Let’s Talk Tax Havens: The EU Blacklist And The Pandora Papers

Tax Notes reporter Sarah Paez discusses the EU tax haven blacklist and the potential impact of the recently released Pandora Papers.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: back in blacklist.

On October 3 a consortium of international journalists published the first in a collection of articles based on leaked information that had been dubbed the Pandora Papers. These documents reportedly show how the world’s rich, famous, and powerful use tax havens to obscure their assets and potentially avoid paying tax in their home countries.

While we’ve seen similar releases before, like the Panama Papers in 2016 and the Paradise Papers in 2017, the Pandora Papers connect twice as many politicians and public figures to offshore activity, bringing on new and heightened calls for a crackdown on tax havens.

Against this backdrop, the EU is having its own reckoning on tax havens. Its tax havens blacklist is facing increasing criticism and calls for reform.

How are countries reacting to the Pandora Papers? Can we expect the EU blacklist to be reformed?

Here to talk more about this is Tax Notes reporter Sarah Paez. Sarah, welcome back to the podcast.

Sarah Paez: Thanks for having me. It’s great to be back.

David D. Stewart: Let’s start from the beginning. What are we talking about when we say tax haven?

Sarah Paez: A tax haven is generally accepted to be a jurisdiction that will offer foreign companies or individuals little to no tax liability for their bank deposits. They may also offer a lack of transparency in beneficial ownership of a company or any other amount of special economic or tax regimes.

David D. Stewart: Tax havens seemed to play a big role in the findings of the Pandora Papers. How are countries reacting to those findings?

Sarah Paez: Well, it’s been a pretty large reaction. The reaction has been some of outrage, and it’s been across the board.

For example, in the European Parliament, there was a huge discussion during the plenary debate among members of European Parliament about the need to crack down on what they’re calling these legal loopholes that were revealed in the Pandora Papers to legislate them out of existence.

But beyond the EU, there have been responses from the Czech police and the Czech Republic, basically saying that they’re going to investigate any and all allegations in the Pandora Papers. That’s also including their own prime minister, Andrej Babiš.

In terms of other countries, the Australian tax authorities and the Pakistani government have all come out and said that they would investigate the findings in the Pandora Papers.

It’s really been a pretty large response globally.

David D. Stewart: You recently did a deep dive on the EU’s blacklist. Could you start off with some background on what is the EU blacklist? What purpose does it serve?

Sarah Paez: The EU tax haven blacklist — which is known as the EU list of non-cooperative jurisdictions in tax — is basically a soft law tool that the EU uses to name and shame non-EU jurisdictions with laws and policies that facilitate tax avoidance. The EU blacklist is administered by the Code of Conduct Group, which is run through the EU Council. That’s the body that basically approves and coordinates EU legislation.

David D. Stewart: How are countries added to the blacklist?

Sarah Paez: Well, it’s a bit of a secretive process. The Code of Conduct Group typically meets in secret. They don’t usually share the minutes of their meetings until well after those meetings have occurred. They basically decide which countries that they’ve screened meet the criteria laid out in the Code of Conduct Group’s blacklist criteria.

David D. Stewart: What countries are currently on the list?

Sarah Paez: The current list, which was adopted by the Council on October 5, includes American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, the U.S. Virgin Islands, and Vanuatu.

In this version of the list, Anguilla, Dominica, and the Seychelles were actually removed and were put on the gray list, which comprises jurisdictions that are subject to increased supervision and progress review by the Council.

David D. Stewart: As we’ve read in some of the Pandora Papers articles published recently, South Dakota came up as a tax haven jurisdiction. So, no part of the U.S. ended up on that list?

Sarah Paez: Well, the short answer would be no. Although if you wanted to split hairs, I guess you could point out that three U.S. territories made it on the list: American Samoa, Guam, and the U.S. Virgin Islands.

But you’re correct. South Dakota, which has been exposed as a tax haven, and also Delaware were not on the list.

David D. Stewart: Now, I understand there is also some controversy over the countries that did end up on the list. Could you give us some insight there?

Sarah Paez: Sure. There are many number of controversies that have come up around the countries that are on the list. Some criticisms, from lawmakers, tax observers, and general observers, say that the list doesn’t go far enough and that it doesn’t list enough countries.

But others have come out and said that the list is unfair to a specific type of non-EU country, namely small island nations. A person I talked for my article gave some criticism about how it’s a majority of black countries that are often on these lists.

So, there’s a lot of controversy about both how the list does not go far enough, but also how it maybe goes too far in the wrong direction. Many of these countries that appear on the blacklist are low-income countries. Many of them don’t have the resources to implement a lot of the changes that the EU would like to see.

A lot of these changes are set by the OECD standards for its global forum. OECD countries are often more wealthy nations. They’re often more connected nations, members of the G-7 and the G-20. As you can see, many of the countries on this list are not members of the OECD. They’re not members of the inclusive framework.

There’s been very valid criticisms from observers that are saying that this is just not fair because these countries are being judged against a standard that they didn’t set up and didn’t create.

