Fiji and Vanuatu amongst the Pacific nations that now appear on EU blacklist
Introduction
With five Pacific Island nations namely Fiji, Vanuatu, Samoa, American Samoa and Marshall Islands now featuring on EU’s revised “blacklist” of tax havens, we take a closer look at the implications the blacklist will have on these economies. More importantly – how could this status affect trade and doing business in these countries?
Legality of Tax Havens
In today’s age of globalisation and digitisation, tax havens challenge international economic and legal norms as it becomes increasingly difficult to link and track funds to certain jurisdictions. Tax havens become particularly problematic when companies and individuals use these regimes for fraud, tax evasion or evading international sanctions. The 2016 leaked Panama Papers exposed some of these schemes, leading to international condemnation and widespread calls to address small tax havens.
There has been a gradual and imposed shift towards transparency, collection and sharing of more information and where possible reducing the impact of tax havens contributing to the avoidance and evasion of tax. In December 2017 the European Union Council adopted a method of assessing countries and publishing a common list of non-cooperative tax jurisdictions in a move to enhance good tax governance.
The following criteria was used to assess whether a country is a tax haven:[1]
Whether there is effective exchange of vital information on taxpayers, their financial dealings and assets between governments?
Is there any advantageous tax treatment for non-residents?
Have the accepted minimum standards of corporate governance and accountability been adopted?
What criteria weren’t met?
Fiji
Fiji was placed on the watchlist following an initial review in 2017 which highlighted the following issues[2]:
Fiji was not a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes;
Fiji had not signed the Organisation for Economic Co-operation and Development(OECD) Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC);
Its preferential tax regimes relating to exporting companies, ICT incentives, concessionary rate of tax for regional or global headquarters; and
Fiji wasn’t a member of the Inclusive Framework on base erosion and profit sharing (BEPS).
While at the time of the initial 2017 assessment the EU acknowledged Fiji’s developing status, it called for Fiji to address its issues or commit to addressing them by certain dates. Since the initial assessment, the EU blacklisted Fiji for failing to amend or abolish its harmful preferential tax regimes. The EU also noted that they will be closely monitoring Fiji’s commitment to comply with the other areas highlighted in the initial review.[3]
Fiji Revenue and Customs Services (“FRCS”) responded by strongly defending Fiji’s incentive packages which help encourage domestic economic activities, claiming that they fall in line with international standards and do not create tax avoidance opportunities.
Vanuatu
Vanuatu was placed on the EU watchlist in 2018 due to the lack of legal substance requirements for entities doing business in or through the country. In its analysis, the Council noted that non-residents were granted advantages in respect of transactions carried out with other non-residents. It also raised concerns around the existence of companies in Vanuatu that lacked sufficient economic substance.
Vanuatu was blacklisted as a tax haven in 2019 for a failure to resolve its facilitation of offshore structures and arrangements aimed at attracting profits without real economic substance. This assessment came despite the FATF removing Vanuatu as a high-risk jurisdiction in July 2018.
Other Pacific Nations
In relation to the other Pacific Island countries included on the blacklist –
A ruling was made in December 2018 to blacklist Samoa due to failure to address its preferential tax regime which was seen as harmful and non-compliant with the Council’s criteria. Samoa was also marked for not being a member of the Inclusive Framework on BEPS.
Marshall Islands was assessed based on its facilitation of offshore structures that lacked real economic substance.
American Samoa has also been blacklisted for failing to meet a number of criteria including their commitment to sign the OECD Multilateral Convention on Mutual Administrative Assistance as amended and to apply the BEPS minimum standards as highlighted by EU.
So how does listing as non-cooperative jurisdictions affect these Pacific Island nations?
Blacklisting is never a good thing and whether this results in economic and trade sanctions or not, the reputational damage that comes with such labelling should not be understated. While FRCS has minimised the potential impact of the blacklist given the small amount of trade that Fiji has with the EU, the implications could extend to funding by the EU into these countries.[4]
While we can potentially expect some form of restrictions on transactions between the EU and these backlisted countries, it remains to be seen whether such restrictions will affect trade with partners outside the bloc such as with major trading partners, Australia and New Zealand. At the very least, this blacklisting could result in additional layers of requirements by financial institutions sending or receiving money to / from these countries, which will eventually impact the ease of doing business in these economies. This assessment by EU could also trigger additional revisions by OECD, FATF and other similar organisations assessing the tax governance and anti-money laundering measures in these countries.
On the other hand, it is also important to consider how much the GDP of these smaller economies depend on such preferential tax regimes, helping boost domestic economic activities through increased investment and employment and whether it is viable to remove them.[5] The key will be in identifying how regulators and lawmakers can address opportunities for tax avoidance and money laundering that may be exploited within these existing regimes.
We will follow the developments in this space closely and if you have any specific enquiry on how backlisting of the Pacific countries will affect you or your business, contact our team now.
Contact
For more information please contact:
John Ridgway
Principal
T + 61 410 520 416
E j.ridgway@pln.com.au
Jinita Prasad
Advisory
T +61 466 811 562
E j.prasad@plnadvisory.com
[1] Cecile Remeur, “Briefing – European Parliament: Listing of tax havens by the EU” European Parliamentary Research Service, available online at http://www.europarl.europa.eu/cmsdata/147412/7%20-%2001%20EPRS-Briefing-621872-Listing-tax-havens-by-the-EU-FINAL.PDF, accessed 15 March 2019.
[2] General Secretariat of the Council, “The EU list of non-cooperative jurisdictions for tax purposes Compilation of letters seeking commitment” 6th March 2018 available online at https://www.consilium.europa.eu/register/en/content/out?&typ=ENTRY&i=LD&DOC_ID=ST-6671-2018-INIT accessed on 13th March 2019
[3] Tomasik, M., “Taxation: Council revises its EU list of non-cooperative jurisdictions” 12th March 2019, available online at https://www.consilium.europa.eu/en/press/press-releases/2019/03/12/taxation-council-revises-its-eu-list-of-non-cooperative-jurisdictions/ accessed on 18 March 2019.
[4] Fiji Revenue and Customs Services, “FRCS response to EU”, 15 March 2019 available online at https://www.frcs.org.fj/news/2018-2/frcs-response-to-eu/ accessed 18 March 2019/
[5] Fiji Revenue and Customs Services, “FRCS response to EU”, 15 March 2019 available online at https://www.frcs.org.fj/news/2018-2/frcs-response-to-eu/ accessed 18 March 2019/
