How Credible Are Tax Haven Blacklists?

Are tax haven blacklists still skewed to the interests of large states? Or, is the framework of criteria used to blacklist 'tax havens' objective, clear and transparent? We recruit six industry commentators to deliver their diverging stances on an issue that has had the power to shake the foundations of nations. 

Valère Moutarlier, Director, Directorate-General for Taxation and Customs Union, European Commission

The credibility of any tax blacklist depends on a number of critical factors. Does it have a clear objective which can effectively be achieved? Is the process impartial, transparent and fair? Is it internationally acceptable – and accepted? To each of these questions, we can confidently answer ‘yes’ for the EU list of non-cooperative jurisdictions, which Member States agreed to for the first time in December 2017.

The new EU list was conceived to rectify a sub-optimal situation in Europe, where every Member State had its own approach to blacklisting (or not). The patchwork of national lists created uncertainty for companies and third countries and sent mixed messages regarding EU expectations on tax matters. Often, the criteria, process or sanctions for the national lists were unclear. Sometimes third countries were not even aware that they had been listed by a Member State. The common EU list, therefore, was a means of creating a more robust, more coordinated and more credible instrument to tackle external threats of base erosion.

From the outset, the purpose of the EU list was clear. It was never meant to be a purely punitive tool. Rather, the EU listing process was designed to prompt new interaction with jurisdictions on tax matters, and to raise the bar of tax good governance globally. In this respect, it has been a success so far. The EU raised its concerns with third countries regarding their tax systems through a screening and dialogue process, and discussed how shortcomings could be addressed. As a result, dozens of jurisdictions have now committed to remove harmful regimes, upgrade their transparency standards and/or introduce measures to prevent aggressive tax planning through their territory by the end of 2018. The fact that so many countries made high level political commitments to improve their tax standards as a result of the EU list, is proof of its global credibility.

The EU list is also credible because of the high priority that was given to making it open, objective and fair at every stage. There was no favouritism when it came to countries; the widest possible approach was taken. More than 200 jurisdictions – big and small, rich and poor – were examined initially, through a neutral economic scoreboard. On this basis, Member States identified 92 jurisdictions for further examination, among which were 15 out of the 20 non-EU countries with the highest GDP. Those countries were immediately notified and the criteria were clearly explained. Importantly, the criteria were internationally recognised and aligned to global norms. The EU worked closely with the OECD at every stage of the listing process to maintain this close link with the global agenda.

Transparency has been important in the EU listing exercise too. It allows the public, stakeholders and third countries to see that the process is fair and objective. It also creates additional scrutiny on the jurisdictions that have promised to make improvements. The latest transparency move has been to publish jurisdictions’ commitment letters, with their consent. As such, the concrete results that were promised through this listing process can be freely measured and monitored.

The final step in securing the credibility of the EU list will be to maintain its dynamic nature. Interaction with our international partners on good tax governance issues must continue. Listing criteria must evolve with new developments. Defensive measures must be further strengthened and coordinated. The Commission will be supporting Member States in this work – now and in the future – to uphold the credible and fair listing process that the EU can be proud of.

* Disclaimer - The views expressed in the article are solely those of the authors and do not necessarily reflect the views of the European Commission.

Mark Pragnell, Director and Strategy Consultancy, Capital Economics, London

If a sovereign nation wishes to restrict trade, investment or any other relationship with another jurisdiction, it can and should do so. If a group of sovereign nations, such as the European Union or the membership of the OECD wish to do the same collectively, so be it. That’s the nature and beauty of sovereignty.

But, when that exercise of sovereign power is in the form of arbitrary, inconsistent and incoherent threats of sanctions against competitor businesses in smaller nations, let’s see it for what it is: protectionism.

The Council of the European Union’s current process for blacklisting, what they call ‘non-cooperative jurisdictions for tax purposes’ is arbitrary. For example, at the time of writing, seven of the Crown Dependencies and United Kingdom Overseas Territories have been cited, under ‘criterion 2.2’, as having ‘tax regimes that facilitate offshore structures which attract profits without real economic activity’. But, in practice, the ‘tax neutrality’ of the island IFCs proffers little or typically no opportunity to avoid payment of taxes in the EU28; the level of so-called ‘substance’ in the offshore centres is an irrelevance to their European tax liability.

It is inconsistent. Focusing blindly on ‘offshore’, Brussels bureaucrats are failing to identify where and how companies shelter profits from European taxes. Almost every significant example of profit shifting abuse in Europe has relied, not on remote jurisdictions, but on the ‘double tax’ provisions of the bloc’s own member states, such as Ireland, Malta, Luxembourg and the Netherlands. But the practical politics of the European Union means members’ indiscretions are ignored. It is realpolitik to pick on small islands – while the United States, for example, notable both for the likes of the Delaware regime that falls well short of international norms and its absence from the EU lists, is untouchable.

