Hard on the heels of the publication of the Paradise Papers and its predecessor the Panama Papers, comes the European Union’s unveiling of its list of non-cooperative tax jurisdictions. The member states have joined forces to compile a list of states that they consider to be “rogue” when it comes to the issue of taxation.

The EU's initiative has some merit. There is little doubt that a combined list highlighting the perceived scallywag states that afford individuals, businesses and corporations the opportunity to evade taxes, should enable a more robust response. However, if this was its intention then there are associated frailties with the initiative.

From the outset I need to stress that I am no tax-evasion apologist. There is an irrefutable ethical argument suggesting that each individual and corporation pays taxes commensurate to what the law requires. What I am commenting upon is the need to differentiate between ethical and legal arguments, and in doing so make for a more robust system that captures more of the taxes currently being avoided.

I have an issue with the inclusion of the word “avoidance” in the EU’s commentary. The fact remains that tax avoidance is legal. Tax evasion is not. The best way for onshore governments to rectify the perceived wrong is to amend their tax laws. By doing so, the issue becomes black and white, in contrast to a greyed-out-area that can be likened to a smart tax-lawyer’s playground.

But to ensure that this structure is not only fair but also enforceable, the “onshore” nations need to address the litigation confines that presently govern the means for entities to avoid paying tax. If an individual or corporation steps outside of these new rules (i.e. they evade tax), then they can be punished accordingly.

Instead, the EU has effectively fudged the issue of litigation and thereby enforcement, by compiling a list of what it perceives to be tax avoidance-facilitating states. By identifying these allegedly tax-disruptive jurisdictions, they have not told their member states anything that they already didn’t know. Which means that the list is as much use as a chocolate teapot when it comes to enforcing tax law.

The EU’s own online Q+A that seeks to explain its rationale fails, in my humble opinion, in the first sentences.

Q- Why has the EU produced a list of non-cooperative tax jurisdictions?
A- The new list is part of the EU's work to clamp down on tax evasion and avoidance. (emphasis added)

As a lawyer who specializes in international fraud and cross-border asset recovery, it is hardly surprising that my focus is drawn not only towards the ethical question, but on the legality of what the EU is seeking to achieve. After many years of investigating corruption and righting the resultant wrongs, I am also able to dissect the EU proposals.

For a start, if the EU is serious about its intentions, then it needs to be savvier with the way it words its communiques. You cannot prevent something that is perfectly legal simply by throwing it into the melting pot with the illegal issue of tax evasion. The only way that avoidance can be addressed is by changing the law, not simply compiling a list of perceived ne'er-do-wells as a reputational bat with which to beat smaller jurisdictions.

But this brings us to a major issue where the EU is concerned. Each member state has its own taxation rules and protocols, albeit with an over-arching vision led by the EU. By simply compiling this list, the EU is seeking to appease the angry voices given fervor by the Paradise Papers and their predecessor, the Panama Papers. In fact, they have done nothing of real moment to address the problem.

The EU contends that its list of naughty jurisdictions will prompt change: but how? Why would one of the offshore facilitators change their rules and position unilaterally, thus disadvantaging themselves in the skirmish for offshore business? Just because they appear on this “bad boy list” won’t prevent them offering their services. By inserting sound bites such as: “It creates a positive incentive for international partners to improve their tax systems where there are weaknesses in their transparency and fair tax standards,” won’t cut any mustard with many of the jurisdictions concerned.

The EU makes mention of “mixed messages” arising out of the various triggers operated by the numerous EU member states, asserting that a single, joint list will be “easier for international partners to understand and engage with.” As Ebenezer Scrooge would say…..bah-humbug.

The only thing that will control these jurisdictions’ links to tax avoidance facilitation is a change in the tax laws within the EU. This may prevent the law-abiding from enjoying lawful tax breaks, but it will see them pay their fair share. What it won’t do is prevent the dishonest from exploiting every means at their disposal to evade their liabilities, and thereby engage in tax crimes and money laundering. This means that the punishments must be severe (to include civil and criminal confiscation of assets) to deter those so-minded. The EU list fails in this objective.

The Q+A webpage asks the question: why weren’t EU states assessed for the same list? It goes onto explain that there are existing rules in place to ensure internal EU tax transparency: in effect we are already squeaky clean. Try telling that to Scotland which, until quite recently, was an offshore service provider up there with the very worst, providing “fully integrated” money laundering facilities to corrupt figures from eastern Europe.

