On Tuesday morning, 5 December 2017, EU Finance Ministers will meet over breakfast to finalise their list of ‘uncooperative jurisdictions’ for tax purposes – or tax ‘blacklist’ for short. In the wake of the release of the Paradise Papers, few will give a second thought to a list populated by palm-strewn islands in the Caribbean, Indian Ocean and the Pacific. Yet there are a number of reasons to care.
The most obvious group that may care are the small states and jurisdictions that have sought to establish international financial centres (IFCs) as part of their development strategy that often populate such ‘blacklists’. This includes not only the more high profile non-sovereign jurisdictions with large offshore ‘footprints’ such as the Cayman Islands and the British Virgin Islands, but a myriad of other small sovereign states operating very small IFCs.
Beyond the threat of yet unspecified ‘defensive measures’ to be taken against listed jurisdictions, the ensuing reputational damage has the very real potential to exacerbate an already critical ‘de-risking’ problem. A recent Financial Stability Board data survey confirms that the small states of the Pacific and the Caribbean continue to be the most impacted by the withdrawal of correspondent banking relationships (CBRs) – relationships that smaller banks and financial institutions have with global banks that are critical in facilitating cross-border transactions. A number of IMF reports highlights the role that jurisdictional reputation and the presence of an ‘offshore’ financial centre plays as a driver of the loss of CBRs.
Amongst other things, further instances of ‘de-risking’ in impacted countries has the potential to further impact the remittance flows upon which many people within these states rely – a concern not only for the impacted states, but their development partners as well.
Of course, many may find it difficult to offer sympathy to such jurisdictions, particularly where the operation of their IFCs is in part based on the facilitation of tax avoidance activities. Such business models appear increasingly at odds with growing public concern in many countries, developing and developed alike, about the otherwise legal tax practices of multinational enterprises and high wealth individuals and their use of such ‘offshore’ jurisdictions. And indeed addressing tax avoidance is in part the goal of the current EU listing process, alongside addressing tax evasion through the promotion of tax transparency standards.
Concerns about the EU process
However, the principle concern with the current EU listing process is not with its underlying policy goals, but with the process by which it is being undertaken. In an area of international public policy which involves judgements being made about the exercise of a jurisdiction’s sovereign will and which, unlike the global trading architecture, operates without the benefit of a formalised system and the rule of law, process is important.
First of all, the EU process has the potential to undermine the legitimacy of the global processes already underway to address tax evasion and avoidance under the mandate of the G20.
Under such a mandate, the Global Forum on Transparency and Exchange of Information for Tax Purposes has been overseeing the implementation of global tax transparency standards as a means of addressing tax evasion since its establishment in its current form in 2009. The success of the Global Forum in combating tax secrecy (success that sadly has gone largely unacknowledged in the reporting that followed the release of the ‘Paradise Papers’) illustrates what can be achieved when a broad group of jurisdictions come together on an equal footing to implement clearly articulated global standards, supported by a robust process of peer review in a transparent process.
To the credit of the EU, the tax transparency criteria adopted as part of their listing process is aligned with the ratings provided by the Global Forum. This is also true of the assessments made by the OECD’s Forum on Harmful Tax Practices charged with assessing the ‘harmful’ nature of certain tax regimes and the work of which forms part of the G20 mandated Base Erosion and Profit Shifting (BEPS) project aimed at addressing tax avoidance.
Whilst this is also welcome, this only applies to those countries or jurisdictions already part of the BEPS process and not to those outside the process, including many not yet invited to join. Such jurisdictions must instead be content to have their tax systems reviewed by a body of which they are not a member, without the benefit of a robust peer review mechanism, and where in many instances, the basis upon which assessments have been made remain largely uncertain.
The final reason to be concerned about the EU process is that, notwithstanding it is based on the application of ‘objective’ criteria, it has the hallmarks of being a political process – evidenced at the very least by the fact that it does not apply to any of its own member states.
As has been seen in many examples in the past, the issue with politicised blacklisting processes is that any ultimate list is often reflective not of a robust and evidenced-based attempt to address the underlying policy issue, but rather of the varying political clout and capacity and effectiveness of lobbying efforts of jurisdictions.
The extent to which the EU process is a political one will ultimately be evidenced as much by which jurisdictions are not on the list as those that are. And make no mistake, any list populated predominantly by the ‘usual suspects’ of palm strewn small island states, many of which readers may be hard placed to identify on a map, will not represent a step forward in the important fight against tax avoidance and evasion, but rather another compromised process in which the legitimate concerns of an increasingly engaged and aware public have sought to be allayed by a ritual offering akin to the gladiatorial events of Roman times.
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