On March 12, 2019, the European Commission on behalf of the European Union (EU), blacklisted fifteen countries around the world and in the region by placing them on a list of jurisdictions deemed as “non- cooperative” with its EU issued “internationally recognized” good governance criteria. St. Vincent and the Grenadines (SVG) was not placed on this list as it met the EU tax criteria owing to delivering on law reform with respect to its international financial services sector.

The EU has indicated that its listing exercise is a common tool for its Member States to tackle external risks of tax abuse and unfair tax competition, however, this blacklist has become known as a notorious way of publicly “naming and shaming” countries which when blacklisted, are forced to expedite law reform, owing to reputational damage and repercussions on its financial system.  

The fact that SVG has been deemed to have met the EU international criteria is a positive outcome for the country, following an extensive screening and assessment of its laws by the EU Commission against the stated tax criteria.

The EU’s Blacklist

The countries which were blacklisted were those which failed to either meet or make a high-level commitment to comply with the EU’s tax governance standards. These countries are American Samoa, Aruba, Barbados, Belize, Bermuda, Dominica, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad and Tobago, United Arab Emirates, US Virgin Islands and Vanuatu.

Consequences of Blacklisting

Blacklisting comes with dire consequences as firstly, the EU list is now linked to EU funding under certain new provisions, thus funds from those instruments cannot be channeled through entities in listed countries. Second, there is a direct link to the EU list in other relevant legislative proposals. For example, under the new EU transparency requirements for intermediaries, a tax scheme routed through an EU listed country will be automatically reportable to tax authorities. The public Country-by-Country reporting proposal also includes stricter reporting requirements for multinationals with activities in listed jurisdictions. The Commission is examining legislation in other policy areas, to see where further consequences for listed countries can be introduced.

Further, EU member States agreed on sanctions to apply at national level against the listed jurisdictions notwithstanding the collective stand taken with the present blacklisting. These include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The Commission is urging Member States to step up their efforts to agree on strong, binding and coordinated defensive measures, as soon as possible, to give the EU list an even greater impact.

Any public/international negative sanctioning in today’s financial world, tends to have grave perennial adverse effects, particularly on a small developing State. Such effects include, but are not restricted to, the impairment of international correspondent banking relations required for international transactions by compliance, business and AML/CFT purposes.       

Background

The issue of harmful tax practices at the global level increased in importance during the 1990s and has been constantly increasing in significance over the years, to the extent that evolving tax standards have been shaping the legislative framework of the international financial services and products in the region. The G20 countries, the Organization of Economic Cooperation and Development (OECD), the United States of America and more recently, the European Union, have all sought to apply international tax criteria extraterritorially, to the rest of the world, no matter the size of the jurisdiction or the jurisdictional context.  Global tax standards seek to reduce tax evasion and tax avoidance by ensuring transparency and accountability of a country’s tax practices.

The European Union (EU) Member States adopted a Code of Conduct for Business Taxation in 1997 and established the Code of Conduct Group (COCG) to administer and police it. In 2016, the EU Council committed to coordinated policy efforts in the fight against tax fraud, evasion and avoidance and adopted the “Conclusions on Criteria and Process leading to the Establishment of the EU list of non-cooperative jurisdictions for tax purposes”.

In early 2017, the European Union (EU), through its Code of Conduct Group (Business Taxation) – (COCG), selected SVG, together with 92 other countries around the world, to be screened against criteria which it had formulated, to assess whether a country would be placed on their list of non- cooperative jurisdictions or their “blacklist” for tax purposes. At the end of 2017, while the EU Finance Ministers included a number of jurisdictions on its list of non-cooperative tax jurisdictions or blacklist, SVG was not so included, but instead identified as a cooperative tax jurisdiction, owing to commitments made by the country to address the concerns of the EU COCG.

St. Vincent and the Grenadines’ Commitments and Legislative Changes

Under the threat of ‘blacklisting’ as an uncooperative tax jurisdiction, SVG made commitments to the EU to undertake a review of its legislative framework for the international financial services with a view to addressing by amendment or abolition, practices which were considered harmful under the EU tax criteria for Fair Taxation and to take the necessary steps to join the OECD’s Base Erosion and Profit Shifting (BEPS) Inclusive Framework and commit to adhering to its minimum standards. Consequently, SVG enacted legislative amendments in December 2018 to its International Business Companies (Amendment) Act and the International Trusts Act, to accord with the requirements of the EU Criteria.

The main significant effect of these amendments means an opening up of the International Financial Services (IFS) sector to Vincentians and removing tax exemptions on income, even though exemptions on estate and succession taxes and certain duties, such as stamp and custom duties, have been retained.  Additional amendments were made to upgrade and strengthen the legislation in keeping with purposes connected to meeting the EU and the OECD BEPS criteria.

SVG International Tax Status

SVG made the afore -stated legislative changes in order to demonstrate its continued willingness to cooperate at the international level as an open, transparent and responsible tax jurisdiction, on the important global issue of tax avoidance. Indeed, such action is consistent with the direction more formally embarked upon as early as 2009, when SVG became a member of the OECD and has since been an active, accountable and cooperative member of that forum. SVG has amended its laws over the past several years and enacted new legislation to keep current with international initiatives and has cooperated fully, not only with the OECD, in implementing that body’s requirements for Exchange of Information, Automatic Exchange of Information and Common Reporting Standards, but also under the US Foreign Transactions and Tax Compliance Act (FATCA).

SVG is presently deemed a cooperative tax jurisdiction internationally, as a result of the work carried out over the years. The recent result of the EU’s screening and assessment exercise of its international taxation regime, confirms this position. By meeting the requirements of the EU Tax Criteria, the country was able to avoid the disruptive effects of blacklisting on its economy, which have the potential to negatively affect financial stability at both the macro and micro level. The country’s integrity in matters of international cooperation, tax transparency and tax accountability has also been preserved.  

Notwithstanding the positive outcome for SVG in meeting the EU’s international tax criteria, SVG does not endorse the EU’s ‘naming and shaming’ countries by inclusion in public blacklists. SVG has also formally represented that there should be better coordination of the administering body for tax standards internationally, that is, one body responsible for one set of international tax standards, rather than the onerous plethora of standards and criteria which are continuously evolving.