EU Adds Hong Kong to the EU’s “Grey List” of Non-Cooperative Tax Jurisdictions

On 12 October 2021, the Official Journal of the EU published the Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes, otherwise also known as the EU tax havens blacklist. The document lists Hong Kong as one of nine countries with harmful tax regimes in its Annex II, the so-called grey list or watch list. The government of the Hong Kong Special Administrative Region (“HKSAR”) has committed to amend the Inland Revenue Ordinance accordingly.

As Hong Kong businesses may recall, the list of non-cooperative jurisdictions was first established in December 2017 following a screening of 92 third country jurisdictions based on three criteria: tax transparency, good governance, and real economic activity, as well as one indicator: the existence of a zero corporate tax rate. The list contains two types of jurisdictions: (i) those that appear in Annex I, i.e., on the blacklist which have failed to take ‘meaningful’ action to address deficiencies in their tax laws or policies identified by the EU and did not engage in a ‘meaningful’ dialogue on the basis of the EU’s criteria, and (ii) those that are listed in Annex II, i.e., on the grey list/watch list which comprises countries committed to improving their harmful tax regimes.

The list is part of the EU's external strategy for taxation and is intended to contribute to ongoing efforts to counter abusive tax practices and promote good tax governance worldwide. Particularly, the tool aims to tackle (i) tax fraud or evasion, i.e., illegal non-payment or underpayment of tax; (ii) tax avoidance, i.e., the use of legal means to minimise tax liability and (iii) money laundering, i.e., the concealment of origins of illegally obtained money. For listed countries, EU Member States may adopt defensive measures to protect tax revenues from fraud and evasion.

The Council of the EU (“Council”) updates the lists twice a year. The latest revision, the subject of this report, took place in October 2021. The next revision of the list will be due in February 2022. The Council approved the removal of Anguilla, Dominica, and Seychelles from the blacklist. The jurisdictions now appear on the grey list, and will continue to be monitored.

The nine countries remaining on the revised blacklist now include American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. The reasons for listing these non-EU countries or territories are that they (i) do not apply any automatic exchange of financial information (American Samoa, Guam, Palau, Trinidad and Tobago, US Virgin Islands); (ii) have not signed and ratified the OECD Multilateral Convention on Mutual Administrative Assistance (American Samoa, Fiji, Guam, Trinidad and Tobago, US Virgin Islands); (iii) did not commit to apply the BEPS minimum standards (American Samoa, Fiji, Guan, US Virgin Islands); (iv) are not members of the Global Forum on transparency and exchange of information for tax purposes (Fiji) or do not have a rating of at least “largely compliant” by the Global Forum (Panama, Trinidad and Tobago, Vanuatu); or (v) have harmful preferential tax regimes (Fiji, Samoa, Trinidad and Tobago, US Virgin Islands), harmful foreign-source income exception regimes (Panama) or facilitate offshore structures and arrangements at attracting profits without real economic substance (Vanuatu).

The grey list, on which Hong Kong had previously been included, was also subject to revision. It is worth recalling that in March 2019, the EU de-listed 25 jurisdictions, including Hong Kong, from the EU grey list as a result of those countries having adequately delivered the reforms and commitments promised in 2017. The Code of Conduct Group continues to monitor the proper enactment of legislative and enforcement provisions of de-listed jurisdictions on an annual basis. As a result of this monitoring, the newest update added six new jurisdictions to the grey list. This brings the total number of grey-listed countries and territories to 15: Anguilla, Barbados, Botswana, Costa Rica, Dominica, Hong Kong, Jamaica, Jordan, Malaysia, North Macedonia, Qatar, Seychelles, Thailand, Turkey, Uruguay.

The grey-listed countries and territories have been allotted deadlines for (i) implementing the automatic exchange of information; or (ii) achieving membership in the Global Forum or a sufficient rating by the Global Forum; or (iii) signing and ratifying the OECD Multilateral Convention on Mutual Administrative Assistance, or (iv) adapting their legislation.

Hong Kong, which committed to amend or abolish its harmful foreign-source income exemption regime, has been granted until 31 December 2022 to adapt its legislation. In response, the HKSAR declared its commitment to implement the required amendments to the Inland Revenue Ordinance in order to comply with EU standards. The government stated that it will endeavour to uphold the “simple, certain and low-tax regime with a view to maintaining the competitiveness of Hong Kong’s business environment.” Amendments can be expected to target corporations, “particularly those with no substantial economic activity in Hong Kong”. The implementation of relevant measures is expected for 2023.