Tax havens are the spider in the web of tax avoidance, and the international community has
officially declared to fight them. However, a coherent and effective policy on tax havens is still a long way off writes *Tobias Hauschild.
Tax havens attract assets and prof-its. They offer a mix of extremely low tax rates, bespoke tax incentives and financial secrecy. They thus permit the avoidance of fair taxation at the expense of the citizens of poor as well as rich countries. Blacklists are an important instrument to tackle them. But at present, they are not being used in a way that would put tax havens under real pressure. The G20 summit in Hamburg, for instance, approved a blacklist pro-posed by the Organisation for Economic Cooperation and Development (OECD) that contained just one country: the Caribbean island state of Trinidad and Tobago.
The EU now promised to do better, and published its own tax-haven list. On 5 December 2017, European finance ministers agreed on a blacklist that contains 17 countries and jurisdictions. Another 46 are on a so-called “grey list”. These are countries that are currently considered tax havens but have commit-ted to reform their systems.
Fears that the EU blacklist might end up virtually empty – and thus a complete farce were unwarranted. Indeed, the list includes most of the 35 countries and jurisdictions that need to be black-listed according to Oxfam researchers who applied the EU criteria. But weaknesses are apparent. The EU assessed countries on the basis of three key criteria:
- tax transparency, which particularly includes willingness to exchange information with other administrations,
- fair taxation, which means that they do not grant harmful tax breaks, and
- implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) standards.
Whether taxes are levied at all is not a criterion. A zero-percent tax rate does not automatically mean that a jurisdiction is considered a tax haven; it is just one of many indicators. This point high-lights a major challenge in international policy making. Countries with extremely low tax rates keep driving the ruinous race to the bottom in international taxation, but this impact is still not regarded as a fundamental problem.
Most of the countries on the EU blacklist are small, and many of them are located in the Caribbean. The list is not consistent. That it includes countries like Mongolia and Tunisia is baffling indeed. The main reason is that these countries fail to meet the transparency criterion, as they do not participate in the international exchange of information. What is being ignored is that their tax administrations simply do not have the capacities to comply with international standards. Middle- or low-income countries should only be listed if they actually engage in harmful tax practices.
It is striking that many heavyweights among the world’s tax havens Switzerland and Bermuda, for instance are merely on the grey list. This is because
the EU says it has secured commitments from them to reform. However, the precise nature of those commitments re-mains unclear. The EU needs to disclose details of the reforms agreed and press for prompt implementation. The grey list must not be a “long-term lifeboat”. Countries that fail to introduce prompt and substantial reforms should be put on the blacklist. To have a serious impact, moreover, the list also needs to be linked with measures such as levying taxes on financial flows to tax havens.
“Another weak point of the EU stance on tax havens is that it ignores EU members. Oxfam reckons that, according to the criteria now set by the EU, Malta, Luxembourg, the Netherlands and Ireland should also be on the list. “
Another weak point of the EU stance on tax havens is that it ignores EU members. Oxfam reckons that, according to the criteria now set by the EU, Malta, Luxembourg, the Netherlands and Ireland should also be on the list. If the aim really is to shut down tax havens, it does not make sense to apply double standards.
The blacklist is merely a first step. The EU must next consolidate the list by identifying the real tax havens, and it must put pressure on them. It needs to make its assessment reasons more trans-parent and, above all, recognise that very low and zero tax rates are an important criterion. Countries that depend heavily on their status as tax havens deserve sup-port for developing sustainable business models. And the EU needs to intensify the pressure on its member states to end harmful tax practices within its own borders.