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With the recent Davos meeting and its debate about fighting tax havens and fiscal evasion, HNFC wanted to talk about this very important topic. This article will be focused on the European Union.
Before starting talking about the European Blacklist, it is important to know what a tax haven is. To do short, it is a territory offering taxation advantages for businesses or individuals. Most of the time, it is a low or 0% tax liability and a total privacy/confidentiality around it. That privacy and confidentiality means no or few information shared with the tax authorities. Because, having an offshore account is actually legal if you declare the revenues you put into it to the national authorities. Yet, tax havens’ secrecy attracts people who want to hide money to avoid taxes.
Panama is a great example to demonstrate the operating of a tax haven and a relevant case as a leak occurred. In the 1970s, Panama decided to become a powerful financial centre with 0% tax for the foreign incomes and a banking secrecy supported by the Panama’s Law. Several firms understood quickly the interest in selling a guarantee of absolute confidentiality to the big fortunes and the international investors. The business of "shell companies", these front companies registered in opaque jurisdictions throughout the planet which enable the fiscal evasion, was launched in the Panama.
The law firm Mossack Fonseca stepped into the market at an early stage. It has been one of the very first firms to help its clients avoiding taxes. It directly seized the importance of shell companies. A shell companies is a fictive and inactive company. It has not significant assets and is basically empty. Such companies are very useful in the process of avoiding taxes because they are the pipe that enable money to evade.
For 40 years, MF’s lawyers built efficient fiscal scheme by using shell companies and Panama’s secrecy. The business was a success as Switzerland lost its fiscal advantage and thus its competitive advantage on the tax havens market. Such a situation helped Panama to reach a leader position.
Eventually (and luckily), an anonymous source sent 2.8 TB of documents to a German Newspaper. The leak revealed that 214,000 shell companies were set up by the law firm in 40 years of exercise with a maximum of 13287 shell companies reached in 2005. It also mentioned MF’s clients. Among them, we could quote Vladimir Poutine, Lionel Messi, Tiger Woods and many more celebrities. Mossack Fonseca was also the advisor of several banks (UBS, Deutsche Bank…).
The EU Blacklist: when, how, who and why?
The idea of a list with all the tax havens have been launched after several tax scandals: Luxleaks (2014), Panama Papers (2016) and the most recent one: The Paradise Papers (2017). During almost a year, EU experts have studied the 92 countries seen as potential tax havens and tried to draft a list of those that don’t coincide with the EU transparency and cooperation standards. It has been difficult because, to create such a list, the 28 EU countries have to agree unanimously on the countries appearing on the list. But, each European country has political and economic interests to keep some other countries away from the list, which made the decision even harder.
The list has finally been drafted by the European Council’s Code of Conduct (COC), a group comprised of finance ministers from EU member states the 5th of December 2017.
Among the 92 countries pre-selected, the list has been defined with 3 questions:
- Does the country comply with the international standards on information exchange?
- Does the country have harmful tax practices or regimes?
- Does the country put in place the OECD anti-BEPS measures?
After studying the 3 previous criteria, the European Council has put 17 following countries on the blacklist:
1. American Samoa
6. South Korea
8. Marshall Islands
13. Saint Lucia
15. Trinidad and Tobago
17. United Arab Emirates
In parallel to this list, a grey one (understand an intermediate list) has been also created with 47 countries that have committed to change their tax policies. The deadline is by the end of 2018 for the “developed” countries and by the end of 2019 for “the emerging” one. In this list, we can find countries like Morocco and the Cape Verde archipelago.
By putting these countries on the list, the EU government hopes that the threat of being listed can act as an incentive for countries to bring their tax systems in line with EU standards. As this list associates a bad reputation to concerned countries, it can discourage companies to invest there, resulting in a negative impact on the country’s economy. Several states, including France, are even lobbying for more punitive measures.
A lack of credibility
First, uncertainty concerning the sanctions is surrounding this list.
Indeed, the list has been announced but the 28 EU member countries have not find a middle ground concerning the sanctions for the listed countries. There is a first block of countries (European Commission, Belgium, Austria, Germany, France, Romania, Italy, Spain, Portugal and Slovenia) that preach for hard sanctions. The second block are whereas preaching for soft sanctions which would be mainly defined by a strong monitoring of the listed countries.
The organization Oxfam has published its own list of 35 countries responding to the EU criteria. Among them, tax havens like Switzerland, Jersey and New Caledonia but also 4 countries from the European Union such as Luxembourg, Malta, Ireland and the Netherlands.
The absence of these UE countries in the “original” list makes it less credible and subject to criticism. Indeed, these 4 countries are among the most powerful fiscal havens in the world allowing big companies such as Apple, Amazon and Starbucks to minimize their taxes. Hence, Oxfam accuses the EU not to include its own countries but also that some State Members have succeeded in getting their own dependencies and overseas territories out of the hook (i.e. United Kingdom with Jersey, France with New Caledonia...)
Recent modifications: the reinforcement of the lack of credibility?
The list is not anymore. The one above with 17 countries in the black list and 47 in the grey list changed quickly. Indeed, the 23rd of January 2018, during the ECOFIN in Brussels, the EU Finance ministers decided to remove the following 8 countries from the black list: Panama, United Arabian Emirates, South Korea, Tunisia, Mongolia, Macao, Grenade and Barbados. These countries will instead figure on the grey list.
This decision is neither a bad or good news. It confirms the fact that regulating tax havens is difficult to enforce in institutions, even in the European Union.
It has somehow a positive impact as it has convinced some countries to make changes on their tax systems. However, such removals make the list lose credibility again. Indeed, one month after adopting the list, the authorities already change it by draining it. How can effective fiscal adjustments have occurred in just one month?
Among lucky countries, we can find the Panama which was recently in the leak we spoke about. It is therefore questionable how this country can be removed from the blacklist in only one month.
To conclude: what HNFC think about it?
We believe that fighting the tax evasion is a good initiative from the EU government. Actually, the hidden money in tax havens represents more than $7 Billion. Such an amount of money can be used to finance public infrastructures and reduce the national debts (which is the true emergency for the moment). Moreover, tax evasion increases the inequality on both economic and social plan.
A measure like this list could be the first true dissuasive measure against tax havens.
Yet, the problem is that there is a big lack of transparency on how this list is built. Thus, its legitimacy and political neutrality is questionable. Indeed, this list does not seem to be drafted based on the only criteria that the EU gave. Today, only 9 countries are blacklisted by the EU on the 35 corresponding to the criteria, according to Oxfam. Moreover, the EU have moved 8 countries from the black list to the grey one without even explaining what these countries have committed to improve.
Among them, no EU countries, which opens the debate about the EU hypocrisy. The EU is pressuring other countries to reform their tax system but not its own countries. Hence, it also opens accusations that this list will only succeed in moving more of the tax havens industry into the European Union. All these accusations and critics could be removed if the EU gave more precise details on how they did the list and what are concretely the measures promised by the countries in the grey list.
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Written by Louiz Domoutschieva│ Independent financial analyst
Edited and Corrected
by Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.