Department of Law Spring Term 2020
Master Programme in International Tax Law and EU Tax Law Master’s Thesis 15 ECTS
Differences, Similarities, and Proposals for the OECD and the EU Blacklisting Measures
Author: Monika Songailaitė
Supervisor: Katia Cejie
2 Abstract
The globalization and cross-border transactions have increased the possibilities for the multinational companies and wealthy individuals to benefit from aggressive tax planning using offshore jurisdictions. The European Union and the Organisation for Economic Co-operation and Development (OECD) have started initiation of the global international transparency standards by naming and shaming the jurisdictions having preferential tax legislation.
The main objective of the thesis is to differentiate the blacklists and criteria issued by the OECD and the European Union to determine the non- cooperative tax jurisdictions. The criteria of tax transparency, fair taxation, and the implementation of the BEPS are analysed from the perspective of the tax havens. The main problems are identified such as issues of reciprocity and selection bias. The suggestions are provided to ensure the full effectiveness of the measures enacted by the OECD and the European Union to ensure fair practices globally.
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Table of Contents
List of Abbreviations ... 4
1. Introduction ... 5
1.1. Background ... 5
1.2 The purpose of the thesis ... 6
1.3 Delimitations... 6
1.4 Method and materials ... 6
1.5 Structure ... 9
2. Historical background and initial policies ... 9
2.1 The Notion of Tax Haven ... 9
2.2 History prior blacklisting ... 10
2.3 Problems caused by preferential regimes ... 11
2.4 First initiative – OECD Tax Competition Report ... 12
2.5 The European Response: The Blacklist ... 14
3. Similarities and Differences between The Measures ... 16
3.1 The purposes ... 16
3.2 Selection criteria to identify harmful tax practices ... 16
3.2.1 Criteria for transparency... 16
3.2.2 Criteria for fair taxation... 19
3.2.3 Implementation of BEPS Action Plans ... 20
3.3 Countries selected ... 21
3.4 Enforcement ... 23
3.5 International response ... 25
3.6 Summary of the criteria ... 26
4. Criticisms and Proposals to ensure effective blacklisting ... 27
4.1 The Issue of Reciprocity and Lack of Cooperation ... 27
4.2 Selectivity bias ... 29
4.3 Blacklisting alternatives ... 30
5. Conclusions ... 33
6. Bibliography ... 36
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List of Abbreviations
BEPS Base Erosion and Profit Shifting CFC Controlled Foreign Corporation
CIT Corporate Income Tax
CRS Common Reporting Standard
EC The European Commission
EU The European Union
FATCA Foreign Account Tax Compliance Act
GDP Gross Domestic Product
OECD Organization for Economic Cooperation and Development
5 1. Introduction
1.1. Background
The scandals of Panama and Paradise Papers have revealed that trillions of euros are being held in offshore jurisdictions around the globe.1 The controversy against the tax havens arose again when the released publication announced that at least 366 corporations of America’s Fortune 500 maintain subsidiaries in tax havens.2 The strong bank and financial secrecy laws, zero or symbolic corporate income tax rates have become very attractive to corporations and wealthy individuals to minimalize the tax liability in high tax jurisdictions.
The OECD, as one of the leading international organizations responsible for economic development has started initiating measures against non- cooperative jurisdictions to eliminate global tax evasion. More than 20 years ago, the OECD released a Harmful Tax Competition Report to raise the issue of tax competition and encouraged to start a collaboration between the countries.3 After two years, the organization issued a progress report blacklisting countries that failed to meet the previously established criteria.4 To follow the offshore financial leaks in 2015, the EU decided to establish its criteria and the blacklist. In 2017 the European Union has released the list of non-cooperative jurisdictions which will be updated annually.5 The major concerns regarding these initiated measures are the main differences and effectiveness. Thus, many questions could be raised regarding these two procedures. For instance, what are the purposes of such provisions, what are
1 G. Zucman “The Missing Wealth of Nations: Are the Europe and the U.S. net Debtors or net Creditors?” (2013) (Volume 128, Issue 3, The Quarterly Journal of Economics), page 3.
2 R. Phillips, M. Gardner, A. Robins, M.Surka “Offshore Shell Games 2017, the Use of Offshore Tax Havens by Fortune 500 Companies” (17 October 2017) (Institute on Taxation and Economic Policy), page 5.
3 Organisation for Economic Co-operation and Development, “Harmful Tax Competition: An Emerging Global Issue” (1998).
4 Organisation for Economic Co-operation and Development, “2000 Progress Report: Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices’’ (2000);
5 Council of the European Union, “The EU list of non-cooperative jurisdictions for tax purposes.
Council conclusions’’ (adopted 5 December 2017) (15429/17).
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the differences, and whether the blacklists are effective to achieve its objectives?
1.2 The purpose of the thesis
The main objective of the thesis is to identify the purposes, differences, and similarities between the blacklisting measures created by the OECD and the European Union to fight against non-cooperative jurisdictions and offshore tax evasion. In addition to this, these two reports should be compared to propose more effective ideas to achieve the main goals of the policies.
1.3 Delimitations
One could write a book about non-cooperative tax jurisdictions, the fiscal practices performed in those countries, including the effects of BEPS Action Plans and the exchange of tax information. Unfortunately, these topics will not be discussed in the thesis in depth. The thesis will not provide a general discussion on issues of tax evasions and tax avoidance which are important, however, very complex in relation to tax havens.6 Lastly, the research will not be aiming to name and shame specific jurisdictions. As a result, pointing at certain jurisdictions is avoided, unless essential to describe the context.
1.4 Method and materials
The research conducted throughout the thesis is a policy-oriented evaluating report to analyse the similarities and differences between the European Union and the OECD blacklisting measures of non-cooperative jurisdictions. The methodology is being applied to achieve the main objectives of the thesis is legal dogmatic used to describe the overall picture of the existing legislation.
Thus, the focus is given to the discussion of de lege lata. Therefore, to identify the distinctions and similarities of the discussed sources of the blacklists the comparative approach is used.