David D. Stewart: Let’s talk a bit more about the criticism that this list is not doing what it needs to do to stop tax avoidance and evasion. What are people saying about that?

Sarah Paez: Sure. I think probably the best example that encapsulates this assertion that the blacklist doesn’t go far enough, that it doesn’t capture the countries that it should, is the case of Turkey.

Turkey was not included in the blacklist. The reason that’s notable is in February of this year, the council had asked Turkey to make a high-level political commitment by May 31 to activate automatic exchange of information relationships for tax information with six member states that it didn’t currently have those relationships with. That was Austria, Belgium, Cyprus, France, Germany, and the Netherlands. It needed to do so by June 30.

It also asked Turkey to send all members states information for fiscal year 2019 by September 1, and to send information for fiscal year 2020 and 2021 by September 30 of this year and then September 30 of next year. Just to keep up with these automatic exchange of information schedules.

Turkey did in fact activate its exchange of information relationships by June 30. But it didn’t do it with all member states. It did it with 26 member states, save for Cyprus, which Turkey does not have diplomatic relationship with. That basically violates EU criteria, which would effectively land Turkey on the blacklist. But it didn’t.

There were a lot of lawmakers, observers, and people who are watching this happen and were pretty unhappy about that, and were really wondering why exactly Turkey was spared from the blacklist, but not all of these other countries that ended up on the blacklist.

David D. Stewart: Since everything is political at some level, how does politics factor into the blacklist?

Sarah Paez: Great question. Politics is really the foundation of this blacklist. Although we can’t always say for certain, because we’re not in the room where all of these discussions happen, what I can say is that plenty of people have gone on record to say that keeping Turkey off the blacklist was absolutely a political move, given the political context of what’s going on between Turkey and the EU. The council’s concessions for Turkey have come amid major political tensions between Turkey and the EU and its allies.

For example, the United States issued sanctions against Turkey in December of 2020 over its July 2019 purchase of an S-400 air defense system from Russia. In the meantime, EU member states Cyprus and Greece have been locked in a years long disagreement with Turkey over Eastern Mediterranean maritime boundaries and energy resources.

There was a lot of political turmoil going on. A lawmaker mentioned to me that the refugee crisis happening with Turkey is also being used as sort of a political manipulation tool to get the EU to not make sanctions or any sort of penalties against Turkey. That definitely factored into that decision.

But then there’s also other examples of the EU leaving certain countries off the list for political reasons, such as the U.S. and several of its own states being left off the list. Some EU sources told us that the EU really wants to preserve its relationship with the U.S., and so it really doesn’t push against the fact that the U.S. does not share as much tax information with the EU as the EU shares with the U.S. under the Foreign Account Tax Compliance Act. That act obliges foreign countries to share foreign bank accounts of U.S. citizens with U.S. tax authorities.

But the reciprocity is not in place for the U.S. with other foreign countries. EU lawmakers have pointed out for years that this is extremely unfair and imbalanced. That’s another sort of political reasoning behind who gets on the list and who doesn’t.

Other sources told us that it just wouldn’t be a good look for the EU to put the U.S. on the blacklist because the U.S. is considered an ally. They need to be able to work together on other high-level political issues.

But really the reasons go on and on.

David D. Stewart: Where does the blacklist stand today? Are we expecting to see any additional changes or revisions to it?

Sarah Paez: Well, currently the Code of Conduct Group is in the midst of discussing whether to reform the scope of its mandate. As I mentioned earlier, the Code of Conduct Group is basically the high-level political group in the Council that works on all aspects of the EU blacklist.

The Code of Conduct Group was established in 1997 as basically the EU group that works on stopping harmful tax practices that threatened the EU’s revenues.

Currently, discussions are ongoing within the council. According to EU Tax Commissioner Paolo Gentiloni, there is a minority of member states in the council that currently oppose reforming any bit of the Code of Conduct’s mandate. But he believes that they’re making a bit more progress with the help of the Slovenian EU Council Presidency in getting those member states to sort of agree to revise the mandate.

That revision would include a new approach to assessing harmful tax practices. The Code of Conduct Group has been discussing whether to screen jurisdictions based on three criteria: whether a measure leads to double nontaxation or tax relief, whether it substantially influences the place of residence of economic activity, and whether there is a cause and effect link between those first two criteria.

The group’s also discussing reviewing the geographical scope of the listing criteria so that the EU could actually screen more countries to consider including on the blacklist.

Additionally, the group is discussing a process that would effectively harmonize protective measures against jurisdictions on the EU blacklist. It would actually add stricter measures to implore jurisdictions to change their harmful tax regimes.

They’re also trying to gather more harmful tax practices under the scope of the blacklist criteria so that there aren’t jurisdictions that escape the listing criteria while providing that same sort of opportunity for tax avoidance, or in some cases, even tax evasion.

David D. Stewart: Sarah, this has been fascinating. Thank you for being here.

Sarah Paez: Thanks so much for having me.