Analytics, EU – Baltic States, Modern EU, Offshore, Taxation

In January 2016, the Commission launched a three-step process for establishing the common EU list as part of its broader agenda to curb tax evasion and avoidance. A common EU list of non-cooperative jurisdictions will carry much more weight than the current patchwork of national lists when dealing with non-EU countries that refuse to comply with international tax good governance standards. An EU list will also prevent aggressive tax planners from abusing mismatches between the different national systems.

The aim is to publish the definitive list of non-cooperative jurisdictions by the end of 2017. Member States have already given their backing to this approach, which is also strongly supported by the European Parliament.

The new EU listing process is part of the EU's campaign to clamp down on tax evasion and avoidance and promote fairer taxation, within the EU and globally. It was proposed by the Commission in the External Strategy for Effective Taxation in January 2016, and endorsed by EU Finance Ministers in May. The European Parliament has also repeatedly expressed support for an EU listing process.

Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici underlined that the EU wanted to have fair and open discussions with all partners on tax issues in the global community. The EU takes its international tax good governance commitments seriously and expects the same from international partners.

Therefore the “list” will serve as the EU tool to deal with third countries that refuse to play fair in taxation, he added.

Compiling the scoreboard

The aim of the Commission’s scoreboard is to help EU states to determine which countries the EU should start a dialogue with regarding tax good governance issues. It will help inform the member states in controlling suspicious countries.

The Commission has analysed all non-EU countries and tax jurisdictions in the world to determine their risk of facilitating tax avoidance. This pre-assessment was based on a wide range of neutral and objective indicators, including economic data, financial activity, institutional and legal structures and basic tax good governance standards.

As a first step, the scoreboard presents factual information on every country under three neutral indicators: economic ties to the EU, financial activity and stability factors. The jurisdictions that feature strongly in these three categories are then set against risk indicators, such as their level of transparency or potential use of preferential tax regimes.

The pre-assessment does not represent any judgment of third countries, nor is it a preliminary EU list. Countries can feature high in the scoreboard's indicators for a number of reasons, even when they pose no threat to Member States' tax bases. The intention is to help Member States to narrow down their focus when deciding which countries to screen in more detail from a tax good governance perspective, which is the next step in the EU listing process. The EU will work closely with the OECD during the listing process, and will take into account the OECD's assessment of jurisdictions' transparency standards.   

The pre-assessment was presented to EU state experts in the Council Code of Conduct Group on Business Taxation on 14 September 2016. Based on the results, the Code of Conduct Group will decide on the relevant jurisdictions to screen, which should be endorsed by finance ministers before the end of 2016. The screening of the selected countries should begin next January, with a view to having a first EU list of non-cooperative tax jurisdictions before the end of 2017.

The External Strategy sets out a clear, fair and objective EU process for listing based on three steps:

1. Scoreboard: The Commission produces a neutral scoreboard of indicators, to help determine the potential risk level of each third country's tax system in facilitating tax avoidance. The Commission presents the findings of the scoreboard to Member State experts in the Code of Conduct Group in Council.

2. Screening: On the basis of the scoreboard results, Member States decide which third countries should be formally screened by the EU. The screening of third countries' tax good governance standards will be carried out by the Commission and the Code of Conduct Group. There will be a dialogue process with the countries in question, to allow them to react to any concerns raised or discuss deeper cooperation with the EU on tax matters.

 3. Listing: Once the screening process is complete, third countries that refused to cooperate or engage with the EU regarding tax good governance concerns should be put on the EU list.

The common EU list is intended as a "last resort" option. It will be a tool to deal with third countries that refuse to respect tax good governance principles, when all other attempts to engage with these countries have failed.

More information in:

- MEMO/16/2997;

- Scoreboard of Indicators, and

 -DG TAXUD.

General reference: http://europa.eu/rapid/press-release_IP-16-2996_en.htm;

Additional information in “taxation listing”      

A single EU listing system – based on clear, coherent and objective criteria – will also be easier for businesses to deal with, as it will eliminate administrative burdens caused by divergent national approaches. For the EU's international partners, who sometimes struggle to understand Member States' divergent national listing conditions, a common EU approach will create more clarity and legal certainty on what the EU expects when it comes to fair taxation.

The common EU list is intended as a "last resort" option. It will be a tool to deal with countries that refuse to respect tax good governance principles, when all other attempts to engage with these countries have failed.

Member States endorsed clear, fair and objective EU process for listing non-cooperative tax jurisdictions at May 2016 ECOFIN Council and called for a first EU list to be ready in 2017.

