EU Code Of Conduct Group Not Satisfied With Changes On Certain Harmful Regimes

; posted on
February 7th, 2019

The EU Code of Conduct Group (Business Taxation) has sent letters to six jurisdictions in relation to the EU list of non-cooperative jurisdictions for tax purposes as their new preferential tax regimes will not be sufficient to keep their country off the 2017 EU blacklist. The letters emphasizing the EU dissatisfaction were sent to Barbados, Belize, Curaçao, Mauritius, Saint Lucia, and Seychelles.

The Criteria

In assessing whether the preferential regimes are harmful for the fair taxation setting, the council is using the following criteria:

  • Targeting nonresidents - whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents.
  • Ring fencing - whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base.
  • Substance - whether advantages are granted even without any real economic activity and substantial economic presence within the Member State is offering such tax advantages.
  • Internationally accepted - whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD.
  • Transparency - whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.

The Warning

To remain off the blacklist, countries should apply “fair taxation” standards by not offering harmful preferential regimes or facilitating structures that attract profit without real economic activity. According to the letter to Mauritius, the council criticized the new 80 percent partial exemption system for foreign-source dividends, profit attributable to a foreign permanent establishment, interest and dividends from local or foreign sources, and financial services. The exemption provides for a significant lower level of taxation –compared to 15% Mauritius tax rate- and is therefore potentially harmful.

In its letter to Barbados, the councils argue that even though Barbados has repealed the low and regressive corporate tax — which falls to 1 percent for income over BBD 30 million ($15 million) — the new preferential regimes still facilitates offshore profit-shifting arrangements because of the absence of adequate economic substance standards. As such, Barbados needs to comply with the requirements under criterion 2.2, including by ensuring that legal mechanisms do not exist, enabling the granting of advantages only to nonresidents or in respect of transactions carried out with nonresidents and that sufficient substance is required for entities doing business in or through Barbados.

In addition, the councils also criticize the new regime on exemption of foreign income of Saint Lucia, Belize, and Seychelles. Since the regime only applies to nonresidents, it means the advantage of participation exemption is ring fenced from the domestic market. Furthermore, the regime has not properly contained the appropriate anti-abuse measures, in order to tackle tax-planning opportunities. Consequently, the council considered this regime as harmful.

What Does It Entail?

Up to date, the six jurisdictions were grey-listed, instead of black-listed, based on commitments made to amend their harmful regimes. If commitments to further changes are not made, the jurisdictions risk being black-listed. The Code of Conduct Group has requested that further changes be made by the end of 2019, with no grandfathering.

Source: European Council

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