The European Commission published on Thursday a list of 81 countries and jurisdictions that have a higher chance of facilitating tax avoidance and may be subject to further screening and even sanctions if all EU states agree.
The “scoreboard” is the first step in a process that should be concluded next year with the first European Union’s blacklist of tax havens, which is part of a wider plan to curb tax avoidance and tax evasion by multinationals and wealthy individuals.
The preliminary lists includes countries and jurisdictions widely seen as facilitators of tax avoidance, such as Panama, Bermuda and Hong Kong. But it also lists economic and political giants like the United States, Japan, China, Australia and Canada.
The initial list is the result of an assessment of all countries in the world and is based on indicators such as the economic ties with the EU and the volume of financial activities.
“There can be legitimate reasons for a country to appear high on certain indicators,” the Commission said in a note. “Therefore, there is no stigma linked to the countries that feature higher on the scoreboard,” the note added.
The list will serve EU countries to decide which countries and jurisdictions may need a further screening of their tax practices.
At the end of the process, if a country is seen as a tax haven by EU countries and refuses to cooperate to change its practices, it may be subject to sanctions.
EU countries have traditionally had widely different positions on tax havens, and may find it difficult to agree on countries to be blacklisted.
In the External Strategy for Effective Taxation, the Commission set out a new EU listing process to deal with jurisdictions that refuse to comply with tax good governance standards.
This list is to be established based on a three-step process:
1: Scoreboard: The Commission produces a neutral scoreboard of indicators, to help determine the potential risk level of each 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: Member States decide which third countries should be formally screened by the EU. This screening will include a dialogue process with the third country jurisdictions in question, to allow them to react to any concerns raised.
3: Listing: Once the screening process is complete, third country jurisdictions that refused to cooperate or engage with the EU regarding tax good governance concerns should be put on the EU list. Member States endorsed this process at the May 2016 ECOFIN and called for a first EU list to be ready in 2017.
The selection indicators are obtained for all jurisdictions and grouped into three dimensions:
Strength of economic ties with the EU: To see how strong the economic ties are between the third country and the EU, indicators such as trade data, affiliates controlled by EU residents and bilateral FDI flows were examined.
Financial activity: To determine if a jurisdiction had a disproportionately high level of financial services exports, or a disconnection between their financial activity and the real economy, indicators such as total FDI, specific financial income flows and statistics on foreign affiliates were used.
Stability factors: To see if the jurisdiction would be considered by tax avoiders as a safe place to place their money, general governance indicators such as corruption and regulatory quality were examined.
For each indicator, the jurisdiction with the highest value receives ‘1’, the second-highest receives ‘2’, etc. To compare indicators easily, the ratings are then reported in percentiles. For example, a country which is 12th out of e.g. 200 countries for which data is available has the percentile value 6 i.e. only 6% of all countries in the sample score higher for that indicator. For each of the three dimensions above, a jurisdiction is flagged if its minimum percentile value comes above a minimum threshold.
If a country ranks above the threshold in all three dimensions, it is considered as economically relevant for the purposes of the scoreboard and features on Table I.
Jurisdictions that display missing values, due to lack of data, feature in a separate part of the scoreboard (Table IV). Risk indicators Once the selection indicators identified the jurisdictions which are most economically relevant, the Commission did a basic assessment of the potential risk level of these jurisdictions facilitating tax avoidance.
The risk indicators used were:
(1) Transparency and exchange of information: The jurisdictions’ status with regard to the international transparency standards i.e. exchange of information on request and automatic exchange of information.
(2) The existence of preferential tax regimes: The existence of potential preferential regimes, identified by the Commission on the basis of publicly available information (IBDF, national websites etc.).
(3) No corporate income tax or a zero corporate tax rate: The existence of a tax system with no corporate income tax or a zero corporate tax rate. European Commission – DG Taxation and Customs Union – 13/09/2016 These three risk indicators, which reflect the situation in July 2016, were then applied to the most relevant jurisdictions (Table I), identified by the selection indicators, as well as to the five jurisdictions with transparency agreements with the EU (Table II). It is important to point out that the risk indicators do not pre-empt the in-depth analysis of jurisdictions’ tax systems, which will take place in the screening stage (Step 2).
The risk indicators are only intended to provide Member States with as much information as possible to decide on the jurisdictions that they wish to screen.