EU Mulls Tax Sanctions for Countries Branded Tax Havens

Countries that end up on the European Union’s list of tax havens could subject companies operating within their borders to tax sanctions—such as withholding taxes and denied deductions for royalty payments—damaging the businesses’ ability to offset losses in the jurisdictions.

Following a March 1 meeting, politicians identified a range of sanctions to impose on companies in any country or jurisdiction that meets the criteria for being considered a tax haven. According to confidential documents obtained by Bloomberg BNA, the sanctions under consideration for the blacklist by the EU Code of Conduct Group for Business Taxation include:

•  withholding taxes;
•  elimination of payment deductions, such as royalties;
•  restrictions via new EU rules for controlled foreign corporations; and
•  elimination of the participation exemption rule.

All of the sanctions could apply to an EU company doing business within a jurisdiction that ends up on the EU tax haven blacklist, which is due to be finalized by the end of 2017.

Based on the confidential documents, the final list of sanctions can be imposed via coordinated measures such as EU legislation or restrictions through EU funding.

Country Screening

The EU Code of Conduct Group for Business Taxation is coordinating the bloc’s work on the tax haven blacklist. It is currently preparing to “screen” 92 countries that fail to meet a range of transparency and corporate taxation criteria. The 92 include the U.S. and Switzerland, as well as a range of offshore finance centers such as Bermuda, the Bahamas, the Cayman Islands, Jersey, Guernsey and the Isle of Man.

“Being listed for tax purposes by the EU is supposed to have already per se a deterrent effect since this would very likely entail potential consequences in terms of international reputation,” according to the document.

It adds that, nonetheless, “member states have asked for concrete, specific and direct countermeasures linked to listed jurisdictions.”

Payment Deductions

Payments such as royalties, interest and services are currently deductible under domestic law in EU countries when made to persons located in a non-EU country.

“At present this type of domestic countermeasure is triggered by different types of criteria including transparency and harmful tax measures,” the document states.

The document notes that in some cases, “the deductibility of costs may be accepted if the taxpayer can prove that the payments relate to the real transactions justified on economic grounds.”

Controlled Foreign Corporations

The code of conduct document notes that the Anti-Tax Avoidance Directive, or ATAD—which takes effect in 2019—provides options for sanctions when it comes to controlled foreign corporations.

“Currently the triggering requirement provided for in the ATAD is essentially based on the level of taxation in the CFC jurisdiction,” the document said. “As a first option the triggering requirement could be automatically satisfied for jurisdictions featuring on the EU list without the need to go to a case-by-case basis.”

Withholding Taxes

The potential withholding tax measures under consideration in the document “provide for a more restrictive tax treatment for certain outbound payments when these have been made to individuals or legal persons located in third-country lists for tax purposes.”

The participation exemption rule applies to dividends paid to shareholders that hold “a given percentage of a company’s stock.” These exemptions are allowed via the EU Parent-Subsidy Directive.

“A possible countermeasure could provide for denial or limitation of the tax exemption if the foreign entity that pays the dividends is located in a listed jurisdiction,” the document said.

Other potential sanctions listed by the conduct group in the confidential document include:

•  reinforced monitoring of certain transactions that include special documentation requirements for payments made towards listed jurisdictions; and
•  placing the burden of proof for the deductibility of certain expenses on the taxpayer rather than the tax authority.