Financial Transparency Coalition

This week, European Union finance ministers agreed to establish a common EU blacklist of so-called “non-cooperative jurisdictions” – in other words, tax havens. With one tax scandal unfolding after the other, listing and sanctioning tax havens may seem like a good solution. However, as tempting as it may sound, this EU exercise is doomed to fail – and here’s why. 

The proposal for a common blacklist stems from the European Commission’s external strategy on tax, which was published this January. However, tax havens are not an external matter to the EU, quite the contrary – some of the world’s most powerful tax havens are to be found in Europe.

For example, a new report from Oxfam uses European Commission (EC) data to analyse the role of the Netherlands as a corporate tax haven. It shows how the Netherlands is making large-scale tax avoidance possible and how Dutch regulations are an integral part of the international tax system that enables multinationals to avoid at least US$100 billion in taxes in developing countries every year. Several other EU Member States – such as Luxembourg, Ireland, Malta and the UK – have also been criticised for helping multinational corporations to avoid taxes. Yet you will not find any of these countries on a blacklist produced by the EU.

Only a year ago, in June 2015, the EC made an attempt to publish a list of countries considered to be uncooperative on tax matters. Not only did it exclude all EU countries, it also did not mention any of the EU’s traditional allies, such as Switzerland and the United States (US). This is in spite of the fact that the Financial Secrecy Index last year ranked Switzerland as the most important provider of international financial secrecy.

In May this year, the Greens/European Free Alliance (EFA) group in the European Parliament published a report showing how the US is becoming the biggest tax haven in the world, with legislation providing several loopholes when it comes to knowing who owns and controls companies. Furthermore, the US has not fully committed to automatic exchange of tax information with other countries, including EU countries.

Shifting the blame

Transparency and automatic exchange of information for tax purposes, in accordance with Organisation for Economic Co-operation and Development (OECD) standards, are some of the criteria mentioned by the EU finance ministers for determining what countries should be listed as uncooperative. Although this is unlikely to concern the US, it may be a problem for many developing countries that do not necessarily have the technical capacity to sign up to automatic exchange of information. The Commission’s list from 2015 included countries such as Liberia – one of the poorest countries in the world – which was at the time struggling to cope with an Ebola crisis.

Developing countries may also find themselves faced with the choice of being blacklisted by the EU (and sanctioned accordingly) or having to sign up to a set of agreements made by the OECD in its so-called “Base Erosion and Profit Shifting” project – or BEPS. Linking the blacklisting exercise with OECD BEPS is very worrying as it means developing countries would be pressured to agree to standards that have not been designed in their interest.

Secret negotiations

In addition to these controversies, the EU finance ministers are suggesting the tax haven blacklist should be drawn up by the so-called Code of Conduct Group on business taxation. This top secret discussion forum was set up by EU Member States in 1990 to “abolish existing tax measures that constitute harmful tax competition”. The group has become controversial due to its high level of secrecy and opacity, which makes it impossible for citizens to know what is being agreed on, if anything.

While very little is known about the workings of the group, it is clear that the system of closed-door negotiations and peer pressure has failed to deal with the widespread problem of corporate tax avoidance in the EU and elsewhere. The meetings include representatives of EU Member States as well as the EC. Leaked documents from the group have shown that meetings in the past have been extremely political. Some of the Member States that make use of harmful tax practices have been very successful in blocking proposals to remove these practices and protect their own special interests.

Instead of being based on neutral and objective criteria, the putting together of a common EU blacklist of tax havens is thus bound to be a highly political exercise, where rich and powerful countries such as the US and Switzerland are protected from blacklisting. There also already seems to be broad agreement in the EU that no EU Member State can be blacklisted. As tempting as it may be to put the blame of corporate tax avoidance on some tax haven islands far away, the EU needs to start by cleaning up its own backyard.

The core essence of the tax haven problem is that financial assets can be moved from one end of the world to the other with the click of a mouse. Therefore, a blacklist that includes a few smaller tax havens, but excludes some of the world’s biggest, will not solve the problem. It will simply move the problem from one country to the other. Although a fair, transparent, global blacklist of tax havens could be a good idea in theory, the EU’s next list of tax havens is unlikely to become anything else than another example of European double standards.