“The difference between tax evasion and tax avoidance is: (a) whatever the IRS says; (b) 20 years in prison; (c) a good lawyer; (d) all of the above.”
The Firm, 1993
Things have moved on significantly since the, rather raw, portrayal of tax evasion in The Firm, and the EU is doing its part in improving tax transparency and compliance through its list of non-cooperative tax jurisdictions: the "blacklist".
What is the blacklist?
25 years after The Firm first aired, debate around tax havens continues to rage and has intensified following the publication of the Panama Papers. The EU is one organisation taking a hard stance to clamp down on tax evasion, and last year published for the first time its “blacklist” of jurisdictions that it considers to be “non-cooperative”. Those countries blacklisted face sanctions from the EU.
Somewhat more interestingly, there was also a “grey list”, which constituted countries that committed to improve their tax practise or risk being blacklisted. One year on from the first publication of the list any many countries have implemented changes, for example on 17 December Cayman published three new bills in an attempt to stay off the blacklist, one of which is going to require increased substance for Cayman operations. Similarly, the BVI is trying to fast track legislative changes to satisfy the EU’s tests.
Why might the US be blacklisted?
The EU is planning to update its blacklist of tax havens in the new year, and a surprising name could be on the list: the United States of America.
Against the back drop of tariffs, a simmering trade war and broader tensions with the Trump regime, the US has so far failed to adopt the OECD’s common reporting standard, which requires jurisdictions to be more transparent, or to comply with the majority of the OECD’s base erosion and profit shifting rules. Paul Tang, a member of the European Parliament from the Netherlands, told Bloomberg Tax in a December 8 interview that “We have been assured by the European Commission that if [the US] does not [implement the common reporting standard] by June of next year the process for it being listed will begin.” There is also some international pressure for the EU to take a stand against the US, with representatives from certain greylisted countries calling for the EU’s standards to be applied uniformly; Jude Scott, the CEO of Cayman Finance told Bloomberg Tax that “Standards of transparency and cross-border cooperation on tax issues can only be considered fair and effective if they apply to all jurisdictions rather than just a targeted few.”
Interesting times ahead!
What does the revised blacklist mean for funds?
The rules could have particular impact on funds that seek investment from EU based investors who may be cautious about investing into a blacklisted country. Funds based in grey listed countries that are seeking to legislate to prevent being moved onto the blacklist, could face increased operational burdens to comply with new laws.
Further, the EU has mooted imposing withholding taxes on amounts moved from the EU to a blacklisted country; this would be very expensive for funds based in a blacklisted country that invests into the EU.
More will become clear next year as the situation develops further, but this is certainly a space to watch.
We have a situation where the United States does not meet the transparency criteria but the EU member states have decided to ignore that.