tax jurisdictions. Those that appear on the list failed to take ‘meaningful’ action to address deficiencies in their tax laws or policies identified by the EU and did not engage in a ‘meaningful’ dialogue on the basis of the EU’s criteria.

The list includes the following countries: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates.

What is the EU grey list or ‘watch list’?

The EU grey list comprises 47 countries committed to improving their transparency standards. The EU says that, once fulfilled, these commitments should enhance the tax good governance environment, globally. Work must now continue to review the situation throughout 2018.

What type of commitments did such countries make in response to the EU listing process?

Member States agreed not to list jurisdictions if they committed to address the deficiencies that were found during the screening process.

These commitments had to be made at high political level (e.g. Minister of Finance), and give a clear domestic timeline for implementing the changes. The commitments related to the good governance criteria used in the listing process.

Here is a summary of the commitments made and the countries in those categories:

Improve Transparency Standards
Armenia; Bosnia & Herzegovina; Botswana, Cape Verde; Hong Kong SAR; Curaçao; Fiji; Former Yugoslav Republic of Macedonia; Jamaica; Maldives; Montenegro, Morocco; New Caledonia; Oman; Peru; Qatar; Serbia; Swaziland; Taiwan; Thailand; Turkey; Viet Nam.

Improve fair taxation
Andorra; Armenia; Aruba; Belize; Botswana; Cape Verde; Cook Islands; Curaçao; Fiji; Hong Kong SAR; Jordan; Labuan Island; Liechtenstein; Malaysia; Maldives; Mauritius; Morocco; Niue; St Vincent & Grenadines; San Marino; Seychelles; Switzerland; Taiwan, Thailand, Turkey; Uruguay; Viet Nam.

Introduce substance requirements
Bermuda; Cayman Islands; Guernsey; Isle of Man; Jersey; Vanuatu.

Commit to apply OECD BEPS measures
Albania; Armenia; Aruba; Bosnia & Herzegovina; Cape Verde; Cook Islands; Faroe Islands; Fiji; Former Yugoslav Republic of Macedonia; Greenland; Jordan; Maldives; Montenegro; Morocco; Nauru; New Caledonia; Niue; Saint Vincent & Grenadines; Serbia; Swaziland; Taiwan; Vanuatu.

On Wednesday, the EU updated the list to remove Georgia from the jurisdictions who need to improve transparency standards. Georgia was included under this category in error.

Why has the EU produced a list of non-cooperative tax jurisdictions?

The new list is part of the EU’s work to clamp down on tax evasion and avoidance. It will help the EU to deal more robustly with external threats to Member States’ tax bases and to tackle third countries that consistently refuse to play fair on tax matters.

Up to now, Member States have had a patchwork approach to dealing with tax havens, which has had limited impact.

Who was responsible for screening the selected jurisdictions?

The process was led by Member States. They nominated national tax experts to screen the tax systems of the selected third countries. These experts were grouped into panels, which examined the jurisdictions against the agreed criteria.

What sanctions will apply to listed countries?

First, following Commission proposals, the EU list is now linked to EU funding in the context of the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM).

Funds from these instruments cannot be channelled through entities in listed countries. Only direct investment in these countries (i.e. funding for projects on the ground) will be allowed, to preserve development and sustainability objectives.

Second, the Commission has made reference to the list in other relevant legislative proposals. For example, the public Country-by-Country reporting proposal includes stricter reporting requirements for multinationals with activities in listed jurisdictions. In the proposed transparency requirements for intermediaries, a tax scheme routed through an EU listed country will be automatically reportable to tax authorities.

In addition to the EU provisions, the Commission encouraged Member States to agree on coordinated sanctions to apply at national level against the listed jurisdictions. First steps have been taken in this direction.

Will the list be updated?

Yes. The list will be updated at least once a year. This update will be based on the continuous monitoring of listed jurisdictions, as well as those that have made commitments to improve their tax systems.

How can a country be de-listed by the EU?

A country will be removed from the list once it has addressed the issues of concern for the EU and has brought its tax system fully into line with the required good governance criteria. The Code of Conduct will be responsible for updating the EU list, and recommending countries for de-listing to the Council.

How is the EU list different from the list published by the OECD in July?

The OECD list focussed on countries that failed to meet international transparency standards, as requested by the G20. The EU list is based on a wider set of good governance criteria. In addition to transparency, it also covers fair taxation, adherence to BEPS standards, and the level of taxation, where this might encourage artificial structures and arrangements.

How does the new EU list compare to the “pan-EU list” published in 2015?

The new EU list is a fully coordinated EU project. It was conceived, developed and managed at EU level. The criteria and process were agreed by EU Finance Ministers at the ECOFIN Council, and Member States worked together to screen selected countries and to decide which ones to list.

The final EU list was unanimously endorsed by Member States in Council. The “pan-EU” list was simply a compilation of Member States’ individual lists. The Commission published this consolidated version of national lists in June 2015, as a first step towards a more coordinated EU approach.

What is the difference between this list of non-cooperative tax jurisdictions and the EU anti-money laundering list?

The anti-money laundering (AML) list is focussed on countries with poor anti-money laundering and counter-terrorist financing regimes.

It reflects the Financial Action Task Force (FATF) approach to dealing with countries that have not implemented internationally agreed anti-money laundering standards. Banks must apply higher due diligence controls to financial flows towards these listed countries.

The EU tax list targets external risks posed by countries that refuse to respect tax good governance standards. It has different objectives, different criteria, a different compilation process and different consequences to the AML list.

Source: European Commission

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