And, it is incoherent. The treatment being meted out by Brussels to tax neutral IFCs will cause harm to the tax receipts of the 28 member states themselves. Europe can expect less foreign investment, fewer jobs and slower economic growth, all to the detriment of its governments’ coffers. Indeed, Brussels’ desire to see ‘substance’ offshore will likely give greater opportunities for multinationals to book their profits outside the continent – the alleged problem that the blacklisting process is seeking to address.

But blacklists are effective at changing the behaviour of nations and territories that are too small to have the diplomatic, economic or military clout to resist.

Up to now, big countries have mostly named, shamed and then penalised IFCs to secure greater transparency for and adherence to measures to reduce financial crime and money laundering. We should rejoice at the end of Swiss-style banking secrecy laws and the demise of regulators who fail to show due diligence when the industry they are regulating isn’t diligent. But Europe’s current round of blacklisting steps well beyond precedent. It is the unjustifiable restriction of competitor nations’ business activities. It is protectionism.

It is incredible that Brussels is pursuing a policy of protectionism under the arbitrary, inconsistent and incoherent guise of ‘unfair tax’. But, for the island IFCs subject to the playground bullying of the gang of big kids that account for a fifth of the world’s economy, the threat posed by blacklisting is more than credible.

Alex Cobham, Chief Executive, Tax Justice Network, Oxford

Not at all; although this is hardly surprising, as the entire concept of a ‘tax haven’ blacklist is flawed. But as the Tax Justice Network has demonstrated, it is possible to construct a meaningful assessment of secrecy jurisdictions based on objectively verifiable criteria, which could be used as the basis for powerful counter-measures – and this is the international direction of travel.

There are three main flaws in the concept of a tax haven blacklist. First, there is no agreed definition of a ‘tax haven’ – in fact, extensive literature supports the view that such a definition is not possible. The key state behaviour that causes damage to others is not in the choice of sovereign, domestic tax policies. Rather, it is the provision of financial secrecy that allows unscrupulous users to hide their abuse of tax and other regulations in other places. For that reason, the approach of our Financial Secrecy Index   is to focus on ‘secrecy jurisdictions’.

Second, the idea of a simple division into tax havens (bad) and all other states (good) is not enormously helpful. When we compile the range of international assessments of states’ transparency and cooperation into 20 key financial secrecy indicators, we find instead that there is a secrecy spectrum. Few states achieve an overall secrecy score below 40, where zero would indicate complete transparency and 100, complete secrecy. All states, without exception, have work to do. None can yet claim to be fully financially transparent.

The third flaw is perhaps the most important. The lack of an agreed ‘tax haven’ definition has historically given rise to blacklists based on opaque, subjective assessment. Inevitably, this has resulted in political bias. The old lists of organisations like the IMF and OECD were laughably skewed towards the smallest, least politically connected states – while major players like the United States were absent.

And so, the Tax Justice Network created the Financial Secrecy Index (FSI) in order to make explicit the argument for a level playing field, assessing all jurisdictions equally against objectively verifiable criteria. These largely reflect our 'ABC' of tax transparency: automatic exchange of financial information, beneficial ownership transparency, and country-by-country reporting by multinationals, publicly. We laid this policy platform out after our formal establishment in 2003 to widespread scepticism and even ridicule – but by 2013, the ABC had become the basis of the global policy agenda at the G20, the G8 and the OECD. Progress has been slow, but unstoppable.

The overall FSI ranking, which in 2018 has Switzerland in the top spot, with the United States second and closing, reflects both the secrecy of jurisdictions and their global scale – which together provide a measure of the risk posed. For individual jurisdictions, the secrecy score alone provides the key measure of how much progress there is to be made and in which areas.

The EU list of non-cooperative jurisdictions, in its initial phase at least, is a missed opportunity. Having published three criteria, of which two were objectively verifiable, the EU produced a list, followed by a set of revisions which hung significantly on the other completely opaque criterion. And the two transparent criteria relate to compliance with OECD initiatives, so are heavily weighted against non-OECD members (i.e. the smaller jurisdictions and lower-income countries of the world). In addition, the EU excluded its own members from consideration – although our assessment   of their criteria suggests six members, including the soon-to-Brexit UK, would likely have been blacklisted.

But watch this space, because as of September 2018 all the world’s financial centres of any size will be exchanging financial information automatically under the OECD’s Common Reporting Standard. All, that is, except the biggest of all: the United States. If the OECD can bring itself to say so, the EU may find that its criteria require the blacklisting of the financial secrecy superpower …

Francoise Hendy, International Lawyer and Treaty Negotiator, Invest Barbados

For something to be credible it has to be subjected to a certain measure of intellectual rigour, and the facts as they exist at the time of the blacklisting exercise.