6 J.G. Gravelle “Tax Havens: International Tax Avoidance and Evasion” (15 January 2015) (Congressional Research Service), page 26.
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The main policies that are being analysed in the thesis are The EU Blacklist adopted by the Council of the European Union, “The EU list of non- cooperative jurisdictions for tax purposes’’7 and from the OECD perspective, the Harmful Tax Competition Report.8 Important to mention that approximately two years after the Harmful Tax Competition Act has been published, the blacklist with non-cooperative jurisdictions has been released by the OECD that described the effectiveness of the criteria and defined the
“harmful” practices.9
The research includes various scholarly articles to elaborate on the arguments or present the outcome of the enacted legislation. The main articles include the analysis of the effects of the OECD recommendations. Concerning the EU, there are very few observations from the professors regarding the outcomes of the EU criteria. The most helpful and accurate analysis are presented by the Tax Justice Network and the Oxfam that are non- governmental organizations (NGOs) providing legal and economic analysis of the international tax standards. For example, the article was written by the Oxfam observing the territories that may appear on the list, and the main criticisms to the OECD and EU criteria are used actively throughout the thesis.10 The article assisted in drafting the main arguments and proposals presented in this thesis.
Unfortunately, the academy still lacks articles about the effects of the EU legislation on non-cooperative jurisdictions. Mainly, the articles written contain information about the development and description but lacks the information about the effects on third countries. Thus, we will still have to
7 Council of the European Union, “The EU list of non-cooperative jurisdictions for tax purposes’’
(adopted 5 December 2017).
8 Organisation for Economic Co-operation and Development, “Harmful Tax Competition: An Emerging Global Issue” (1998).
9 Organisation for Economic Co-operation and Development, “2000 Progress Report: Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices’’ (2000).
10 Oxfam “Blacklist or Whitewash? What a real EU blacklist of tax havens should look like”
(November 2017).
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wait for more elaborated articles about the economic effects and the legislative changes in those jurisdictions.
Even though the EU Blacklist has attracted lots of media attention, academic scholars writing about tax havens and offshore financial flows do not seem to discuss the policies very often. Tax evasion should be considered as an international issue because of the globalization. For this reason, the proposed issues could provide a general idea of how the world could develop future legislation. Lastly, there are no apparent scholarly articles that make a comparison between the Harmful Tax Competition Act and the EU blacklist.
Thus, the research could promote an understanding of the differences and the effects of these measures.
However, before entering into an accelerated analysis of the policies created by the organizations, the main problems caused by preferential tax regimes are discussed. Fortunately, many articles are defining offshore jurisdictions.
The primary and most used article in every research conducted by the legal scholars appears to be research conducted by D. Dharmapala and J.R. Hines Jr. The article is providing the analysis and definition of tax havens and economic reasons behind such jurisdictions.11
Tax havens receive mostly negative reviews from the scholars and national governments for obvious reasons – their assistance to conduct tax fraud activities. These jurisdictions were even defined as “parasitic”. However, there are not many sources that discussed the situation from the tax haven perspective. For example, the countries may be pressured by the economic giants leaving them no space to compete in the global market. For this reason, the research of these jurisdictions becomes interesting and important to understand how the assistance could be provided, so these countries could become competitive in other sectors.
11 D. Dharmapala and J.R. Hines Jr. “Which Countries become Tax Havens?” (21 July 2009) (Journal of Public Economics 93).
9 1.5 Structure
Apart from the introduction, the thesis has the introductory chapter (Chapter 2) providing background information about the notion of tax havens and why certain policies are necessary against these jurisdictions. Moreover, the measures taken by the OECD and the EU will be explained. The third chapter will discuss the criteria chosen to define the non-cooperative jurisdictions by two organizations; what are the differences and similarities between the enforcement mechanisms applied. The fourth chapter will provide the possible solutions to enter into agreements between these countries – what common measures should be taken – should the major economies of the world use an aggressive tone or propose the negotiations in a good faith because, in the end, it is the companies and wealthy individuals that decide to shift profits to offshore jurisdictions.
2. Historical background and initial policies
2.1 The Notion of Tax Haven
The definition of the “tax haven” is not as straightforward as it appears from the beginning. The main reason is that there is no universally adopted definition under the OECD framework or any bilateral taxation treaty.12 The scholars analyzing tax havens Dharmapala and Hines Jr. define tax havens as
“locations with meager tax rates to attract foreign investors <…> As a result, these countries enjoyed significant economic growth over the past 25 years”.13 The OECD, as discussed later, has no definition, however, the organization has set the criteria that assist in defining such jurisdictions. The chapter will outline the historical facts and circumstances concerning the raise of tax haven jurisdictions. In addition to this, the initiation of blacklisting these territories will be presented.
12 M. Orlov “The Concept of Tax Haven: A Legal Analysis” (2004) (Volume 32, Issue 2, INTERTAX) page 2.
13 D. Dharmapala and J.R. Hines Jr. “Which Countries become Tax Havens?” (21 July 2009) (Journal of Public Economics 93), page 1058.
10 2.2 History prior blacklisting
The historians claim that the territories offering preferential tax regimes existed back in 166BC in the Mediterranean. The island of Delos (currently the territory of Greece) practiced the form of trade free of taxes and customs duties. For this reason, the island has received the attention of the traders and become a centre for trading ivory, textiles, wine, and other luxurious items.14 The mutation of the preferential jurisdictions has developed throughout the centuries, depending on the historical circumstances. However, as could be seen, nowadays the situation is similar. There are still some jurisdictions that offer better tax regimes to attract investors.
The rapid growth of tax havens in the 1980s was caused by market liberalization and the development of financial transactions.15 The question of why the countries become tax havens could be answered differently. First of all, some countries decide to introduce preferential fiscal laws to boost national economies.16 What is more, other countries may consider that lower tax rates and benefits provided to the companies are the most efficient method to attract foreign direct investment.
The history of colonization could be identified as another reason. The speculation has been raised by Raymond Moore years ago that the “mother counties” of the decolonized jurisdictions encouraged to adopt legislation that could assist these countries in obtaining supplementary revenue from tax planning and other financial operations.17 These jurisdictions could assist the companies established in high tax “mother” jurisdiction to shift the profits to these territories.
