Cayman may find itself on EU’s ‘non-cooperative jurisdictions’ list

Cayman could find itself on a new EU list of “non-cooperative jurisdictions” in tax matters after the European Council of finance ministers published the criteria for including third countries in the blacklist last week.

The provisions emphasize that a jurisdiction “should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.”

In September, the EU Commission named Cayman in a list of countries that should be examined more closely, but the factors used by the Commission in the initial list have now been replaced.

The EU will decide whether to blacklist third countries based on three factors: tax transparency, fair taxation and the implementation of anti-Base Erosion and Profit Shifting (BEPS) measures.

The concern that any country without corporate and income taxes would be blacklisted inevitably was not confirmed. Following the meeting of European finance ministers, Italy’s Finance Minister Pier Carlo Padoan said that countries with zero tax rates cannot automatically be considered tax havens.

“We have found an agreement on the fact that if a jurisdiction applies zero tax rates, this can be considered as an indicator of possible unfair practices, but it would not be enough to define a jurisdiction as non-cooperative,” Mr. Padoan said.

Tax transparency

Countries will fulfil the tax transparency criteria if they commit to implement the Organisation for Economic Cooperation and Development’s common reporting standard for the automatic exchange of tax information, and have arrangements in place to exchange information by the end of 2017. Countries must also be assessed “largely compliant” by the Global Forum, an intergovernmental tax transparency group, in tax matters regarding their systems of exchanging tax information on request through tax information exchange agreements.

From 2018, the EU plans to introduce additional criteria governing the exchange of beneficial ownership information to improve the transparency of the true owners of shell companies and other entities.

Given that the Cayman Islands is one of the early adopters of the common reporting standard and has been rated largely compliant by the Global Forum, tax transparency is unlikely to be a reason to blacklist the jurisdiction.

However, the wide definition of what constitutes fair tax is a considerable obstacle for Cayman in avoiding the blacklist.

Fair taxation

Cayman does not offer preferential tax measures, another fair tax criterion considered harmful by the EU, as it applies its zero-tax rate uniformly. Yet it may prove difficult to convince EU officials that Cayman does not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.

Local industry professionals have for years proclaimed that Cayman is a “tax neutral” jurisdictions that does not impose additional layers of tax on international transactions, rather than a tax haven designed to attract profits that were generated, and should be taxed, elsewhere.

They reiterate that tax is just one of many reasons for establishing Cayman entities and arrangements.

But regardless of the intention, it is clear that the totality of profits allocated to Cayman entities does not reflect the local economy.

The EU Code of Conduct Group (Business Taxation) is charged with defining the scope of the fair tax criterion and “should evaluate the absence of a corporate tax system or applying a nominal corporate tax rate equal to zero or almost zero as a possible indicator,” the notes of the EU finance ministers’ meeting said.

Complementing the tax transparency and fair tax conditions, countries also have to commit by the end of 2017 to the OECD anti-BEPS minimum standards and effectively implement them later on to avoid EU blacklisting.

The measures to curb base erosion and profit shifting, a catch-all term for harmful tax avoidance practices that exploit inconsistencies in national tax systems, seek to address the challenges imposed by the digital economy, neutralize hybrid mismatches, strengthen controlled foreign companies rules and tax profits where they are truly created.

The EU will send letters to selected countries by January 2017 and, in some cases, engage in bilateral discussions with jurisdictions “to explore solutions to concerns with [their] tax systems.”

The European bodies aim to agree on the final list of non-cooperative jurisdictions by the end of next year.

Blacklisted countries will face a range of penalties called “defensive measures” that have yet to be agreed.