EU black list: further defensive measures recommended

In its meeting on 5 December 2019, the ECOFIN group of Finance Ministers approved the recommendations of the latest report by the Code of Conduct Group (Business Taxation). These include recommendations as regards defensive measures to be taken by Member States in relation to jurisdictions listed on the EU black list of non-cooperative jurisdictions and, in particular, a commitment to introduce specific legislative tax measures by the start of 2021.

Background

In 2016, the EU Anti-Tax Avoidance Package included a commitment to agree common EU criteria for blacklisting third countries to encourage good governance and transparency outside the EU. The EU Code of Conduct Group on Business Taxation carried out a screening process on relevant jurisdictions, which then led to the publication in December 2017 of the EU black and grey lists of jurisdictions by the EU Council as part of its Conclusions on the EU list of non-cooperative jurisdictions for tax purposes.

The black list contains those jurisdictions which are deemed non-cooperative based on the EU Criteria which are set out in the Council’s Conclusions and covering compliance with international standards of tax transparency, fair taxation and implementation of anti-BEPS measures. The black list originally contained 17 countries, however several of these jurisdictions have since been removed whilst others have been added. As of 14 November 2019, the list contains eight jurisdictions namely: American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, the US Virgin Islands and Vanuatu.

Member States are encouraged to apply additional administrative measures for tax purposes to transactions or structures involving jurisdictions on the black list. In addition, financing from the European Fund for Sustainable Development is not available to such jurisdictions and further defensive measures are likely to be added in the future.

December 2019 recommendations

The Report reiterates the importance of Member States adopting effective and proportionate tax measures to discourage non-cooperative practices. It makes the point that, in order to encourage a positive change leading to removal from the black list, defensive measures should involve a tax differential and, as such, defensive measures should be specific measures that are different from the general administrative practices and tax rules in the Member States.

Member States have already agreed to apply at least one of the administrative measures listed in the Council’s Conclusions of 05 December 2017 being: (a) reinforced monitoring of certain transactions; (b) Increased audit risks for taxpayers benefiting from the regimes at stake; and (c) Increased audit risks for taxpayers using structures or arrangements involving these jurisdictions.

Although the recommendations adopted are not formally binding on Member States, the December 2019 recommendations go further and recommend that Member States should introduce at least one of the specific legislative measures listed in the report from 1 January 2021. The report lists four such measures:

• Non-deductibility of costs: denying a deduction for costs and payments otherwise deductible (such as interest, royalties or service fees) when they are directed to entities or persons in a black listed jurisdiction.
• CFC rules: including in the tax base of a taxpayer income of an entity resident or a PE located in a black listed jurisdiction
• Withholding taxes: applying withholding tax at higher rates to payments treated as received in black listed jurisdictions or applying specific targeted withholding taxes to such payments
• Limitation of participation exemption on profit distribution: denying or limiting exemptions for dividends or other profit distributions received from subsidiaries in a black listed jurisdiction with provisions which go beyond existing limitations in, for example, the parent-subsidiary directive or similar domestic rules.

The report also suggests that Member States could apply a reversal of the burden of proof and special documentation requirements to reinforce the effect of any of the defensive measures which they apply.

Going forwards, the Code of Conduct Group is tasked with reviewing such measures from July 2021, with a view to assessing the need for further coordinated defensive measures in the tax area and the need to apply defensive measures in a more targeted way from 2022.

Further details

For further details of the EU black list and grey list, see our article EU list of non-cooperative jurisdictions for tax purposes updated or visit the EU Council website.