14 A. Raposo and P. Mourao “Tax Havens or Tax Hells? A discussion of the historical roots and present consequences of tax havens” (2013) (Financial Theory and Practice), page 3.
15 R. Palan, R. Murphy, C. Chavagneux “Tax havens: how globalization really works” (4 July 2011) (Journal of Economic Geography, Volume 11, Issue 4); page 754.
16 Moerman “The Main Characteristics of Tax Havens” (1999) (Intertax, Vol.27, No.10), p. 372.
17 R.E. Moore “Attitudes of Tax Haven Countries with Regard to the Tax Haven Problem” (1980) (International Fiscal Association Seminar in France, Vol.5), page 40.
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Lastly, some become tax havens to increase competitiveness internationally.
Tax havens are geographically small, lacking sufficient natural resources, depending on tourism sector. It could be argued that these countries have invested in the financial services sector and are being supported by multinational enterprises.
2.3 Problems caused by preferential regimes
The main issues caused by non-cooperative tax jurisdictions are tax evasion conducted through aggressive tax planning by the MNEs and wealthy individuals. The illegal shifts of money have become a major headache for national tax authorities worldwide. The main services provided by these jurisdictions are the shelter of financial activities through administrative and bank secrecy laws. As an example, a sham corporation can be established in a tax haven and the profits made in the high tax jurisdiction can be transferred to this sham company that has a default beneficial owner. In this way, the earning remains untaxed, while at the same time, the jurisdiction that should be claiming tax rights losses the revenue.
There are other examples of how these preferential tax laws could be used.
For example, in transfer pricing, setting the pricing of goods and services sold between affiliates that would lower a tax bill. As a result, low tax jurisdictions have become attractive locations to transfer intellectual property to lower taxation on royalties. Nowadays, several major multinational corporations such as Microsoft, Starbucks, Apple use this method to lower their tax bill. In addition to this, the profits can be sheltered by borrowing more in the high-tax jurisdiction and less in the low rate jurisdiction.18 This method is called earning stripping directing interest payments to low tax jurisdictions while generating interest deductions in high tax jurisdictions.
Even though the pressure on citizens that maintain accounts in offshore banks was straightened, wealthy individuals can benefit as well. For instance, by
18J.G. Gravelle “Tax Havens: International Tax Avoidance and Evasion” (15 January 2015) (Congressional Research Service), page 20.
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opening a bank account, trust, or a company in the offshore jurisdiction and conduct various investment transactions in high tax countries.19 If the jurisdiction does not have an automatic exchange of tax information mechanism or because of the limited resources to conduct the audit, the income is not being taxed.
Unfortunately, the explained techniques are just the peak of the iceberg. It is indisputable that because of the tax evasion and money laundering, the measures against such territories are necessary and inevitable. The international organizations strive to ensure at least minimum standards of tax harmonization. As expected, the OECD has initiated various tax information exchange mechanisms to assists tax authorities to track similar financial transactions, however, there are still doubts whether the mechanisms are effective.20 Thus, international organizations have chosen a blacklisting strategy to name and shame jurisdictions that do not meet the set criteria and are non-compliant with the established standards. The following sub-chapter will present the foundations of the blacklisting together with the aims that were trying to be achieved.
2.4 First initiative – OECD Tax Competition Report
The fight against tax evasion internationally was initiated by the OECD which raised the issue of globalization. The rapid growth of financial transactions was praised; however, it was understood that the growth will also bring the new challenges for the national tax authorities. Mainly, processing the tax returns and audits that were conducted under national level only due to the lack of information that could be obtained from the other jurisdictions. Thus, international measures unifying countries around the globe in fiscal matters appeared inevitable.
19 P.Pierreti, G.Pulina, S. Zanaj “Tax havens Compliance with International Standards: a Temporal Perspective” (Centre for Research in Economics and Management, University of Luxembourg, Discussion Paper 2016-07), page 4.
20 N. Johannesen and G. Zucman “The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown” (2014) (American Economic Journal: Economic Policy, Vol.6), page 5.
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The Harmful Tax Competition Report has been presented by the OECD stating the main purpose – “to develop a better understanding of how tax havens and harmful preferential tax regimes affect the location of financial and other service activities, erode the tax bases of other countries, distort trade and investment patterns undermine the fairness, neutrality and broad social acceptance of tax system generally”.21 The OECD issued the criteria stating that the recommendations are considered as the practical guidelines to assist governments in identifying tax havens.22
The states were given two years to improve public transparency in financial matters, set at least minimum tax rates and limit the possibilities of creating artificial structures that assist enterprises to limit their tax liability in high- tax jurisdictions.23
To follow this, in June 2000, the OECD released another publication –
“Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices”.24 Mainly, the report identified and blacklisted territories that the organization considers as tax haven territories (or having preferential tax regimes).25 The countries and territories were put on the list because the recommendations published in the 1998 Report were not satisfied or these territories declined the proposal to enter into negotiations with the OECD to eliminate harmful tax practices. Interestingly, even if the territories failed to implement or start implementation procedures of recommendations, the OECD identified these countries as “potentially harmful” only, taking a less severe political position.
21 Organisation for Economic Co-operation and Development, “Harmful Tax Competition: An Emerging Global Issue” (1998); page 8.
22 The OECD “Harmful Tax Competition: An Emerging Global Issue” (1998), page 20.
23 Ibid, page 70.
24 The OECD “Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices” (2000) (Report to the 2000 Ministerial Council Meeting and Recommendations by the Committee on Fiscal Affairs).
