EU blacklist of tax havens and plans for taxing the digital economy

The EU blacklist

On 5 December 2017, the European Council Code of Conduct (“ECOFIN”) published a blacklist of 17 countries named as tax havens (access the list here), for having failed to implement necessary measures to tackle tax fraud, evasion and aggressive tax avoidance. The final list includes, among others, the United Arab Emirates (the “UAE”), Bahrain, Tunisia, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Barbados and Grenada. A number of other countries have been put on notice (a “grey list”) including Bermuda, the Cayman Islands, Jersey, Guernsey and the Isle of Man. These are considered non-compliant but have agreed to make necessary changes.

The UAE has been named on the list due to its alleged failure to comply with minimum global standards against tax avoidance.

ECOFIN has established three criteria that should be met by jurisdictions to avoid being included on the blacklist:

1. countries must not provide preferential arrangements that allow companies to move profits from other jurisdictions to avoid chargeability to tax;
2. countries should be compliant in relation to tax transparency; and
3. anti-BEPS measures must have been implemented to target profit-shifting.

The EU list will be updated at least once a year taking into account the close monitoring and dialogue with all jurisdictions and whether further jurisdictions should be added to the list. An interim progress report is expected before the summer of 2018.

The Commission expects the list to have a real impact on the countries concerned and identifies these EU level implications:

a) funding from certain EU instruments (eg the European Fund for Sustainable Development, the European Fund for Strategic Investment) cannot be channelled through entities established in any of the blacklisted countries; and

b) some European legislative proposals (eg regarding Country-by-Country reporting) include stricter reporting requirements where activities take place in any of the blacklisted countries.

At Member State level, mandatory sanctions have not been agreed. Member States may opt to implement measures regarding entities and business located in blacklisted countries, such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The Commission hopes to make progress on Member State level countermeasures in 2018.

The alleged failure by the UAE, which resulted in its inclusion on the blacklist, is its failure to implement, or commit to implementing, the BEPS minimum standards by December 2018. This is relatively light in comparison with other countries on the blacklist, and has been met with some bullish response from the UAE and financial institutions in the UAE. The UAE has announced its commitment to implement BEPS minimum standards, however the timing imposed by ECOFIN is more ambitious than the UAE is able to deliver on. It remains to be seen what impact (if any) the announcement will have on the UAE economy, or how long the UAE remains on the blacklist.

EU plans for taxing the digital economy

On the subject of taxing the digital economy, ECOFIN has also agreed to consider the concept of a ‘virtual permanent establishment’, which would set aside the requirement of a physical presence for a permanent establishment to exist. Instead, it would take into account factors such as the existence in a host country of revenue generated, users, and digital footprint. Amendments to the provisions relating to transfer pricing and profit attribution were also considered. ECOFIN called for close cooperation at an international level, including with the OECD. Legislative proposals are expected in early 2018.

For information in respect of the EU developments in this area please see our articles Europe Taxing the Digital Economy: could a turnover tax be on the horizon? (here) and Public Input on Taxing the Digital Economy (here). For information on the first steps taken by the UK to hold the digital economy accountable to tax please see our blog post Taxing the Digital Economy: First Steps by the UK (here).