In brief
In its efforts to continue to promote fair tax competition and address harmful tax practices, the European Council decided on 14 February 2023 to add the British Virgin Islands, Russia, Costa Rica and the Marshall Islands to the EU list of non-cooperative jurisdictions for tax purposes or “blacklist”. Now is the time for multinational enterprises (MNEs) and investment funds with subsidiaries or investors in these jurisdictions to consider the potential tax implications of this development on their structures.
Key takeaway
The consequences of jurisdictions being included on the EU blacklist are various sanctions imposed directly by EU member countries, including, for example, applying withholding taxes at a punitive rate on payments received in “black-listed” jurisdictions. In addition, the inclusion of a jurisdiction on the EU list of non-cooperative jurisdictions determines the application of one of the hallmark arrangements under the EU disclosure regime for cross-border tax planning arrangements often referred to as DAC 6. As a result, MNEs having group companies in these jurisdictions should carefully review how this development might impact on their payment flows and disclosure requirements.
In more detail
Background
The EU list of non-cooperative jurisdictions for tax purposes was established in December 2017. It is part of the EU’s strategy on taxation and aims to contribute to ongoing efforts to promote good tax governance worldwide.
Jurisdictions are assessed by the EU Code of Conduct Group on the basis of a set of criteria laid down by the European Council. These cover tax transparency, fair taxation and implementation of international standards designed to prevent tax base erosion and profit shifting. The Council updates the list twice a year and the next revision of the list is scheduled for October 2023.
With these additions, the EU list now consists of 16 jurisdictions: American Samoa, Anguilla, Bahamas, the British Virgin Islands, Costa Rica, Fiji, Guam, Marshall Islands, Palau, Panama, Russia, Samoa, Trinidad and Tobago, the Turks and Caicos Islands, the US Virgin Islands and Vanuatu. The Council has invited the newly-added jurisdictions, indeed as it asks all listed countries, to improve their legal framework and to work towards compliance with international standards in taxation.
Reasons for adding the British Virgin Islands, Russia, Costa Rica and the Marshall Islands
This revised EU list of non-cooperative tax jurisdictions includes countries that either have not engaged in a constructive dialogue with the EU on tax governance or have failed to deliver on their commitments to implement necessary reforms.
We have seen a large number of jurisdictions with low or no corporation tax compelled to implement economic substance requirements in response to the requirements of the OECD Forum on Harmful Tax Practices and the EU Code of Conduct Group. Where there are such requirements, companies must have “adequate” levels of expenditure, people and premises, along with evidence of certain “core income generating activities” being undertaken in the jurisdiction in some cases. Whilst the British Virgin Islands has implemented economic substance requirements this has not, however, enabled the British Virgin Islands to avoid inclusion on the list. The British Virgin Islands is listed because it was found not to be sufficiently in compliance with the OECD standard on exchange of information on request. The British Virgin Islands has not previously been listed and, given that it has traditionally been popular as an intermediate holding company jurisdiction for multinational groups and used in investment fund structures, it warrants particular attention.
Russia has been added after the EU found that it had not fulfilled its commitment to address harmful aspects of a special regime for international holding companies introduced by new legislation adopted in 2022. In addition, dialogue with Russia on matters related to taxation came to a standstill following the Russian invasion of Ukraine.
For the first time since the list was established, Costa Rica is included because it has not fulfilled its commitment to abolish or amend harmful aspects of its foreign source income exemption regime. The Marshall Islands have been added after being found to be lacking in the enforcement of economic substance requirements.
EU “blacklist” sanctions
EU Member States have broad discretion on the type and scope of defensive measures they apply in the tax area. These largely depend on their national tax systems. Nevertheless, there is a certain degree of coordination.
EU countries agreed in December 2017 to apply at least one of the following administrative measures in respect of “blacklisted” jurisdictions:
- Reinforced monitoring of transactions
- Increased risk audits for taxpayers who benefit from, or use tax schemes involving, listed regimes
Member States also committed, as of 1 January 2021, to use the EU list in the application of at least one of four specific legislative measures:
- Non-deductibility of costs incurred in a listed jurisdiction
- Controlled foreign company (CFC) rules to limit artificial deferral of tax to offshore, low-taxed entities
- Withholding tax measures (WHT) to tackle improper exemptions or refunds
- Limitation of participation exemption on shareholder dividends
Currently, 26 Member States apply or have taken steps to apply at least one of these four legislative measures and of these 26 member states, 16 apply at least two.
The list is also now relevant, in particular, to the disclosure regime for cross-border tax planning arrangements introduced by Council Directive (EU) 2018/822 (often referred to as “DAC 6”). Specifically, inclusion of a jurisdiction on the EU list of non-cooperative jurisdictions determines the application or otherwise of certain category C hallmark arrangements.
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