It is right that the EU should aspire to lead by example, but I have made the point repeatedly that naming and shaming offshore jurisdictions who don’t play by your rules achieves little. Their response is simple: who put you in charge of me?

The policing of taxes falls to the onshore countries themselves. They make their own rules designed to prevent their national and embedded corporations from manipulating the system to their own ends. If you make it unlawful to invest your assets offshore to avoid tax, then you regain control. Making up lists of those who assist your nationals in their avoidance endeavors has little meaning. As a sleight of hand designed to deflect internal criticism of the EU, it is merely smoke and mirrors.

The EU trumpets that it is now “….the lead when it comes to tax standards.” If that is true, why is it bleeding-out when it comes to collecting taxes? The point I am seeking to make is that company directors and their accountants have a duty to their shareholders to maximize profitability. One avenue that they can lawfully pursue is tax avoidance. But they can only do so within the rules laid out before them.

There is no point in whinging that sophisticated businesses are not operating within the “Spirit of the Act.” They are not bothered unless they are considered to be acting unlawfully. To prevent their actions the law makers must change the current legislation. But, again, this comes with risk. If the EU’s member states raise taxes, then there is the potential for corporations to take their business and jobs elsewhere. Is this why onshore legislators appear to be reticent in changing laws in favor of shouting out sound bites, clearly designed to appease the baying commentariat?

As Apple and Ireland have found to their cost, there is a set of rules that must be abided by within the EU. Ireland has been told to collect billions of additional dollars in taxes from Apple — and it doesn’t want to. It attracted Apple and its jobs to Ireland by offering it tax incentives, allegedly outside EU rules. This scenario continues to play out. But you do not require a crystal ball to predict the likely and unhappy conclusion.

This may be one of the reasons the EU fears Brexit so much: a concern that once the UK is outside of its control, it will set itself up as the place to locate in Europe to enjoy lower corporation taxes: lower than the EU inwardly allows. It could enable the UK to gain the upper hand in any bidding processes for new factories, commerce and jobs.

The EU suggests that it can effectively “incentivize” alleged rogue states into cooperating, by withholding EU investment/payments/subsidies from various EU development funds. Whether it can or can’t, I reaffirm my belief that the only way to properly police these issues is by legislative changes onshore.

Remember also that one person's incentivization is another’s blackmail: does the EU really want to put itself in a position where it causes real hardship to the ordinary people of the jurisdictions concerned, who have no say in the matter? As the UN is finding out to its cost, rogue states such as North Korea have no sympathy for their own people, no matter how devastatingly affected they are by UN sanctions.

From the outside, the EU proposals reek of arrogance. Like the United States, the EU is seeking to flex its significant muscle on the world stage, bullying other nations into complying with its wishes, when in fact the answer to its problems lies with its own (member state) legislators. The EU should ask itself what its attitude would be to outsiders trying to assert control over its internal policy.

Plus, may I ask why there is no mention of the U.S. offshore service providers in Delaware and Nevada, for example? I would contend that this is because nobody wants to rattle Mr. Trump’s cage, as his economic retaliation is likely to be both swift and severe. The inclusion of the U.S. island of Guam is noted. The absence of the more obvious and important mainland offshore providers like Nevada and Delaware smacks of cowardice. Prodding the United States with a little stick, knowing that to do so with a big stick would see the U.S. rain down reprisals, paints the EU in a poor light.

This is no oversight: this is simply the EU picking its targets with care. If you are a global behemoth you are safe to operate some of the weakest-regulated offshore services on the planet; but woe betide if you are a little collection of islands in the Caribbean. Nobody likes bullies. The EU should apply the same rationale to all, or not at all.

To many we appear to be entering a period where the word “taxation” is interchangeable with “corruption.” This is the effect that the Panama and Paradise Papers have had on many. There will be some out there who welcome the EU initiative; however, I would suggest that the EU’s “Santa’s Naughty List” will have minimal impact unless supported by new, meaningful and effective onshore tax law.

Happy Holidays to all.


This article originally appeared on the FCPA Blog http://www.fcpablog.com/blog/2017/12/13/martin-kenney-eu-bully-boys-draft-their-own-santas-naughty-l.html