Naomi Fowler ■ Geopolitics trumps EU tax haven blacklist

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We have blogged many times about the EU and the OECD’s blacklisting process. The deadline for the US to comply with the EU list transparency criteria expired on 30 June 2019. Nothing has happened so far. We’re publishing here an update guest blog written by Stefan Herweg, writing in his personal capacity (he is tax advisor to the Die Linke group in the German parliament).

The European Union launched its first tax haven blacklist with fanfare in December 2017. It featured 17 countries: mostly small economies such as Mongolia, Palau and Samoa, but also a few territories more known for offshore business such as Panama or Barbados. A further 47 countries had made commitments to addressing deficiencies with respect to the blacklisting criteria defined by EU member states (tax transparency, fair taxation and anti-BEPS measures) within one year or two (for developing countries with no mayor financial centre) and were thus relegated to a grey or monitoring list.

The Tax Justice Network published its own assessment at the time showing 60 countries not meeting the EU criteria. Crucially, six EU member states (Cyprus, Ireland, Luxembourg, Malta, Netherlands and the United Kingdom) failed to meet the blacklist criteria but were excluded from scrutiny by design. Further criticism stressed that EU member states failed to agree on sanctions against listed territories focusing on reputational pressure alone. Non-OECD developing countries, meanwhile, were pressured to adopting standards of the rich countries’ club’s BEPS project which they had no say in negotiating. Some countries like Namibia subsequently took a significant toll from being listed while not featuring any tax haven characteristics in reality.

The big elephant in the room however was the United States of America which have so far refused to join the OECD’s Common Reporting Standard (CRS) for automatically exchanging tax-related information despite a 2014 commitment to doing so. Yet, adherence to the CRS is the first criteria on the EU’s check list. In order to avoid diplomatic embarrassment, member states pushed the deadline for meeting all three tax transparency criteria (amongst which the CRS) until 30 June 2019. The US, the world’s second greatest contributor to global financial secrecy, according to the TJN’s Financial Secrecy Index, was off the hook.

Fast forward 18 months, the EU list has somewhat evolved. Many of the initially listed countries were removed after handing in commitment letters and a few additional ones were listed in the first half of 2019 after the first deadline to actually meet commitments lapsed with the end of 2018. Fundamental problems remain with the listing criteria which differ substantially from those of the FSI or the Corporate Tax Haven Index leaving some notorious offshore centres unscathed. Most tellingly however, the EU led its own deadline slip without acting on tax haven USA. What is more, three of the eleven remaining non-cooperative territories (Guam, American Samoa, US Virgin Islands) are actually connected to the US.

In fact, the US currently violate not just one but two out of the three tax transparency criteria. Besides the CRS they have also refused so far to ratify the amended OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMAA) which provides the basis for a wide range of administrative cooperation in tax matters. Alternatively, the US could have signed equivalent agreements with all EU member states, which equally is not the case.

At the heart of the problem is however the American refusal to join the CRS. The OECD’s own status report on CRS implementation makes clear that the US are non-compliant on the standard (see also this map), merely referring to the political commitment taken in the US FATCA agreements to “achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions“.

In practice, pressure is low on the US to make good on that commitment. The German government, for instance, “regrets that no progress was made so far [on moving towards reciprocal information exchange]”, thus confirming the uneven playing field while not taking further action. Concretely, the US does not share information on financial account balances, only limited information on capital gains and no information on beneficial ownership with other states while requesting all the above themselves (under the threat of prohibitive penalties against foreign banks in cases of non-compliance).

Behind closed doors, EU negotiators have repeatedly met with US representatives ahead of the June deadline to find a face-saving way out. The US side was however in no political hurry conscious that the EU would rather eat their own words than adding to disputes over international accords from Iran to climate or the tug of war in trade politics. While the US government is in negotiations with the last remaining member state (Croatia) to seal a general tax cooperation agreement – meeting the MCMAA equivalence criterion – it has shown no intention to give up its competitive edge in attracting illicit funds by staying out of global automatic information exchange. In fact, US havens like Delaware are measurably benefiting from the status quo.

The EU’s current effort had more material impact than previous OECD attempts significantly speeding up the global dissemination of the CRS and other standards. The treatment of the US is however a prime example of why general tax haven blacklists are regularly taken hostage by political considerations and therefore constitute an inadequate tool to combat aggressive tax competition and offshore secrecy provision.  

What looks more promising is the use of national lists which can be tailored – in conditions and countermeasures – to the specific threats posed to an economy through harmful tax structures or financial secrecy. Recent research has examined the relatively effective tax haven lists by some Latin American countries which could be adapted swiftly in the case of constructive non-compliance when tax havens adhere to global standards while opening new loopholes to continue business as usual.

Fighting tax havens remains a political power game with strong and universal transparency measures like public country by country reporting and comprehensive public beneficial ownership registers the best bet in town. Those avoid diplomatic tinkering around (global) blacklists and set out clear rules for everybody. For larger countries like Germany – or the EU as a whole – they can even be introduced unilaterally as companies will abide by the rules rather than lose access to lucrative markets.

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