Pre-assessment in the listing process  

The scoreboard is the first step towards a definitive list. Its purpose is to assist Member States in identifying which third countries are of most relevance for screening in greater detail against tax good governance criteria.

It presents a comprehensive set of data compiled by the Commission during a pre-analysis of all tax jurisdictions in the world. This data can then help Member States to decide which countries may be of most interest to examine in greater detail, based on their economic ties with the EU, financial activity, legal and institutional stability and tax good governance levels.

There is no pre-judgment of the countries mentioned in the scoreboard. It simply presents objective and factual, publicly available data from reliable sources, including the OECD and national websites.

The scoreboard and "tax havens" countries 

The scoreboard should in no way be considered as initial EU list. Nor is it a pre-judgment of countries' cooperation on tax matters. All third countries were examined against each indicator. There can be legitimate reasons for a country to appear high on certain indicators e.g. strong economic ties with the EU. Therefore, there is no stigma linked to the countries that feature higher on the scoreboard.

It will be for the EU states to determine which countries may require further screening, once they have reviewed all of the scoreboard data. It is only through the screening and dialogue process with the selected third countries that the EU will gain a clear picture of third countries' tax good governance standards and their willingness to cooperate on tax matters.

The Commission used a wide range of indicators (165 totally) to screen all third countries. The Commission began by considering the situation of 213 third country jurisdictions (third countries as well as dependent or associated territories). However, it decided not to include Least Developed Countries (48 of them) and the EU has also proposed that third countries which are engaged in legally binding transparency agreements with the EU should be featured in a separate part of the scoreboard.

These indicators help to classify countries according to risk and prioritise those that are of most relevance to screen. The indicators were grouped into the following dimensions:

- Economic ties with the EU: To see how strong the economic ties are between the third country jurisdiction and the EU, the Commission examined indicators such as trade data, affiliates controlled by EU residents and bilateral Foreign Direct Investment (FDI) flows.

- Financial activity: Tax havens are often found to have a disproportionately high level of financial services exports, or a disconnection between their financial activity and the real economy. To determine if this was the case, indicators such as total FDI, specific financial income flows and statistics on foreign affiliates were used.

- Stability factors: Tax havens usually have strong and stable institutional and legal structures, as tax avoiders naturally seek safe countries to put their money. Therefore, the Commission looked at general governance indicators, such as corruption levels and regulatory quality.

- Risk factors: For the jurisdictions which emerged strongly in the three indicator headings above, the Commission also looked at basic tax good governance indicators, such as countries' international transparency performance, the presence of preferential tax regimes, and a 0% tax rate or no corporate tax.

The Commission suggested that the scoreboard should not include Least Developed Countries, in line with the EU's commitment to support those countries with the greatest constraints in meeting tax good governance standards.

The five European countries with transparency agreements with the EU, e.g. Switzerland, Andorra, Liechtenstein, Monaco and San Marino are also presented separately in the scoreboard. This acknowledges the efforts they have already made to cooperate with the EU in meeting higher levels of tax good governance.

For more details on the scoreboard methodology, see the Scoreboard of Indicators.

Perspectives in the listing process

Based on the scoreboard results, Member States should decide in the Code of Conduct Group on business taxation on the relevant third countries to screen, along with the criteria to screen them against. These should be endorsed by EU Finance Ministers before the end of the year. The selected countries will be fully informed of this decision in good time, and will receive a clear explanation of the criteria and next steps in the screening process.

The screening of the selected countries should begin next January, with a view to drawing up a first EU list of non-cooperative tax jurisdictions before the end of 2017. The screening and dialogues will be carried out by the Code of Conduct Group and the Commission. Countries will have ample opportunity to put forward their case and discuss solutions to any concerns that are raised.

The aim is to complete the screening process by summer 2017, so that the results can be analysed and reviewed by Member States and the final EU list drawn up by the end of next year.

Criteria used to screen the selected countries

In the External Strategy of January 2016, the Commission suggested that the following criteria should be used for screening:

• Transparency: Does the country comply with the international standards on automatic exchange of information and information exchange on request, and has it ratified the multilateral convention for this information exchange?
• Fair Tax Competition: Does the country have harmful tax regimes, which go against the principles of the Code of Conduct or OECD's Forum on Harmful Tax Practices?
• BEPS implementation: Has the country committed to participate in the OECD's Base Erosion and Profit Shifting (BEPS) Inclusive Framework?
• Level of taxation: Does the country have no corporate taxation or a zero-rate on corporate tax?
•  

Member States are expected to agree on the exact criteria, based on those proposed in the External Strategy. The criteria will be clearly communicated and explained to all countries selected for screening.