25 Ibid, page 12.
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To be removed from the blacklist, countries were obliged to implement principles of transparency and exchange of information on tax matters.26 What is more, the organization encouraged its’ members to rearrange tax treaties with harmful jurisdictions until harmful elements in national tax legislation are removed.27
The other important step to encourage blacklisted countries to improve transparency happened in 2009. The OECD insisted tax havens sign at least 12 tax exchange agreements otherwise the economic sanctions will be imposed by the OECD Member States. Thus, most of the jurisdictions being blacklisted as potentially harmful complied within five days.28 However, as expected, some tax havens decided to cooperate and sign the treaties with each other. The research shows that one-third of tax havens signed treaties with other tax havens.29 This meant that blacklisted countries were trying to pursue their fiscal sovereignty and defend their economic interests. In the same year, the OECD claimed that “the era of banking secrecy is over” and the Harmful Tax Competition Report and has achieved its goals and has no countries in its’ blacklist today.30
2.5 The European Response: The Blacklist
The EU reacted passively in identifying harmful tax practices. The European Union is a supranational organization currently consisting of 27 politically and economically powerful European countries. These countries have given their sovereign rights to the Union in various aspects including competition market regulations and free movement. However, the Union does not have exclusive competence to interfere with national tax laws. The Union has
26 Ibid.
27 The OECD “Harmful Tax Competition: An Emerging Global Issue” (1998), supra note 9, pages 49-50.
28 K. Bilicka and C. Fuest “With which Countries do Tax Havens Share Information?” (2012) (Oxford University Center for Business Taxation), page 3.
29 Ibid.
30 The OECD, http://www.oecd.org/tax/transparency/ [accessed 17 May 2020].
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always raised concerns regarding tax evasion; however, it has never been explicitly stated in the primary sources of EU law.
The Panama Papers scandal in 2015 revealed that many European companies, wealthy individuals, and even politicians are hiding funds in offshore jurisdictions. Definitely, it has raised awareness in the European Commission to act more urgently. Back in 2014, blacklists of tax havens have been adopted in 13 states.31 The lists had contrasting criteria and enforcement mechanisms. For this reason, the Union published its’ first communication concerning the blacklist that identified the jurisdictions that appeared in at least 10 lists.32
The Council of the European Union has released communication in 2016 expressing the need to develop the external strategy for effective taxation.33 The European Union attempt to improve tax governance on a global level by tracking tax fraud, tax avoidance, and money laundering.34 The need to cooperate with the OECD was raised in order to establish a list of non- cooperative jurisdictions within the EU and the defensive measures in the situations of non-compliance.35
The selection procedure in the European Union started in 2016 September when 213 (non-EU) territories were pre-assessed. Mainly, the indicators used were economic ties with the Union, financial activity, legal and institutional stability, and tax governance levels.36 Then, the working group has put the countries in the scoreboard to decide which countries should be investigated thoroughly.37 The subsequent step included contacting the selected territories
31 G. Melis and A. Persiani “The EU Blacklist: A Step Forward but Still Much to Do” (May 2019) (EC Tax Review), page 253.
32 Ibid.
33 Council of the European Union “Criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes – Council conclusions” (8 November 2016) (13918/16 FISC 182 ECOFIN 991).
34 Ibid, page 2, section 2.
35 Ibid, page 2, section 4.
36 Ibid, page 3, section 7.
37 Ibid, page 3, section 10.
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to conduct screening procedures. The last step was listing of jurisdictions confirming whether the countries meet the EU criteria.38
The Code of Conduct Group monitors the selected jurisdictions up to date to define whether countries have adopted the EU recommendations.39 It is worth mentioning that the members of the EU were not scrutinized. This is one of the criticisms raised by NGOs and legal scholars. The issue will be dealt with more in detail in the following chapters.
3. Similarities and Differences between The Measures
3.1 The purposes
The purpose of both lists of non-cooperative tax jurisdictions is analogous.
The OECD and The EU encourage the laws targeted against tax evasion, anti- money laundering, and aggressive tax planning. Nonetheless, when selecting the targeted non-cooperative jurisdictions, the criteria used to define non- cooperative jurisdictions is different. As an example, when the OECD initiated the primary measures, one of the objectives was to reduce the number of jurisdictions that have zero corporate tax rates, lacked fiscal transparency and had strict bank secrecy laws. Meanwhile, the European Union selection criteria are based on the tax transparency, and implementation of BEPS Action Plans which were not in force at the time Harmful Tax Competition Report was released. The purpose of the following sub-chapters is to elaborate on similarities and differences between the selection criteria chosen by both organizations.
3.2 Selection criteria to identify harmful tax practices 3.2.1 Criteria for transparency
First of all, it could be argued that the OECD Report set the foundations for the mandatory exchange of information standards. The transparency was promoted by stating that the territories have harmful tax practices if the assistance is provided to non-residents to escape tax in their country of
38 Ibid;
39 Ibid, page 8.
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residence, laws or administrative practices preventing the exchange of information with the third-countries, and there is no legislation imposing requirements for substantial business activity in the jurisdiction.40 Furthermore, the OECD advocated that some jurisdictions have unique laws preventing tax authorities’ information about investors which disallowed home jurisdictions to perform the audits.41
In contrast, the EU recognized that all jurisdictions should start initiating the legislative process and implement an automatic exchange of tax information between the tax authorities – the Common Reporting Standard.42 Mainly, because information exchange upon request is ineffective. For the future, the communication included that the territory shall be largely compliant based on the OECD Global Forum evaluation.43 Moreover, the EU applies different criteria applies for sovereign and non-sovereign states where the EU Commission specifically emphasized the exchange of beneficial ownership information.
The main criticism in this aspect of the European Union is that no guidelines and assistance are provided to the third countries regarding implementation, adoption, and amortization of the CRS (The Common Reporting Standard).
Based on recent studies, it has been said that the automatic procedure is costly and requires infrastructure and the enormous amount of information needs to be processed appropriately.44 While the EU countries are well-developed, have financial capabilities, and actual benefits received to implement and use the CRS in practice, it has not been considered that imposing such requirement on less developed countries may not be completely effective.
40 The OECD “Harmful Tax Competition: An Emerging Global Issue” (1998); section 52.
41 Ibid; section 53.
42 Council of the European Union “Criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes – Council conclusions” (8 November 2016) (13918/16 FISC 182 ECOFIN 991); page 3, section 8.
43 Ibid; page 3, section 1.2.
44 L. Finer and A. Tokola “The Revolution in Automatic Exchange of Information: How is the Information Used and What are the Effects?” (December 2017) (Bulletin for International Taxation, IBFD), page 694.
