The Expert Explains: EU reaction to Panama Papers confirms creation of new ‘tax haven’ blacklist

On 12 April, the European Commission adopted a new proposal to introduce public country-by-country reporting requirements for the largest companies operating in the EU and in so-called ‘tax havens’ to “address concerns flowing from the Panama Papers”. The European Commission also published new draft legislative provisions which will pave the way to the creation of a new EU-wide ‘tax haven’ blacklist. So what do the provisions look like, and what does this all mean for Mauritius and other countries still on the existing blacklist? For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.

On 12 April, as part of its ‘Fair Taxation” agenda, the European Commission proposed public tax transparency rules for multinationals on a country-by-country basis. It estimates that the new rules, once adopted by the European Parliament and Council, will apply to the approximately 6,500 largest companies operating in the EU – whether European or not – with global revenues exceeding EUR 750 million a year.

Specifically, the new rules would require large multinational companies to disclose publicly the income tax they pay within the EU country, country by country, and also how much tax they pay – in aggregate – on the business they conduct outside the EU. However, for those tax jurisdictions that “do not abide by tax good governance standards” (so-called tax havens) then the information will need to be disclosed on a disaggregated basis.

These changes will be introduced in the form of amendments to the EU’s Accounting Directive (Directive 2013/34/EU) to ensure that large groups publish annually a report disclosing the profit and the tax accrued and paid in each Member State on a country-by-country basis. In this context, however, the European Commission has taken the opportunity to finally present draft legislative provisions on a new common EU blacklist of tax havens, which states the following:

Article 48g: Common Union list of certain tax jurisdictions: The Commission shall be empowered to adopt delegated acts in accordance with Article 49 in relation to drawing up a common Union list of certain tax jurisdictions. That list shall be based on the assessment of the tax jurisdictions, which do not comply with the following criteria: (1) Transparency and exchange of information, including information exchange on request and Automatic Exchange of Information of financial account information; (2) Fair tax competition; (3) Standards set up by the G20 and/or the OECD; (4) Other relevant standards, including international standards set up by the Financial Action Task Force. The Commission shall regularly review the list and, where appropriate, amend it to take account of new circumstances.

Cutting through the EU legal jargon, these draft provisions have a number of important consequences. The first, and possibly the most significant, consequence is that the EU will in future have a genuine legal basis to act in relation to, or to sanction, third countries which are on the tax haven blacklist.

The second point is that the European Parliament and Council have limited powers under the ‘delegated acts’ procedure, which are basically only to object to a proposal within two months (with a possible further two months to be granted upon request) but not to amend the details, and further down the line they will have no role at all in the review or updating of the list.

The third point – which is of particular relevance to countries like Mauritius who are on the existing blacklist of June 2015– is that the process of adopting the legislation and delegated acts will take at least six months to a year, and these will only come into force a year after that. In the meantime, while ‘screening’ processes of potential ‘tax havens’ will be held, the European Commission has no particular procedural incentive to make any changes to the existing tax haven blacklist, as they will say they are already working on a new one. Countries like Mauritius will need to take a proactive approach to becoming involved in the screening and to furnish full details of their compliance with international standards to minimise the chance of being included on the new one.

Is this all a sensible response to the Panama Papers, even if the Commission was clearly well advanced in its work before the leaks? An EU Tax Policy Advisor for Oxfam, Aurore Chardonnet, has claimed that the European Commission “is more interested in saving face after the Panama Papers, instead of actually fixing the broken tax system” and that “the Commission criteria to list tax havens are already absolutely vague, and we also expect EU Member States to delay or oppose the process of compiling an official EU list.” In the light of the Panama Papers, and the earlier LuxLeaks, it will be interesting to see which European leaders stand up to support greater tax transparency and a new blacklist, and which prefer to keep a low profile.

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