Consequences be for countries on the EU list

The Commission's External Strategy states that EU states should apply common counter-measures against third countries on the EU list. These sanctions should be an incentive for these countries to improve their tax system and also protect Member States' tax bases in the meantime.

Member States have asked the Code of Conduct to agree on the exact nature of these sanctions, based on current national practices and taking into account other defence measures in place in the EU (like those contained in the Anti-Tax Avoidance Directive). States should decide on these sanctions before the end of 2016, so that they are agreed when the first screenings begin.

The common EU list is meant to be a last resort option – when all other efforts to engage dialogue fail. Dialogue with the country in the screening stage will therefore be an extremely important part of the process.

Once the states have agreed on who should be screened and the screening criteria, the countries in question will be fully informed of the next steps and the ways in which they can interact with the EU in the process. Each country will have a chance to present their position, address EU concerns and discuss ways of closer cooperation on tax matters.

The EU list fits well with the OECD/G20's work on tax good governance. The common EU list will support the OECD's agenda, as it will be based on internationally agreed good governance standards. The EU listing process should encourage countries to meet the OECD's transparency standards and sign up to the Base Erosion and Profit Shifting (BEPS) project.

In the scoreboard, some of the indicators are drawn directly from OECD data e.g. compliance with transparency requirements. Moreover, the Commission remains in close and regular contact with the OECD on the listing issue, to ensure a complementary approach.

The OECD list and the EU list of non-cooperative jurisdictions

The OECD has been tasked by the G20 to develop a new international blacklist for countries that fail to meet international transparency standards; it will be ready in summer 2017.

The EU list will deal with transparency problems too (based on the OECD assessment), but it will also go further, covering a wider range of tax good governance criteria, particularly fair taxation. This is essential to effectively protect states' tax bases. The EU will work closely with the OECD as the two lists are being developed, and ensure that the approaches are mutually reinforcing.

The list of non-cooperative tax jurisdictions and the EU anti-money laundering list

The anti-money laundering list aims to address risks to the EU's financial system caused by countries with deficiencies in their anti-money laundering and counter-terrorist financing regimes. It follows the global approach developed by the Financial Action Task Force (FATF) to deal with countries that have not implemented internationally agreed standards on anti-money laundering. On the basis of this list, banks must apply higher due diligence controls to financial flows to the high risk countries.

The common EU list of non-cooperative tax jurisdictions will address external risks to Member States' tax bases, posed by non-EU countries that refuse to adhere to international tax good governance standards. The criteria used to compile this list may include anti-money laundering standards, but will be much wider than this. The criteria should cover the full range of international tax good governance criteria i.e. transparency, information exchange, fair tax competition and implementation of the new Base Erosion and Profit Shifting (BEPS) measures. States will define the exact nature of the criteria for the common EU list in the coming weeks and will also consider what countermeasures should be applied to listed countries.

The two lists may overlap on some of the countries they feature, but it makes sense that they are kept separate. They have different objectives, different criteria, a different compilation process and different consequences. Nonetheless, the two lists should complement each other in ensuring a double protection for the Single Market from external risks.

Attitude to third countries that fail to meet international tax good governance standards  

The Commission is very sensitive to the situation of developing countries and the need to support and assist them in the international tax good governance framework. The External Strategy has a whole section on developing countries, which is already being taken forward. The Commission excluded the 48 Least Developed Countries from the scoreboard, in recognition of the particularly difficult constraints they face.

However, not all developing countries share similar traits and some have quite developed financial centers or internationally attractive tax regimes. Any developing country selected for screening will have a chance to discuss their capacity constraints and other obstacles with the EU, as part of the dialogue process, and the EU will be ready to work with them to find solutions. This is also aligned with our "Collect More, Spend Better" strategy to follow up on our Addis Ababa commitments.

Concrete examples of how we are supporting developing countries in the area of revenue mobilisation and tax good governance include:

• € 1 million to support developing countries in the OECD BEPS inclusive framework e.g. paying for their participation costs, assisting them with BEPS implementation.
• € 1 million to support the international implementation of Addis Tax Initiative by donor and recipient countries, by supporting an international coordinating secretariat. 
• € 0.3 million (to be added to later) to support the participation of developing countries in the UN Tax Committee and sub-committees.
• A tripartite initiative on transfer pricing (with OECD and WB/IFC) to provide technical and policy support to developing countries in the transfer pricing area.

In addition, the Commission has already started working with the states in order to prevent negative spillovers on developing countries from EU or national tax policies.http://europa.eu/rapid/press-release_MEMO-16-2997_en.htm?locale=en 

(Brussels, 15.09.2016)