EU blacklist does not properly identify tax havens, Parliament says

January 27, 2021 Europe, European Commission, European Parliament, Featured News
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By Francesca Amaddeo, Lecturer-Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland

“The influence of the Union in tackling tax evasion and harmful tax practices worldwide depends on the example it sets at home.”

This is the European Parliament’s warning, made in a non-legislative resolution released on 18 January.

2021 opens with the unexpected, but strong, stance of the European Parliament in fighting against tax evasion, tax avoidance, and aggressive tax planning.

Specifically, the Parliament reveals the inefficiency and inadequacy of the criteria used to assess non-cooperative jurisdictions, namely, tax havens.

What happened?

Moving back to October 2020, you surely remember the surprising delisting of Cayman Islands from the well-known EU tax blacklist of non-cooperative companies.

While, under EU Commission criteria, the Cayman Islands must be considered as cooperative, the Tax Justice Network provided evidence that this was the jurisdiction responsible for the most global tax losses, costing countries over USD 70 billion per year, equal to 16.5% of tax losses worldwide.

This seems to have been the drop that overflowed the bowl.

Indeed, tax havens and offshore centers cause huge financial losses to European Union Member States, which drains resources from national budgets and hampers governments’ capacity.

“The equivalent of one nurse’s annual salary is lost to a tax haven every second,” the Tax Justice Network estimates. The annual cost of corporate tax avoidance is about USD 500 billion.

This is a severe injury for the European Union, especially in such a period where the priority is the recovery from the health, social, and economic crisis caused by the Coronavirus.

Accordingly, the European Parliament decided to play an active role in addressing this sensitive issue.

Even if the list of non-cooperative jurisdictions had a positive impact, it is not enough, the Parliament has concluded. Indeed, States currently listed represent less than 2% of the worldwide tax revenue losses. An improvement is required.

Governance and transparency of the European blacklist

The enhancement of the listing process is the first step. The mechanism also requires more transparency. The Parliament recommends that transparency be formalized through a legally binding instrument.

Besides, relevant criteria must be clearly defined. Only in this way, all stakeholders involved can understand the reasons beyond the listing. It follows that the EU Code of Conduct Group must disclose topics of discussion, technical assessments, summaries, and the conclusions adopted.

It follows that the EU Code of Conduct Group must disclose topics of discussion, technical assessments, summaries, and the conclusions adopted.

Otherwise, the lack of transparency may lead to decisions being misinterpreted and risks undermining public trust in the listing process, particularly when the outcome of the European Union differs from the lists of tax havens created transparently by third parties, the Parliament says.

The reference is twofold. On the one hand, trusted international entities, such as the Tax Justice Network, which constantly monitor evasion and avoidance indexes, especially, the renowned Corporate Tax Havens Index and the Financial Secrecy index. On the other hand, coherence with national blacklists is required.

Moreover, the Parliament emphasizes different levels of transparency. Cooperation between different States represents the basis for success, but worldwide there is a huge discrepancy.

For instance, between countries which adopted the OECD Common reporting standard and the US system of FATCA.

Updating the EU listing criteria

The Achilles’ heel of the current system is represented by the criteria used to identify tax havens. A standalone criterion is required, indeed. A standardized yardstick of the minimum effective level of taxation may represent the solution.

The preferential nature of tax measures and zero tax rate are no longer sufficient. Tax exemptions and transfer pricing mismatches must be taken into account.

That’s not all. The new evaluation must encompass all those measures which lead to low levels of taxation in line with the ongoing negotiations on GloBE proposal, particularly as regards minimum taxation. 

Jurisdictions adopting sweeteners, such as the Cayman Islands and Bermuda, cannot deceive the monitoring Committee.

The Parliament requires the strengthening of the screening criteria, including the substance requirement and its monitoring, to increase the effectiveness of the list and its ability to meet new challenges posed by the digitalization of the economy, regardless of the political consensus on OECD Pillars.

Corporate tax regimes, third jurisdictions with 0% rate or with no taxes on companies’ profits, must be automatically added to the blacklist. Special attention must be paid to the substitution of non-compliant tax regimes with potentially harmful ones. Consistently, public country-by-country reporting can help check substance requirements.

In-house checks are also desirable. The Parliament reveals that also among European countries there are tax havens, whose tax policies are harmful to the internal market. Uniformity is required.

In-house checks are also desirable. The Parliament reveals that also among European countries there are tax havens, whose tax policies are harmful to the internal market. Uniformity is required.

Currently, the listing process lacks transparency, has soft criteria, and limited geographical scope.

Playing on the reputational impact of inclusion on the list, the Parliament aims to strengthen State aid rules and Member States’ national support programs to ensure that businesses with an economic link to non-cooperative jurisdictions, such as those residents for tax purposes in such countries, are not eligible for support.

Strict countermeasures would reduce tax avoidance incentives but the European toolbox of defensive measures is undermined by the discretionary application by Member States.

Tax evasion and avoidance

The Parliament also calls on the Commission to put forward a proposal for coordinated measures tackling tax evasion and tax avoidance, consistently with the OECD negotiations on a minimum effective tax rate at the European level.

Such measures shall encompass non-deductibility of costs; reinforced controlled foreign company rules; withholding tax measures; limitation of participation exemption; a switch-over rule; consequences for public procurement and State aid; special documentation requirements’ and suspension of double tax treaty provisions.

Remarks

European efforts to curb tax evasion and avoidance are helpful, but not enough, the Parliament asserts.

Given the above, the Parliament wishes to be directly involved in monitoring the listing of countries, both among member States and third jurisdictions.

Once again, transparency is the keyword. This time, transparency is required also within the European institutional processes.

This policy is intended as a tangible signal of the awareness that the European Union must set the example.

Francesca Amaddeo

Francesca Amaddeo

Lecturer-researcher at Tax Law Competence Centre, Department of Business Economics, Health and Social Care, University of Applied Science and Arts of Southern Switzerland (SUPSI)
Dr. Francesca Amaddeo, PhD in European law and national legal systems, is an Italian lawyer that works as Lecturer-researcher at the Tax Law Competence Centre, Department of Business Economics, Health and Social Care, University of Applied Science and Arts of Southern Switzerland (SUPSI).

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