date | theme

13. July 2020 | Limited and unlimited tax liability in Germany

22. July 2020 | Functional relocation and functional doubling in International Tax Law

02. October 2020 | Founding a company abroad: tax and other implications

30. October 2020 | Avoid travel tax: set up a family foundation and transfer GmbH shares

03. January 2022 | EU blacklist – what measures do tax havens take? (this contribution)

The EU blacklist is a measure to reinforce the demand for internationally established minimum standards. The EU blacklist includes tax regimes known as tax havens. However, many of these tax havens have agreed to introduce or expand such conventions since the publication of the EU’s first blacklist in 2017. In addition to the unflattering appearance in the EU blacklist, concrete measures should also lead to a rethink. This includes both measures that can be taken without a tax reference at EU level and tax consequences that EU member states implement at national level. In fact, the steps taken so far have already yielded some success. For example, the EU blacklist has merged from the original 17 to now only nine tax regimes.

Anyone interested in tax havens also knows the EU blacklist. It lists all the tax regimes in the world that, simply put, denounce the EU for its tax practices. The EU blacklist is about much more than a kind of international tax pillory. Indeed, the inclusion of a tax regime on the EU blacklist is accompanied by a whole series of measures designed to persuade the tax havens listed there to change their tax policy.

The EU list of non-cooperative tax jurisdictions, as the correct designation in official usage, has been available since the end of 2017. The aim of the publication of 17 tax regimes at that time was to combat tax evasion and tax evasion. To this end, the finance ministers of all EU member states came together to achieve this through a common strategy. After all, the Panama Papers recently published had caused an enormous media echo to which the EU had to respond. Otherwise, it would have given the impression that such practices are acceptable. However, the approving implementation of such practices in the denounced tax havens would have seriously damaged tax justice, as officially promoted by the EU.

But before we go into the specifics that characterize the EU blacklist, let’s first explain its structure. Indeed, there is more than just a list that the EU has in this regard. And only one of them is black.

But in order. Let's start with a historical perspective. In the first attempt, the EU examined the tax framework conditions that form the basis for taxation in more than 90 tax regimes worldwide. Developing countries not home to financial markets were excluded from the investigation. Furthermore, no tax regimes of EU member states were affected, because they have internal requirements for taxation. So the investigation was a purely external analysis.

Approximately 1,600 different criteria were used as a benchmark to clarify three basic requirements: compliance with minimum standards in terms of transparency, ensuring fair tax competition and the implementation of the BEPS measures in the sense of the OECD proposal. At the same time, the tax regimes under investigation were given the opportunity to comment. Furthermore, the EU endeavoured to encourage the respective candidates who, in their view, should improve their tax systems to cooperate. For this purpose, it granted them a certain period of time in which the respective tax regime was not included in the blacklist.

The first EU blacklist of 17 jurisdictions was established in 2017: American Samoa, Bahrain, Barbados, Grenada, Guam, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, South Korea, Trinidad and Tobago, Tunisia, United Arab Emirates. However, since a distinction was made between those tax regimes that did not make promises of improvements and those that wanted to be given time to implement, the second group had to be included in a separate list. In this way, the Annex II of the Council of the EU report or, colloquially, the grey list of the EU came about. The EU blacklist is Annex I.

Next, we look at how the EU proceeds after its initial analysis of tax regimes and the resulting blacklist. After all, this is also a continuous process. On the one hand, it monitors compliance with promises. On the other hand, it is also examined whether adverse developments can be detected in other areas that lead to an erosion of the aforementioned tax standards. In such a case, the EU would put such a candidate on its grey or blacklist.

Since the publication of the first EU blacklist in 2017, an update has already been made several times. The first was in 2018 to check whether the previously promised improvements were actually implemented. This happened at the end of the first deadline that the EU had negotiated with the respective tax regimes. A further deadline until 2019 could use some more tax regimes, which had demanded a little more time to implement. Thus, in 2019, the second review and, in conjunction with it, the second revision of the EU blacklist took place.

Since then, the EU blacklist has been reviewed and revised twice a year – once in spring and once in autumn. At the time of this article, the EU blacklist of 05.10.2021 applied. The EU Council publishes up-to-date information on the EU blacklist on its homepage. There you will also find a chronological list of changes to the EU list.

But what exactly is the purpose of the EU blacklist if it does not otherwise entail any consequences other than a negative international image? This question has certainly been joined by those responsible for dealing with the issue. As the answer to this must be sobering, further opportunities have been sought to reinforce the EU's demands for internationally appropriate tax standards in all third country territories. A whole catalogue of measures was conceived. And now let's take a closer look at that.

On the one hand, the EU restricts the use of EU funds that go to tax regimes when they are on its blacklist. This concerns EU budget funds that would otherwise flow to official institutions in the respective territories through the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investments (EFSI) and the EIB External Mandate (ELM). The general framework for securitisation is also affected. At the same time, direct investments in civil society development projects or similar goals are still possible.

In addition to these measures, which have no direct tax reference, also those that are based in international tax law come into play. However, since tax matters are still reserved for national law, EU member states must implement these measures independently. To this end, the EU member states undertake to implement at least some of the tax proposals put forward. It is also possible to determine further measures. Specific measures are also included.

4.2.1. Stricter controls

One of the tax measures affecting tax regimes that are on the EU blacklist is stricter controls, for example on international transactions. This may also include special documentation obligations. This also includes a reporting obligation when applying tax arrangements that take place in connection with these territories.

4.2.2. Direct tax intervention

In addition, EU member states can also take measures that directly affect taxation. This includes the exclusion of deductible costs incurred in areas on the EU blacklist. Furthermore, the collection of withholding taxes can be helpful here. Further steps may also be considered to counter the shift of profits of corporations to the areas designated by the EU blacklist. Finally, a restriction of box privileges in connection with tax regimes on the EU blacklist should also be an option.

The EU’s influence on the blacklisted countries has already borne some fruit. Numerous areas have adapted their tax systems in line with the requirements for minimum standards. These include, for example, adjustments in tax law to ensure the precondition of economic substance in order to be able to use the use of low taxation. Also important are numerous measures of different tax regimes, which lead to greater international transparency in the field of taxes.

In addition to the fulfillment of previously made agreements, which the EU previously published, by the way, the entry of a number of tax regimes into international organizations can also be recorded as a success. For example, inclusion in the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes is linked to compliance with minimum tax standards. The same applies to the OECD BEPS project.

In summary, the success of the EU blacklist since its first publication can be seen in the number of tax regimes currently remaining on it. Of the original 17 countries and territories that were on the EU’s first blacklist, only nine remain in the current list.

Thus, only a few tax regimes are currently on the EU blacklist. But the EU wants to continuously expand its efforts. In the near future, an analysis of tax systems in some of the G20 countries is also expected. Russia, Mexico and Argentina will also be subject to the next review. We can therefore look forward to seeing what happens in this respect.