The EU publishes a list of non-cooperative tax jurisdictions

On 5 December 2017, the EU published its list of 17 non-cooperative jurisdictions for tax purposes. The list forms part of the EU's work to clamp down on tax evasion and avoidance, presenting a united front to dealing with non-EU jurisdictions that, in the EU's view, encourage abusive tax practices. The 17 jurisdictions identified are: American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates.

Final decisions have not been made in respect of eight jurisdictions in the Caribbean that were badly hit by the hurricanes in the summer, namely Antigua and Barbuda, Anguilla, Bahamas, British Virgin Islands, Dominica, St Kitts and Nevis, Turks and Caicos and the US Virgin Islands. These jurisdictions have been given until early 2018 to respond.

The inclusion of the Republic of Korea is surprising. The explanation given is that Korea has harmful preferential tax regimes and did not commit to amending or abolishing them by the end of 2018.

No EU countries were assessed for this list.

In this guest blog post by Heather Gething, Nick Clayton and Dawen Gao of our tax disputes team, we summarise the background to and consequences of the list, and provide a comparison to some other lists of jurisdictions which are perceived as presenting particular tax risks.

What are the consequences of being listed?

A number of EU funds, such as the European Fund for Sustainable Development, the European Fund for Strategic Investment and the External Lending Mandate, cannot be channelled through entities in the listed jurisdictions. Direct investments in these jurisdictions are not affected.

Other EU legislative proposals have also made reference to the list. For example, the public Country-by-Country reporting proposal includes stricter reporting requirements for multinationals with activities in the listed jurisdictions. In the proposed transparency requirements for intermediaries, a tax scheme routed through a jurisdiction on the list will be automatically reportable to the tax authorities.

Member States are also encouraged to agree on coordinated sanctions to apply at national level against the listed jurisdictions, such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions.

How was the list compiled?

In May 2016, EU Finance Ministers endorsed the listing process and agreed on the common criteria to assess selected jurisdictions. The Code of Conduct Group, the body comprising Member State taxation experts in the European Council, managed the process of compiling the list.

213 non-EU jurisdictions were assessed using a three-stage process. At the pre-selection stage, all the 213 jurisdictions were assessed using over 1,600 different indicators and classified according to their economic ties with the EU, financial activity, legal and institutional stability and tax good governance. 92 jurisdictions were selected for screening and were given an opportunity to engage with the EU for an in-depth analysis of their tax systems.   At the end of the screening stage, 72 jurisdictions were asked to make high level commitments to address identified deficiencies within a set time period.  Those that did not do so were put forward for listing.

Three main criteria were used in the listing process:

• Transparency – whether the jurisdiction complies with international standards on automatic exchange of information and information exchange on request and whether it has ratified the OECD's multilateral convention or entered into bilateral agreements with all Member States to facilitate information exchange;
• Fair tax competition – whether the jurisdiction has harmful tax regimes, which go against the principles of the EU's Code of Conduct or OECD's Forum on Harmful Tax Practices; and
• BEPS implementation – whether the jurisdiction is committed to implement the OECD's Base Erosion and Profit Shifting (BEPS) minimum standards.

How is the list updated?

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

In June 2019 more stringent transparency criteria will come into effect, which will require a reassessment of all jurisdictions to ensure that they are in line. The listing criteria will also be updated in the future, reflecting new elements that Member States may agree upon.

How does the list compare with other lists?

OECD

The OECD's most recent progress report on transparency and exchange of information for tax purposes in July 2017 identified Trinidad and Tobago as the only "non-compliant" jurisdiction.

HMRC

In 2013 HMRC conducted an assessment of territories it considered to have insufficient information exchange arrangements with the UK. 57 such territories were identified and classified as "category 3" territories for the purposes of assessing the level of penalties for offshore non-compliance.

Ten jurisdictions feature in both the EU's and HMRC's lists. These are: Bahrain, Barbados, Grenada, Macau, Marshall Islands, Palau, Panama, Saint Lucia, Trinidad and Tobago, and United Arab Emirates.

Comment

Companies with activities in the listed jurisdictions should assess the impact of the relevant EU legislative proposals and identify any compliance issues that can be addressed.

The jurisdictions which are included in the list because of the lack of exchange of information arrangements are likely to be red flag territories for the purposes of assessing the risk of tax evasion.

Those persons promoting or devising tax arrangements involving these jurisdictions and those providing loan finance and management services to persons utilising these arrangements for the purposes of avoiding UK tax may be subject to penalties (equal to fees earned for these services) if these arrangements are abusive, under section 65 and Schedule 16 of the Finance (No.2) Act 2017, which received Royal Assent on 16 November 2017. This new regime applies to all arrangements entered into on or after 16 November 2017.