On 6 October 2020, the European Council (the "Council") revised its list of non-cooperative jurisdictions for tax purposes by removing Cayman Islands and Oman and adding Anguilla and Barbados.
The first EU list of non-cooperative jurisdictions for tax purposes (so called "EU tax blacklist" was adopted on 5 December 2017 by the EU Council, following work of the EU Code of Conduct Group (CoCG) on Business Taxation.
In addition to the black list, the EU Council adopted also a grey list containing a number of jurisdictions in relation to which the EU Code of Conduct Group identified concerns during its screening process. The jurisdictions identified on the grey list do not yet comply with all international tax standards but have committed to reform.
The black and grey lists (also called Annex I & Annex II respectively) have been updated several times, most recently in October 2020. As of 2020, the list is updated twice a year (next update being scheduled for February 2021).
The list is designed to combat tax evasion and avoidance. It aims to enable the European Union to address more effectively external threats to Member States' tax bases and to take coordinated action against third countries that refuse to act fairly in tax matters.
What does it mean to be on the EU blacklist?
EU countries can choose to apply certain defensive measures against the blacklisted countries. Tax-specific defensive measures may include (but are not limited to):
- Increased monitoring and audits from tax authorities,
- Greater scrutiny on withholding tax rates (e.g. denying reduced rates or imposing higher/penal rates)
- Non-deductibility of costs
- Controlled Foreign Company (CFC) rules
- Special documentation requirements in respect of transactions with blacklisted countries, and
- Automatic information exchange with relevant tax authorities.
Where a blacklisted country has a double tax treaty with the relevant EU country, the effect of any withholding tax measures may be mitigated. Increased scrutiny is, however, expected when an entity in a blacklisted country would seek relief from taxation under a double tax treaty.
Further, certain transactions between associated enterprises in the EU and the blacklisted countries would trigger a reporting obligation and automatic exchange of information under the EU’s Directive on Administrative Cooperation in the field of taxation (known as “DAC6”).
DAC6 provides for the mandatory disclosure to EU tax authorities of certain cross-border arrangements, and mandates the automatic exchange of this information among the EU Member States’ tax administrations.
An arrangement would be “reportable” under DAC6 if it meets certain “hallmark” criteria. One specific hallmark is where there is an arrangement that involves deductible cross-border payments from the EU to an associated enterprise resident in a country that is on the EU blacklist, irrespective of whether the payment results in a tax advantage. Accordingly, the inclusion on the EU blacklist has direct implications for the disclosure of transactions between those countries and associated enterprises in the EU,
In addition, the EU blacklist is linked to EU funding under new provisions in the Financial Regulation and in the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM). Funds from these instruments cannot be channeled through entities in listed countries.
Which countries are currently listed?
The (black)list adopted by the Council on 6 October 2020 is composed of:
- American Samoa
- Trinidad and Tobago
- US Virgin Islands
Cayman Islands was removed from the EU list after it adopted new reforms to its framework on Collective Investment Funds in September 2020.
As regards Annex II - state of play of pending commitments - due to the ongoing COVID-19 global pandemic, the Council decided to extend several deadlines for these commitments. The Council also decided to remove Mongolia and Bosnia and Herzegovina from Annex II after those countries deposited the instruments of ratification of the OECD Convention on Mutual Administrative Assistance in Tax Matters, as amended.
The impact of being included on the EU blacklist is that entities transacting with entities in those countries may face increased monitoring and audits, special documentation requirements, increased withholding taxes and other defensive measures in EU Member States.
In addition, increased DAC6 reporting obligations would apply to related party transactions between the EU and the blacklisted countries.