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In this regard, the OECD recommendation on the implementation of exchange the information upon request appears more manageable to the third countries although it is less effective in practice. Apart from that, even though some countries have started the legislative process to implement the CRS, it cannot be claimed that this will assist in achieving its primary goals. The Standard appears uncertain in the first place due to the lack of enforcement mechanism. The enforcement of the CRS will be conducted by each of the countries that adopted the Standard. The delegated authorities will be required to establish an audit and penalty regime for non-compliant countries.45 Besides, one of the strongest economies – the United States introduced a “sister” standard before – FATCA (Foreign Account Tax Compliance Act) which is still considered unsuccessful; however, it still has stronger enforcement procedures due to immediate penalties on financial institutions.46
As a result, it could be suggested that, higher restrictions on banks and other financial institutions should be imposed. The automatic exchange of tax information allows the signatories to choose reportable financial institutions.
For this reason, there is a risk that the tax avoiders may benefit from the existing loopholes. As a result, the EU should not have drawn strong emphasis on the automatic exchange of tax information because of the loopholes in the Standard as well as the lack of economic analysis of the effectiveness of automatic exchange. The spontaneous exchange of information would appear less urgent and more effective for the third countries that would also give them time to prepare for the new mechanism.
45 D. Hintzke, A.G. Castelao “The Common Reporting Standard: Impact on Financial Services Institutions” (1 March 2016) (American Institute of CPAs), page 3.
46 W. Lips, A. Cobham “Paradise lost. Who will feature on the common EU blacklist of non- cooperative tax jurisdictions?” (27 November) (Open Knowledge and the Tax Justice Network), page 3.
19 3.2.2 Criteria for fair taxation
Secondly, with the fair taxation requirement, the EU considers that the jurisdictions shall not offer preferential tax regimes that are considered harmful based on a lack of conduct for business taxation.47 As a result, the working group should evaluate the absence of a corporate tax system. For instance, the nominal corporate tax rate is equal to zero or close which would be a possible indicator that the territory offers preferential tax legislation.
The drawbacks of these criteria are that the limited number of territories at the moment are offering zero or limited tax rates. One of the main reasons for that is that the OECD set this as the criteria from the very beginning together with the first report. The OECD report stated that the absence of nominal taxation on the relevant income is the starting point to classify a jurisdiction as a tax haven48 but when scrutinizing the territory, the other key factors should be taken into consideration. For example, the definition of domestic source income and a tax base.49 As a result, the jurisdictions have become compliant with the OECD criteria.
The downside of these criteria is that the condition regulates the tax rates concerning the corporate income tax only. Nowadays, there are different types of corporate income that should be regulated more scrupulously. For instance, the taxation on royalties. A well-known fact is that some of the countries offer just a symbolic tax rate on royalties. A significant number of multinational enterprises have decided to transfer their property rights to these jurisdictions. As an example, some of the EU states offer lower tax rates on royalties or different schemes in order to minimize tax liability raising from royalty income. Unfortunately, such the requirement is not imposed under the established guidelines. One could make a speculation that the reason for this is that the EU Members themselves are not willing to abolish
47 Council of the European Union “Commission Communication on an External Strategy for Effective Taxation and Commission Recommendation on the implementation of measures against tax treaty abuse” (25 May 2016) (8792/1/16 REV 1), section 9.
48 OECD Report page 23; para. 52.
49 OECD Report page 27.
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the existence of such structures. Therefore, the companies can benefit from such a minimal tax rate on other types of income.
Furthermore, the EU claims that the absence of the corporate tax rate cannot immediately mean that the territory in question does not meet the criteria.50 One of the reasons for this could be that the countries in the Middle East do not impose tax rates, however, those have stricter rules on establishments of the companies by non-residents. Besides, the absence of tax rates could mean that the country is offering tax incentives to encourage foreign investment or facilitate research and development. On the other hand, the EU required that if the state fails to cooperate with the working group, the requirement is applied automatically.51
What is more, the EU criteria concern the artificial arrangements that could be significantly assisted by the offshore jurisdictions.52 Same as the OECD, the EU requires real economic activity legislation. The European Union aims to ensure that the mailbox companies are eliminated. However, the EU does not provide any guidelines regarding how such requirements could be assessed. This requirement is important, but it becomes unclear how the Union will access such economic activity legislation in foreign territories which will depend on how the scrutinized territories will be willing to cooperate.
3.2.3 Implementation of BEPS Action Plans
Subsequently, the last criterion used by the Union is the commitment to the BEPS Action Plans.53 To be compliant, the Action Plans need to be implemented by the end of 2017. For future observations, the country will be
50 Council of the European Union, “The EU list of non-cooperative jurisdictions for tax purposes.
Council conclusions’’ (adopted 5 December 2017) (15429/17); page 31, section 3.
51 Ibid, page 32.
52 Council of the European Union “Criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes – Council conclusions” (8 November 2016) (13918/16 FISC 182 ECOFIN 991), section 2.2.
53 Council of the European Union “Commission Communication on an External Strategy for Effective Taxation and Commission Recommendation on the implementation of measures against tax treaty abuse” (25 May 2016) (8792/1/16 REV 1), section 9.
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considered compliant if it receives positive reviews from the Inclusive Framework which is responsible for the evaluation of the implementation process of the Action Plans.
The OECD did not set this as a recommendation because BEPS has been initiated in 2013 only. To place this aside, the European Union facilitates the OECD to ensure that BEPS measures are being implemented because BEPS was created by the OECD in the first place.
On the other hand, some foundations of BEPS Action Plans could be discovered in additional criteria set forth by the OECD. The strong emphasis was drawn to the implementation of international transfer pricing standards.
At that time, the OECD Guidelines 1995 had raised the importance of the introduction of the arms-length principle.54 The OECD considered that if a tax authority fails to apply the 1995 Guidelines judiciously, it could give an impact on the competitive position of the subsidiary of the MNE.55 Conversely, the EU criteria do not specify the importance of transfer pricing.