It has been the case from the early days of the first iterations of OECD blacklists that they were the primary instruments of compliance in a world were such lists were designed and promulgated by a group of countries who were, not only the ‘purveyors' of international business and financial services, but also in competition with ‘like’ countries who were blacklisted for want of compliance.

As if this was not enough to doubt on the bone fides of the blacklists, these lists aimed to invariably include small states, while deliberately excluding ‘like’ jurisdictions that clearly employed the same country business models, and yet seemed to escape scrutiny based on their geographical location. Indeed, when discrepancies arose, the solution was to re-define the list as ‘a work in progress’ and subject to review. This was after the damage to reputation was done.

A further encumbrance on the blacklisted countries is the fact that their proliferation created a public perception that some countries were ‘innocent choir boys’ while others of the same ilk were nonetheless deliberately characterised as ‘harmful’.

During the heady days of the Panama Papers, for example, the OECD gave the US a ‘pass’ by allowing their bilateral agreements in support of FATCA to suffice as exchange of information edicts. This meant that the standard of compliance did not apply to the US, based on the view that the US inter-governmental agreements, designed to support FATCA implementation, would also be applied to the OECD transparency and information exchange protocols.

Interesting enough, at the time, the only two countries outside of this requirement were the US and Panama. Panama was dealt with quite harshly, while the US was allowed to employ its own home-grown solution.

The EU has since indicated that it will blacklist the US if they do not apply the EU crafted rules on transparency and information exchange that have already landed countries on the wrong side of both the OECD and the EU under its good tax governance agenda.

From its inception OECD blacklists have been subject to credibility issues, because of the modalities and the countries exempted from sanction.

Blacklists have always been about creating public furore which has been an indispensable ally in driving the tax compliance agenda. Blacklists have also been used as an anti-competitive measure against small IFCs.

It is no coincidence that lists are invariably leaked to create ‘buzz’ — and one can be rightly concerned about the integrity of communications about the EU’s tax agenda. It is quite easy to use a blacklisting exercise to convince the public of who is on the right side of governance and who should continue to languish on the ‘wrong side’ of accepted best practices.

Nevertheless, two decades after their inception, blacklists have come a long way from the days when the language of blacklisting was designed to demonise the financial services of one group of countries to glorify another group engaged in the same activities. Those entities creating the blacklists must lean on their long experience to establish a comprehensive framework of objective, clear and transparent criteria that can be fairly applied consistently and across the board – this is the only way to bolster credibility in the long-term.

Paul Byles, Director, FTS, Cayman Islands

In order to assess whether tax haven blacklists are credible, we need to take a closer look at the foundation on which these lists tend to be created:

1. The idea of ‘harmful tax competition’, when applied to certain IFCs, is flawed

Companies finding ways to structure their affairs to avoid multiple layers of taxation for the same transaction, while abiding by the laws in all the respective countries, is not harmful tax competition. In fact, it is not competition at all if the offshore jurisdiction does not purposely set its tax policy as a means to attract business. There are several examples of countries which have historically had no, or very low tax for domestic policy reasons – long before the offshore financial world was even conceived. Far from being a ‘race to the bottom’, IFCs, such as the Cayman Islands, are not in a race at all. The idea of a race implies that the Cayman Islands somehow predicted this competition over 200 years ago and devised a system to try to ‘win’ today!

What’s more, a simple Google search of ‘EU lowest corporate tax’ will reveal examples within the EU/OECD where countries have purposely reduced their corporate tax rates to attract new investment (to create jobs) and curiously this intentional policy move is not regarded as either ‘harmful’ or ‘competitive’.

2. Without a credible whitelist, there can be no credible blacklist

For there to be a blacklist, there must be a corresponding ‘whitelist’. On that whitelist we would expect to see a list of countries that have all met some agreed global standard. In the case of the EU, what we are seeing is a mixed group of countries – some of which meet standards and others that do not – getting together as a ‘bloc’ and blacklisting countries located outside the group. As an example, Oxfam points out that several EU countries should be on the EU’s recent blacklist when assessed by the EU’s own criteria.

However, there are examples of IFCs that have in place 100 or more cross-border agreements (the Common Reporting Standard, FATCA, the EU Savings Directive etc.) to share information which aids tax authorities in EU and OECD-based countries, yet those IFCs have not been placed on the whitelist (because some still face a threat of being placed on the blacklist).

If there is no true whitelist demonstrating that each member of that list has met all of the imposed global standards, there can never be a credible blacklist.