Tax havens in the spotlight

Wednesday, 13 december 2017 | Redacción CEU

States and regions of "non-cooperative jurisdiction in tax matters". This is how the European Union denominates tax havens. It has not been easy for these organization members to reach an agreement about the seventeen countries that are part of this list. Some analysts say that this is the first time that an organization of this magnitude dares to take such a step when it comes to combating tax evasion at a global scale. Others point out to countries that do not appear on the list. What criteria has the EU followed to choose who are the listed members? Which countries have the great honor of appearing on it? How have the chosen ones reacted? What will be the consequences of publishing this list?

The ministers of Economy and Finance of Ecofin have taken two years to reach an agreement. It has been a slow and difficult process that has culminated in the creation of a list of countries that could be considered tax havens –although the EU does not use this terminology–. Last Tuesday, the Twenty-eighth countries published the list of States of "non-cooperative jurisdiction for tax purposes". Seventeen territories are finally listed on the called black list: American Samoa, Bahrain, Barbados, Granada, Guam, South Korea, Macao, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates. Has anyone been left out? Why?

The chosen ones

Although images of idyllic beaches come to the minds of many when they talk about tax havens, it is not essential for these places to have a wonderful coastal area. Tax havens are those territories where citizens go with the aim of finding a fiscal "den" with a questionable nature. Those destinations that serve as a refuge thanks to their special tax regimes. Places that can be especially attractive for people who do not reside in them. The OECD defines them as instruments of harmful tax competition. Among the main characteristics of these places we find the strict protection of their financial information –like the bank secrecy–, the opacity of operations and the total exemption or a considerable amount of the taxes that individuals must pay.

Some people situate the origin of financial paradises in the sixties, when some small states became independent and took advantage of the conjuncture to offer certain fiscal benefits. It was not until the 1980s that some of these places became consolidated as an important destination for international capital flows. Others build theories about islands where pirates hid their booties of Spanish ship boardings, but this is an issue than could even be older. Some historians have revealed the existence of isolated islands that functioned in a similar way since the times of ancient Greece. Whatever their past is, these places occupy an important space in the present of the international economy as it is evidenced by recent scandals.

The establishment of companies in these territories is legal, as long as the founders declare where the money or legacies come from. The criminal act responds to the tax evasion that takes place through these companies. Sometimes, law firms, due to the prevailing secrecy, cannot or do not want to verify where this capital comes from. Therefore, these havens can become the ideal destination for the fortunes of criminals and delinquents.

The "gray" list

The European Union sent letters to 92 territories and jurisdictions to request information and let them know that they were going to be analyzed according to three criteria: transparency, fiscal equity and application of measures against the erosion of the tax base and the transfer of benefits. The response of these countries has been key to make the decision of including them, or not, in the list. Those that finally figure in it, either have not responded to the European Council or have not committed themselves to take action in this matter.

The countries that have agreed to correct this normative framework in 2018 or 2019 –depending on whether or not they are developing countries– appear in another classification, the named "gray" list. The territories in the spotlight are: Albania, Andorra, Armenia, Aruba, Belize, Bermuda, Bosnia and Herzegovina, Botswana, Cape Verde, Cayman Islands, Cook Islands, Curazao, Faroe Islands, Fiji, Macedonia, Greenland, Guernsey, Hong Kong, Isle of Man, Jamaica, Jersey, Jordan, Liechtenstein, Malaysia and Labuan, Maldives, Mauritius, Montenegro, Morocco, Nauru, New Caledonia, Niue, Peru, Oman, Qatar, Saint Vincent and the Grenadines, San Marino, Seychelles, Switzerland, Serbia, Swaziland, Taiwan, Thailand, Turkey, Uruguay and Vanuatu.

On the other hand, the EU has taken into account the special position of the countries affected by hurricanes like Antigua and Barbuda, Bahamas, Dominica, San Cristobal or the British Virgin Islands. These regions have a grace period. Their cases will be reviewed within a few months when their situation improves, with the aim of resolving this process by the end of 2018.

The goal of developing this list according to its promoters is the "good governance" and "maximizing efforts to avoid tax fraud and tax evasion." The twenty-eight countries claim that these places that are subject to EU and national sanctions will not be able to access European development funds and Member States should intensify control over those taxpayers who operate in them, monitor transactions and perform audits. Ecofin has also put on the table a series of measures that can be adopted by tax agencies to combat these tax havens. Among them, to develop the rights of companies controlled from abroad, limiting tax exemptions, requesting additional documentation or demanding more transparency are some measures that we can highlight.

Of course, those who are tagged disagree with this classification. This is the case of China, for example, which has denounced that the inclusion of the Macao special administrative region in the black list is a "unilateral and partisan" decision, as the regional government itself claimed and it has added in a statement that this is "inconsistent with reality". Those who look towards the countries that do not appear on the list also differ and stand out notable absences like some member countries. The European Commission formulates and answers itself the following question: Why were the EU Member States not assessed for this list?

<The EU list is a tool to deal with external threats to Member States' tax bases. It is also a means to promote more dialogue and cooperation with international partners on tax issues>

The future of the fight against tax havens can be summed up in these questions: will tax havens continue to occupy the international agenda? Will tax refuges be in the spotlight?