The BEPS Action Plans are more advanced as they provide the measures to more advanced tax evasion issues such as challenges of the digital economy (Action 1) or Country-by-country reporting (Action 13). Thus, the application of the Action Plans becomes essential in the countries having preferential regimes. The European Union could be praised because it assists the OECD to ensure that the Action Plans to become the global standard.
3.3 Countries selected
The selectivity of the countries makes the major influence on the blacklists.
While these two international organizations are different because of the objectives pursued, the selection of the countries continues to raise controversies due to the discrimination towards smaller jurisdictions and over-favouritism. For example, the OECD is occasionally referred to as “a
54 The OECD “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations OECD Transfer Pricing Guidelines” (1995).
55 The OECD “Harmful Tax Competition: An Emerging Global Issue” (1998), page 30.
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club of rich countries” involving 37 countries with the highest GDP and having influential political standing in their region. Mainly, the organization’s objective is to promote the economic welfare of the Member States. The forward-looking goals are to influence non-Member States positively by promoting transparency and co-operation. However, if one decides to apply the democratic principles, the positions of so-called non- cooperative jurisdictions should be taken into consideration.
To begin with the OECD, the organization categorized jurisdictions based on two categories – “tax havens” having no interest in combating “race to the bottom” with respect to income tax; and “potentially harmful preferential tax regimes”.56 The differentiation of the jurisdiction was relevant for the application of the recommendations. In the 2000 Progress Report, the OECD gave 5 years to the Member Countries to remove preferential tax regimes.57 Interestingly, the OECD states were supposed to carry-out the self-review procedure in order to identify its own harmful practices. Following that, the peer-review from the other Member States would take place.58 The OECD could be congratulated because it at least tried to achieve global compliance by scrutinizing its own members.
Regarding the non-members, the OECD allowed not to blacklist countries that promised a high level of political commitment to eliminate harmful practices even if those countries meet 1998 criteria.59 The potentially harmful countries were given 12 months to start initiating the legislative process to ensure compliance with the report.60
In the EU blacklist, none of the Member States has been selected as potentially harmful. It could be argued that several European Union countries
56 Organisation for Economic Co-operation and Development, “2000 Progress Report: Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices’’ (2000), section 44.
57 Ibid, para.4.
58 Ibid.
59 Ibid, para. 17.
60 Ibid, para.19.
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could be considered as having preferential regimes for the multinational companies. However, the 28 Member States did not go through the scrutiny process. The European Commission argues that within the European Union different legislation is being used to ensure fair and transparent taxation. For instance, Member States are bound by the OECD BEPS measures that are considered as binding within the Community.61 In addition, most hopes are given to The Anti-Tax Avoidance Directive aiming to eliminate the mismatches in national legislation to avoid tax liability.62
3.4 Enforcement
The major concern arising from the international standards is the matter in how the policies could be implemented in the national legal order and what are the countermeasures for non-implementation because most, if not all, the internationally accepted legislation is soft law. The tax sovereignty of each jurisdiction, even in the European Union level, allows the countries to choose tax legislation that is suited more for the economic situation. However, it becomes evident that international measures are necessary in order to demolish the harmful tax practices.
The issue of enforcement has been raised by legal scholars and national governments. The Oxfam agrees that blacklisted countries should face the punitive sanctions.63 The report written by Tax Justice Network indicated that sanctions or incentive schemes are necessary to encourage tax havens’ co- operation.64
It could be advocated that the OECD has completely failed to enforce the unified standard against harmful tax practices. The issue arises from the main
61 All the EU Members are signatories of the BEPS Action Plans.
62 Council of the European Union, Council Directive 2016/1164 “laying down rules against tax avoidance practices that directly affect the functioning of the internal market’’ (12 July 2016) (L193/1).
63 Oxfam “Blacklist or Whitewash? What a real EU blacklist of tax havens should look like”
(November 2017); page 2.
64 A. Knobel, M. Meinzer “Automatic Exchange of Information: An Opportunity for Developing Countries to Tackle Tax Evasion and Corruption” (June 2014) (Tax Justice Network) page 3.
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objective of the organization – encourage economic development. The OECD has no mandate to impose sanctions in the first place. The OECD agreed that it is for the Member States, not the organization that will apply the measures as the OECD provides the framework for cooperation only.65 In 2001, the OECD proposed the guidelines for enforcement claiming that the measures taken by the individual national governments should be proportionate and prioritized according to the extent of harm that a particular practice has the potential to inflict.66 The sanctions imposed by the OECD could be challenged under the World Trade Organization’s provisions on dispute settlement.67 The strategies that could be taken by the countries are the increased numbers of audits on companies trading in the blacklisting countries. In addition, the ceased negotiations of the tax treaties that could minimize the foreign investment in blacklisted countries.
It could be argued that the defensive measures for non-compliance with the EU criteria are fundamentally stronger.68 The sanctions are defined and elaborated both on the international and national levels. However, as emphasized in Annex III of the EC communication, that the enforcement measures in the EU (international) level are in the non-tax area. The Union will cease the funding through the European Fund for Sustainable Development.69 In the area of tax, the application of sanctions is left to the Member States.70 The reason for this, the EU does not have the exclusive competence to regulate the national fiscal laws of the states. As a result, the
65 W. Gilmore “The OECD, harmful tax competition and tax havens: Towards an understanding of the international legal context’’ (2001) (Commonwealth Law Bulletin, 27:1), page 561.
66 R. Sanders “The Fight Against Fiscal Colonialism: The OECD and Small Jurisdictions” (2002) (The Round Table, 91:365); page 340.
67 Ibid.
68 V. Kalloe “European Union – EU Tax Haven Blacklist” – is the European Union Policing the Whole World” (26 January) (IBFD, European Taxation, Vol. 58, No. 2/3), page 54.
69 Council of the European Union, “The EU list of non-cooperative jurisdictions for tax purposes.
Council conclusions’’ (adopted 5 December 2017) (15429/17), page 18, section A.
70 Ibid, page 17, para. 3.
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Union is allowed to interfere only when the freedom of free movement is involved.
