The publication of the Panama Papers in 2016 and the Paradise Papers in 2017 revealed to the world the scale of tax evasion by multinational corporations and wealthy individuals. This led to the tax-paying citizens of many countries demanding that their governments do something to stop the draining away of potential revenue into tax havens.

Now the EU thinks it has found a solution. In December 2017 it published a blacklist of countries that it considers 'non-co-operative tax jurisdictions'.

At the end of a complex screening and investigative process, 17 countries were placed on the blacklist for failing to address EU concerns, and 47 landed on a watch list by agreeing to work toward meeting the EU criteria for tax transparency, “fair taxation”, and the implementation of the OECD’s efforts to end tax base erosion and profit shifting.

Lilting and listing

The blacklist has teeth in the form of sanctions for countries that do not comply. Direct investment in those countries will still be allowed. However, access to EU funds for sustainable development, strategic investment and external lending will be restricted.

Multinationals with activities in listed jurisdictions will face stricter country-by-country reporting requirements that reveal detailed country-specific financial and tax information. A tax scheme routed through an EU-listed country will be automatically reportable to tax authorities. Legislation in other policy areas is under consideration.

“There must be no naivety: promises must be turned into actions. No one must get a free pass,” declared EU tax commissioner Pierre Moscovici.

The effectiveness of that statement was open to question barely a month later when eight of the 17 countries on the blacklist were removed from it into a separate category – 'subject to close monitoring' – for unexplained reasons.

Lacking credibility

Tax reform campaigners and even some members of the European Parliament derided the fact that the blacklist excludes some European countries notorious for their accommodative tax policies, such as Luxembourg, the Netherlands, Ireland and Malta, targeting instead smaller, lesser developed jurisdictions.

“The result of the flawed blacklisting process is a politically led list, that includes only the economically weak and politically unconnected,” the non-profit Tax Justice Network (TJN) asserted, noting also that “the UK has sought to frustrate the blacklisting of its crown dependencies and overseas territories at every turn.”

Calling the EU list “hard to take seriously,” in January TJN released its own Financial Secrecy Index of tax havens. By this index, the top two secrecy jurisdictions are Switzerland and the US – which the index claims account for 22.3% of the global market in offshore financial services.

Questions remain

Amanda Raad, co-leader of law firm Ropes & Gray’s global anti-corruption and international risk group, believes many questions remain about the execution of the EU strategy. “There’s concern that it will become a political tool instead of a well-researched transparent mechanism,” she says.

She adds that it has a way to go before it becomes an international standard, in the way that Transparency International’s Corruption Index is accepted by global regulators. And as her colleague Joanna Torode points out, how the enforcement mechanism will be put in place is also not clear.

Ms Torode cautions multinationals against looking at issues in isolation. “If you are going into a jurisdiction with both high tax and corruption risks, you have to look at it from a reputational as well as regulatory perspective and do due diligence.”

Ms Raad says it is too soon to advise clients on tax considerations arising from the EU actions until the process is better understood. She does not think companies will make big changes in their investment strategies until there is more clarity.

Caricom anger

Harsh reaction came from representatives of some of the countries placed on the EU blacklist. Two members of the 20-strong Caribbean Community (Caricom) – Barbados and Saint Lucia – were placed on the blacklist, and five other full or associate members were placed on the watch list: Jamaica, Belize, Saint Vincent and the Grenadines, Bermuda and the Cayman Islands.

In a statement, Caricom said the actions would significantly damage the reputation of those countries, even if they were eventually delisted, while the criteria used by the EU went beyond generally accepted international tax transparency standards and would require time to implement legislatively and administratively.

Caricom warned that the sanctions proposed would deter foreign private investments needed to grow the countries’ small, highly vulnerable economies. Furthermore, it said the EU list ignored the efforts made by Caricom members to comply with OECD standards for transparency, accountability and co-operation.

There is something to be said for this complaint, according to William Vlcek, a senior lecturer at the University of St Andrews in Scotland and author of a book on offshore finance and global governance.

Mr Vlcek notes that in 2009 the OECD abandoned its own efforts to blacklist tax havens. Instead, it created the Global Forum on Transparency and Exchange of Information for Tax Purposes, with 148 members participating on an equal footing. Through a peer review process, members are monitored as they implement the forum’s transparency standards.

The EU’s heavy-handed tactics may undermine the OECD’s efforts to get everybody to cooperate. “The OECD is much more inclusive in its strategy and has made more progress with this approach,” says Mr Vlcek. “The Caribbean countries have all been actively involved with the OECD and are trying to be compliant with the banking sector. And now their hard work is not being recognised.”

Capacity issues

Whether small countries have the capacity to implement the EU’s regulations is also questionable, according to Mr Vlcek. “Withholding money from them will make it even harder,” he says.

“Corporations will continue to make adjustments. They are not going to change their strategies even with new tax laws,” adds Mr Vlcek, who believes that some companies may shift operations to other financial centres not on the blacklist.

Meanwhile, tax collectors around the world are rejoicing in the tax haul they have been able to recover as a result of the revelations about offshore bank accounts in the Panama and Paradise Papers. Since 2016, the UK has tripled the number of criminal and civil investigations linked to the Panama Papers, investigated 66 individuals for suspected tax evasion, and made four arrests. And the International Consortium of Investigative Journalists, which broke both stories, says more than $500m has been recouped by tax authorities since the Panama Papers were published. How the EU and other regions move on and prevent this situation repeating remains to be seen, however.