The European Union plans to update its year-old blacklist of tax havens to include new criteria and an expanded geographic reach—possibly all the way to the U.S.
The bloc has previously threatened that the U.S. could wind up on the blacklist, along with the likes of Guam and Trinidad and Tobago, unless it adopts stricter financial reporting standards and agrees to share that information with other tax authorities.
The 2019 blacklist of tax havens will include those that haven't adopted the Organization for Economic Cooperation and Development's Common Reporting Standard, like the U.S. The standard calls on countries to obtain information from their financial institutions and automatically exchange it with other countries every year.
"So far the Trump Administration has not moved to adopt the OECD Common Reporting Standard," Paul Tang, a member of the European Parliament from the Netherlands, told Bloomberg Tax in a Dec. 8 interview.
"We have been assured by the European Commission that if it does not do so by June of next year  the process for it being listed will begin."
The EU's goal is to flag jurisdictions that have failed to make sufficient commitments to increasing tax transparency and reducing preferential tax measures. Its overall goal is to eliminate tax avoidance and fraud.
Countries on the blacklist could face sanctions—measures the EU has discussed include imposing withholding taxes on any funds moved from the EU to a country on the list.
What started out as a list of 17 countries in December 2017 is down to six. Besides the U.S. Virgin Islands, the others, including Samoa, American Samoa, Guam and Trinidad and Tobago have insignificant financial centers.
The new criteria for the blacklist adopted for 2019 will require countries to apply the OECD's base erosion and profit shifting minimum standard—requiring companies with a $750 million global turnover to report country-by-country tax and profits to national tax authorities.
The EU is also negotiating new rules to require countries or independent territories to apply transparency standards to publish the beneficial owners of companies.
"Negotiations are ongoing with the beneficial ownership requirement but the idea is to target millions of shell companies based in offshore financial centers," an EU diplomat told Bloomberg Tax on the condition of anonymity.
In addition, the EU will expand the number of countries to be vetted in 2019 with 12 new additions, including Russia, according to the EU diplomat.
Decision Time on the U.S.
Most EU officials, tax experts and advocacy groups expect 2019 to be crucial because the bloc must decide how to deal with the U.S.
There were several other tension points between the EU and the U.S. in 2018: The bloc accused the U.S. of violating trade rules through some of its international tax reform provisions, and the U.S. opposed the bloc's proposal to tax digital companies.
"Standards of transparency and cross-border cooperation on tax issues can only be considered fair and effective if they apply to all jurisdictions rather than just a targeted few," Jude Scott, the CEO of Cayman Finance, which represents the multibillion dollar financial service industry based on the Caribbean island, told Bloomberg Tax in a Dec. 11 email.
Report Card on Blacklisting Process
Some EU politicians and tax advocacy groups insist that the EU gets either a failing grade or an "I" for incomplete in its tax haven blacklisting process.
For others, the first year of the EU tax haven process has made a mark as part of an overall trend away from the the use of offshore financing centers in places like the Channel Islands or the Caribbean.
"There is a general pressure on companies using offshore financial centers, driven by politics, popular media and multinational organizations such as the OECD," Antony Mancini, a tax partner with KPMG Channels Islands Ltd. told Bloomberg Tax in a Dec. 11 email.
EU Member State Exemptions
"So far the process has been an overall failure because the process has been unfair or inconsistent," Jeppe Kofod, a Danish member of the European Parliament and a leading member of the institution's Tax Committee, told Bloomberg Tax in a Dec. 10 interview. "When we have tax havens within the EU and they are not on the list it makes, it hard to go after others outside the EU."
The EU Code of Conduct Group for Business Taxation, made up of officials from EU member nations, has the final say on which countries end up on the EU list. It excludes members of the European Parliament.
"We have a situation where the United States does not meet the transparency criteria but the EU member states have decided to ignore that," Tang said. "This goes to show that the process is political."
Although the current EU tax haven blacklist only contains six countries and jurisdictions, the EU member states agreed a year ago to establish a gray list. This is a roster of countries, which include more than 50 countries, that currently don't comply with EU transparency and fair corporation criteria but made commitments to do so by the end of 2018.
EU member nations are due to decide by March 2019 whether the gray list countries have either met their commitments or should be placed on the blacklist.
"The gray list has been positive in pushing countries to reform harmful tax practices and has for the first time addressed the issue of zero tax regimes," said Johan Langerock, an Oxfam International official following the EU tax haven listing process, told Bloomberg Tax Dec. 11.
Indeed one of the most critical issues the EU must decide in the coming months is whether countries or jurisdictions with zero corporate tax rates have substantial "economic substance" on the ground to justify the multinational corporations using their territory as a headquarters. The goal is to clamp down on letterbox companies.
Economic Substance Requirements
According to Mancini the EU is succeeding in the Channel Islands and in other territories as of Jan. 1, 2019.
"Guernsey and Jersey are introducing substance requirements for tax resident companies carrying out relevant activities, " Mancini told Bloomberg Tax Dec. 12. Guernsey and Jersey are both on the EU gray list.
The Cayman Islands, one of the world's largest offshore centers for fund management, is another territory on the EU gray list. It has also recently adopted "economic substance" requirements for any company that uses its territory for its headquarters.
"Because the EU also has used the [OECD] Forum for Harmful Tax Practices as its base for the EU's non cooperative tax jurisdiction initiative, Cayman's bills therefore fulfill our commitment to the EU," the Cayman Island Ministry of Financial Services and Home Affairs in a Dec. 6 press release. It added that the legislation will be approved by the end of 2019.
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