In the area of tax, the EU tries to ensure the coordinated action by asking the Members to apply at least one administrative measure mainly including the higher scrutiny through audits.71 Additional measures that could be used include the non-deductibility of costs raised from the blacklisted country, the CFC rules, or withholding tax measures. Lastly, the European Commission suggests that the blacklist could be used to facilitate the operation of relevant anti-abusive measures listed in the EU Directive.72
In comparison to the OECD Harmful Competition Report, the EU provides a more comprehensive and detailed list of defensive guidelines. However, it cannot be forgotten that the EU is a supranational authority that is considered to have a higher hierarchy towards national legal orders. Thus, the Union has the actual powers and rights to impose sanctions on the third country. To defend the OECD, the report has been issued more than 20 years ago, when the ideas and measures targeted against tax evasions were still under development. For instance, the CFC rules, even though they existed, however, were not as advanced as these days.
3.5 International response
As will be discussed in the following chapter, the blacklisting of the jurisdictions has received major criticism from the NGOs, legal scholars, and blacklisted countries themselves because of the consequences brought by the list. For instance, after the EU published the blacklist, the non-cooperative territories rushed to change their legislation to meet the EU criteria. As a result, after two months of implementation of the list, 8 out of 17 countries have been eliminated from the list arguing that the countries have become
71 Ibid, page 18, section B.
72 Ibid, page 19, section B.3. See also: Council of the European Union, Council Directive 2016/1164
“laying down rules against tax avoidance practices that directly affect the functioning of the internal market’’ (12 July 2016) (L193/1).
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compliant as the recommended legislation has been implemented or adjusted respectively.
The OECD claims that all the territories that have been blacklisted, do not meet the criteria to be associated as harmful tax jurisdictions. The OECD claims that the Harmful Tax Competition Report had fully achieved its aims.
For this reason, no further measures or sanctions needed.
3.6 Summary of the criteria
The criteria set by the EU and the OECD could be summarized in several ways. Regarding the purposes of the enacted policies, both organizations are trying to achieve global transparency and fair taxation standards. The organizations consider that the best strategy to meet the objectives is the cooperation with the jurisdictions that are offering preferential tax systems.
Meaning, that if the countries achieve at least the minimum harmonization in the area of tax, tax evasion, fraud, and anti-money laundering could be minimized or eliminated.
With the criteria of transparency, both organizations have promoted tax information exchange mechanisms. Considering the fact that the Harmful Tax Competition Act has been delivered in 1998, there is no reason to argue that the Common Reporting Standard should have been promoted by the OECD at that time. The European approach to require the implementation of the automatic exchange appears reasonable, however, inefficient due to the lack of funds and infrastructure in less developed countries.
The fair taxation has been promoted by requesting that the countries should have effective tax rates to ensure the fair tax and investment competition.
While the OECD strongly emphasised such a requirement, the European
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Union was resistantly prioritizing the need for economic activity requirements in the jurisdiction.73
The EU requirement to implement the BEPS Action Plans should be considered as an achievement and the evidence that both the EU and the OECD are cooperating in global tax transparency standards. In this way, if the country fails to implement the Action Plans, the European Union may impose sanctions that are hardly achievable under the OECD level.
4. Criticisms and Proposals to ensure effective blacklisting
The naming and shaming strategy have been selected by international organizations to change the legislation in tax haven jurisdictions. The criteria are possibly helping to identify the main features of these countries in order to reduce the global tax evasion. However, the strategies taken have several important drawbacks which will be described in the following sub-chapters.
4.1 The Issue of Reciprocity and Lack of Cooperation
When the international standard is adopted, one needs to meet the proportionality test. Subsequently, two problems could be raised regarding blacklisting of the countries - what purposes do the standard tries to achieve and who receives the benefit.
Both the OECD and the European Union consist of the members that are economically and authoritative influent. These countries are holders of the wealthiest corporations and individuals that are willing to minimize their tax liability by conducting some international tax planning. The planning is facilitated by the jurisdictions that have stronger bank secrecy laws, limited tax administration burden, and minimal income tax rates. As a result of the tax planning schemes, the corporations can make their tax liability lower in their home jurisdiction while the later losses the revenue. For this reason, the
73 Council of the European Union “Criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes – Council conclusions” (8 November 2016) (13918/16 FISC 182 ECOFIN 991), section 2.2.
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mechanism to ensure the minimum tax compliance standards were introduced by the OECD and the European countries.
The economic-dominant position has been taken by the wealthy countries;
tax havens are captured without no offered alternatives. The blacklisting of the countries creates a disincentive to develop globally competitive economies and makes it difficult to reject the organization’s demands or even require negotiating for alternative options.74 As an example, the EU did not invite any third-countries to participate in the drafting of the criteria. Also, the only consideration taken by EU communication was that these countries may have some difficulties in the implementation of the BEPS Action Plans.75
From the ethical point of view, one could argue that the decisions by both organizations were taken without the consultations with the jurisdictions that have been placed on the blacklists. This is one of the issues why the blacklists are lacking reciprocity – the main benefits of the standards are received by the wealthy countries. The example could be taken from one of the measures imposed by the OECD – tax information exchange agreements. The conducted tax information exchange agreements research proves that developed industrialized jurisdictions are not interested in concluding agreements with developing countries because rich countries do not expect much profit from such agreements for themselves.76
The smaller countries should be able to compete in financial markets because these countries do not have as many resources as other major economies.
Some scholars and economists claim that those countries have been
74 Ibid, page 554.
75 A. Rusina “Name and shame? Evidence from the European Union tax haven blacklist” (28 March 2020) (International Tax and Public Finance, Springer), page 8.
76 Tax Justice Network “Double Tax Treaties and Tax Information Exchange Agreements: What Advantages for Developing Countries?” (February 2010), page 4.
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victimized and bullied by the strong and powerful nations.77 Accordingly, the assistance is needed to promote the welfare in these countries.
