Clamping down on tax havens? EU policy is unfair and largely ineffective
The EU aims to combat tax avoidance with a blacklist, but this policy has far-reaching consequences for non-European countries. It leads to unequal treatment and largely fails to achieve its goals. This is shown by Federica Casano’s PhD research.
Non-European countries are given one year, and in exceptional cases two, to comply with European tax standards. If they fail to do so, they are placed on a public blacklist, which can have diplomatic and economic consequences. Investors, for example, may avoid countries that are listed. There is little room for negotiation or for explaining how national tax systems work. ‘It is essentially: comply or be listed’, legal scholar Casano says.
What are the goals of the EU tax list?
With the EU list of non‑cooperative jurisdictions for tax purposes (hereafter, the EU tax list), the EU aims to combat tax avoidance and keep the European market competitive. By requiring non‑European countries to comply with the same tax standards, the EU seeks to create a more level playing field for European companies. The tax list is also intended to help developing countries improve their tax systems to generate more tax revenue.
Goals not achieved
Casano’s research shows that these goals are largely not met. The criteria used for the EU tax list are technically weak and contain significant loopholes, allowing tax avoidance and harmful tax competition to persist.
As countries are given only one year to amend their legislation, there is hardly any time for substantive parliamentary debate. ‘They mainly try to comply as quickly as possible because they are afraid of being blacklisted’, Casano explains. Countries that literally copy European legislation are often the most successful in avoiding listing, even though they frequently lack the knowledge or capacity to properly enforce these rules.
How was the research conducted?
For her PhD research on the EU tax list, Federica Casano analysed EU documents, including letters sent to non‑European countries requesting compliance with EU tax standards and the responses to those letters. She also interviewed policymakers from EU member states, non‑European countries, and the Organisation for Economic Co‑operation and Development (OECD), as well as representatives from the private sector and non‑governmental organisations.
Developing countries
Casano observed a clear difference between developing countries and jurisdictions such as the Cayman Islands and the British Virgin Islands, which have been listed more frequently and therefore know how to respond. ‘Countries like Botswana or Namibia have no experience with this, and sometimes there is literally one person having to do the entire tax reform’, she says. As a result, developing countries are forced to make far‑reaching decisions under severe time pressure, without being able to assess the economic consequences.
Unfair treatment
Non‑European countries accuse the EU of holding itself to less stringent standards, thereby gaining a competitive advantage. ‘At first glance, it seems the same criteria apply to European and non‑European countries, but there are important caveats’, says Casano. ‘Member states are often given two years to implement certain directives, and sometimes even longer. Italy, for example, took up to six years to enforce an anti‑tax‑abuse directive.’
Casano understands why: ‘It is quite something to implement, especially when there are changes in government.’ But when Costa Rica was unable to comply within one year, the country was placed on the blacklist. Moreover, the procedures applied to EU member states lack transparency, whereas the black and grey lists [countries that have not yet met all EU tax standards but have committed to implement reforms]) of non‑European countries are publicly visible. EU member states themselves will never be blacklisted because the decision requires unanimous agreement among all member states.
There are also substantive differences in the rules. Non‑European countries are required to introduce rules against letterbox companies, while there are no uniform substance requirements within the EU. In addition, the EU asks non‑European countries to abolish tax incentives for companies that build factories. Casano considers this particularly unfair for developing countries. ‘These are real economic investments that help employment and can also help the collection of personal income tax because more people have a job.’
Putting own house in order
Casano argues for a more targeted approach. The EU should focus its resources on countries that genuinely play a major role in international tax avoidance. At the same time, she believes there should be more room for dialogue, especially for developing countries. That dialogue should not involve only one country at a time; it should involve regional organisations too. ‘If you are Botswana talking to the whole European Union, that is one thing. If you are a union of Southern African countries, together with the United Nations Development Programme, the African Tax Administration Forum and research institutes, talking to the European Union, that is a very different dialogue. It is diplomatically stronger and far better tailored to local policy needs.’
She also proposes the appointment of an EU ombudsman to whom countries can turn if they feel the process is unfair. ‘Right now, if you think you as a country are being penalised, there is nothing you can do.’ Finally, Casano stresses that the EU must also address its own shortcomings. ‘If we don’t put our own house in order, there will be no international recognition of what the European Union is doing.
Federica Casano defended her thesis Anatomy of the EU tax list: a case-study on EU external tax policy on 8 May.