EU Paper Discusses ‘Blacklist’ of Tax Havens: Hong Kong Still on the List

In the framework of a meeting among EU officials of 24 September 2015, a Discussion paper on an External Strategy for Effective Taxation was prepared, to launch a debate on effective taxation in the EU. The paper discusses a common EU approach on the application of defensive or incentive tax mechanisms, in relation to third countries.

As part of the ongoing work to ensure that persons and companies are effectively taxed within the EU, Member States have called for an EU approach to address what they see as external threats to their tax bases. In order to effectively tax profits generated in the EU, it is generally agreed that common defensive measures are needed against outbound profit-shifting (to third countries).

In this connection, earlier this year, the European Commissioner for Taxation and Customs, Pierre Moscovici, announced a pan-EU list of 30 countries, equivalent to a ‘blacklist’ of tax havens which represent an external threat to Member States’ tax bases. The list was announced on 17 June 2015, and includes Hong Kong.

Mr. Moscovici highlighted that the EU must maintain a robust EU stance against tax havens, thus giving Member States a collective weight to resist such external threats. “As a move in this direction, we take today another decisive step to push non-cooperative non-EU jurisdictions to be more cooperative and to adopt international standards” he stated, in his 17 June announcement (please click on the following for the Commissioner's announcement).

The list shows the ‘top 30’ non-cooperative jurisdictions, or tax havens, consisting of those countries or territories that feature on at least ten Member States’ national blacklists.

As Hong Kong is on the pan-EU list, as revealed by Commissioner Moscovici’s statement, it means that, at that time, at least ten Member States had listed Hong Kong on each of their national blacklists. However, in October this year, the Commission updated its overview of Member States’ national blacklists, revealing that, currently, only eight Member States still have Hong Kong on their national blacklists. These are: Bulgaria, Croatia, Greece, Italy, Latvia, Lithuania, Poland and Portugal. That said, the same pan-EU list from 17 June remains in force (even though Hong Kong should technically no longer be on that list). Officials have pointed out that the situation will be formally reviewed early next year, when the pan-EU list will be amended, or else other changes (yet unknown) may be introduced to reflect the situation at that time.

The pan-EU list has its origins in a Commission Recommendation of 6 December 2012, regarding measures intended to encourage third countries to apply minimum standards of good governance in tax matters (please click on the following to see the Commission Recommendation). The Recommendation is expressly addressed to all EU Member States. However, recommendations are never binding on Member States. A recommendation allows the EU institutions (here, the Commission) to make their views known and to suggest a line of action without imposing any legal obligation on those to whom it is addressed.

Point 3 of the Recommendation sets out the minimum standards of good governance in tax matters. A third country only complies with such minimum standards where, for example, it does not operate harmful tax measures in the area of business taxation. The Recommendation thereafter encourages the Member States to publish blacklists of third countries that do not comply with minimum standards. Furthermore, with a view to improving compliance by that third country with such standards, Member States are also encouraged to either seek to renegotiate double tax avoidance treaties, or suspend or even terminate them.

Thus, as a result of the Recommendation, the existing (already effective) double tax avoidance (DTA) treaties between EU Member States and Hong Kong may be adversely affected due to the above-outlined provision. However, and importantly, whether Member States should act and how they should act vis-à-vis the DTA with Hong Kong is up to each Member State to decide.

Hong Kong businesses may like to know that by February 2015, the Commission issued a Discussion paper on the follow-up of the Commission Recommendations of 6 December 2012. In this document it is stated that “Member States have not reported using two of the measures (treaty renegotiation or incentives)”. In consequence, Hong Kong traders can see that the Member States had not, until then, reported to the Commission that they had used the renegotiation of the DTA with Hong Kong or any other third country as a tool to bring them into line with the minimum standards of good governance.

Just as with the Recommendation, the pan-EU ‘blacklist’ is also not a binding instrument. Rather, the latter is part of a wider publication: the “Action Plan for Fair and Efficient Corporate Taxation in the EU”. The publication of the list is the first step under the Action Plan’s fourth item, intended to deal with issues of tax transparency.

The Action Plan points out that, as an immediate first step, the Commission has published the EU-wide list of third country non-cooperative tax jurisdictions. This has been compiled from Member States’ independent national blacklists which were discussed at a December 2014 Platform on Good Tax Governance. Going forward, the Commission intends to amend this list on a periodic basis, so as to reflect changes to Member States’ own national lists.

Although not binding, national blacklists – and the pan-EU list – may have implications for bilateral investment. As noted above, Member States are encouraged to take measures to bring tax havens into line with good taxation practices. The 2012 Recommendation mentioned above can be examined, to see how this can occur.

Moreover, the September discussion paper mentioned above highlights the effect that a pan-EU list of third countries can have. It was indeed found that the publication of a pan-EU list has a stronger persuasive impact than national blacklists, motivating third countries to address good governance concerns. In fact, some countries did not even care if they were on national blacklists, but they were extremely concerned to be on the pan-EU list.

In the longer term, the goal will likely be to have a common EU list, rather than simply a consolidated version of Member States’ national lists.

For more information on the matters discussed above and on related issues, please see the following European Commission webpage: Platform for Tax Good Governance.