4.2 Selectivity bias
The absence of the global international tax organization makes a significant difference in the selection process of the blacklisted countries. Both organizations could be claimed as a politically bias towards its members. This is because the delegates of the members themselves prepare the list of recommendations to the non-cooperative jurisdictions. The third countries are only allowed to participate if they get an invitation to cooperate with the institutions.
The members of the organizations have preferential regimes as well, however, these could be categorized as more advanced, thus, not added to the selectivity criteria. For example, artificial arrangements of intellectual property rights, dividend distributions, the compliance standards of the publicly listed companies. According to the research, 80 % of the total offshore financial services industry is in the OECD countries, excluding the colonies. Thus, the total amount of 10 % of the offshore businesses is in blacklisted countries.78 This shows that not the small countries that have been placed in the blacklists of both organizations should be placed under scrutiny but the members themselves.
It comes with no surprise that the OECD measures received criticism from smaller countries. As an example, the former President of Nauru Rene Harris in 2001 Pacific Islands Forum presented the defensive argument stating,
“many small island countries choose not to levy taxes on their people does not harm the people of that specific country”.79 The presented argument is practically based. Most of the OECD members are well-developed leading
77 R. Sanders “The Fight Against Fiscal Colonialism: The OECD and Small Jurisdictions” (2002) (The Round Table, 91:365); page 345.
78 Ibid.
79 J.G. Salinas “The OECD Tax Competition Initiative: A Critique of its Merits in the Global Marketplace” (2003) (Houston Journal of International Law, 531), page 552.
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economies from distinct geographical areas. These countries generate enough revenue from taxes paid by foreign or local investors. As a result, the OECD members are interested in finding the solutions on how to generate the same amount of revenue, keep the investors inside who do not decide to shift profits to offshore jurisdictions that offer attractive tax incentives. Thus, there is a clear division between the countries that support the initiative and ones that are constituted as tax havens that do not support the OECD’s position.
What is more, when the initial blacklist of the EU had been published, several obvious offshore financial centers were not placed in the list due to the close economic and political ties with the EU Member States. For instance, the Cayman Islands are a popular option for offshore companies. Initially, the islands were also placed in the OECD blacklist as potentially harmful. It came as the surprise that the islands did not appear on the original list of the EU. Mainly, because the United Kingdom that was still the EU Member at the time 2017 list was released. On the other hand, after the Brexit, the working group immediately placed the Cayman Islands on the blacklist.80 Even though the blacklists intend to name and shame countries that have fiscal legislation facilitating tax evasion, the lists are politically or economically bias. The blacklisting of the territories will never achieve the set purposes if the major jurisdictions that facilitate the illicit financial flows are not placed under scrutiny procedures. The aims could be achieved only if all the countries negotiate the criteria and peer-review procedures collectively.
4.3 Blacklisting alternatives
One criticism that could be raised against both blacklists is that the lists are aimed at the legislation of each country entirely. However, the observation
80 The Council of the European Union “The Council conclusions on the revised EU list of non- cooperative jurisdictions for tax purposes” (18 February 2020) (6129/20), page 7.
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could be made that the main tax avoiders are multinational companies and wealthy individuals.
The blacklisting shows just a minor effect when it comes to the country’s investor environment.81 It appears that the companies and investors are keen on investing in companies even though they engage in operations in the countries that are considered as tax havens in the OECD and EU blacklists.
This shows that multinational companies raise more important concerns.
Based on the conducted research, the blacklists of the jurisdictions should lower the investors’ confidence to use tax havens effectively, however, the outcome is different.82
One possible, however, the very unlikely achievable method could be targeting and blacklisting multinational enterprises that engage in aggressive tax planning schemes. Later, the sanctions or tax on annual turnover could be imposed if the transparency rules are disrespected. The scheme could work based on the U.S. FATCA’s principle that in case of non-compliance, the extra tax rate could be imposed.
There are certain methods of compliance currently applicable. For example, the Master file or country-by-country report concerning transfer pricing and global compliance. The penalties are being imposed based on the laws of national legislation. Therefore, some tax administrations claim that the information is difficult to process due to the lack of local infrastructure.83 The issue could be solved if the countries would set up a fund in order to subsidize the upgrading of the systems of the tax authorities, improving the qualifications of the staff. For this reason, using this strategy, the tax authorities would be able to track the illicit flows of financials. The real tax
81 R. T. Kudrle “Did blacklisting hurt the tax havens?” (2009) (Journal of Money Laundering Control, Vol. 12, No.1), page 37.
82 Ibid.
8383 L. Finer and A. Tokola “The Revolution in Automatic Exchange of Information: How is the Information Used and What are the Effects?” (December 2017) (Bulletin for International Taxation, IBFD), page 695.
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evaders – multinational enterprises and wealthy individuals could be tracked and penalized.
Important to mention that even though some of the so-called financial centres are being considered to receive lots of revenue from the tax evaders – the national population of those countries is dealing with poverty. Based on Oxfam research, almost one-third of the identified tax haven population is below the poverty line, proving that tax havens are not necessarily rich.84 Thus, the dialogue with the national governments should be initiated to establish whether any assistance is needed in order to establish an independent tax system that is following the international tax standards.
Additionally, some argue that aggressive tax planning by using offshore jurisdictions are facilitated by major law firms. The highly skilled financial advisors discover new ways to overcome the increased international tax compliance standards by using the loopholes in the offshore centres that are trying to re-arrange their national legislation in a better way in order to meet the criteria set forth by the OECD and the European Union. The OECD once made a step-in advance by asking the major law firms and professional tax advisers to report the advice given to their clients about the structures proposed to avoid the Common Reporting Standard in order to improve the standard and minimalize the use of offshore.85 In comparison, the EU has introduced the mandatory disclosure rules for intermediaries providing tax advice to assist concealing money offshore.86 It could be argued that the blacklist of such tax advisors and law firms that assist in the creation of structures could be published as well. This would help the tax authorities to
84 Oxfam “Blacklist or Whitewash? What a real EU blacklist of tax havens should look like”
(November 2017), page 4.
85 The OECD “Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures” (9 March 2018).
86 Council of the European Union, Council Directive 2018/822 “amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements” (25 May 2018) (L139/1), preamble section 5.
