October 2021 was a big deal for taxes, and not because the extended filing deadline for those required to file a U.S. tax return fell on the 15th. Two very important events transpired last month.
The first was an agreement among the Organization for Economic Cooperation and Development (OECD) to uniformly tax multinational corporations—or more accurately, multinational enterprises (MNEs)—at a consistent rate around the world.
On Oct. 8, the OECD announced that Estonia, Hungary and Ireland – three prominent “tax havens” - had signed on to the “Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy,” bringing the number of signatories to 136 countries that have pledged to tax MNEs at 15 percent, and thus bringing the agreement into effect.
Three days earlier, the European Union released its updated list of “tax havens,” which included several Pacific Island jurisdictions. The Council of the European Union voted to approve “the EU list of non-cooperative jurisdictions for tax purposes,” which included American Samoa, Fiji, Guam, Palau, Samoa, and Vanuatu. The remaining jurisdictions on the list are in the Caribbean, plus Panama.
What exactly is a tax haven?
There’s not an absolute definition of “tax haven,” but typically they offer no or low taxes on broad classes of assets (which is to say “money”) that a foreigner (either a person or a company) can deposit into local banks. Perhaps more significantly, however, is that they keep information secret. There are two key types of information: beneficial owners and information exchanges.
“Beneficial owners” refer to the identity of who actually owns the assets; exchange of information refers to what the tax haven country and its banks will share with the government where the funds originated.
The OECD defines a tax haven as “a country which imposes a low or no tax and is used by corporations to avoid tax which otherwise would be payable in a high-tax country.” Their definition further states that tax havens typically show, “lack of effective exchange of information; lack of transparency in the operation of the legislative, legal or administrative provisions.”
The EU, through various documents, echoes this in defining “tax havens” as a jurisdiction that provides “taxpayers, both legal and natural persons, with opportunities for tax avoidance, while their secrecy and opacity also serve to hide the origin of the proceeds of illegal and criminal activities,” with characteristics of “low or zero taxation, fictitious residences (with no bearing on reality) and tax secrecy. The last two are key methods for hiding ultimate beneficial owners.”
What exactly did the EU say?
The EU non-cooperative tax jurisdiction list is a bureaucratic document that focuses mostly on compliance with EU-accepted financial standards, including other multilateral agreements. The European Council referenced these other agreements in approving the list.
Here is what they say about some of the listed jurisdictions in the Pacific:
Palau does not apply any automatic exchange of financial information, has not signed and ratified the OECD Multilateral Convention on Mutual Administrative Assistance as amended, and has not resolved these issues yet.
American Samoa does not apply any automatic exchange of financial information, has not signed and ratified, including through the jurisdiction they are dependent on, the OECD Multilateral Convention on Mutual Administrative Assistance as amended, did not commit to applying the BEPS minimum standards and did not commit to addressing these issues.
Fiji is not a member of the Global Forum on transparency and exchange of information for tax purposes (“Global Forum”) has not signed and ratified the OECD Multilateral Convention on Mutual Administrative Assistance as amended, has harmful preferential tax regimes, has not become a member of the Inclusive Framework on BEPS or implemented OECD anti-BEPS minimum standard, and has not resolved these issues yet.
Samoa has a harmful preferential tax regime and has not resolved this issue yet.
Does the EU list really matter?
It depends. Essentially, the list is about compliance with a specific legislative and regulatory regime. Compliance is never absolute. If you’re in compliance, you can slip out. If you’re out, you can get in. It’s like losing and gaining weight.
International law is a different creature from the domestic law of nations. It’s essentially a matter of following agreements and abiding by widely-observed protocols. Powerful nations often ignore, or blatantly violate, this thing called international law when it serves their interests, often without consequences.
As the events of the past month have demonstrated, a base level of financial transparency and taxation of foreign parties are likely to become a more significant part of the international legal landscape. Figuring how to comply – or how to evade – will likely define many nations’ relationships with other countries and multinational institutions.
Gabriel McCoard is an attorney who previously worked in Palau and Chuuk State. He is currently weathering the pandemic stateside. Send feedback to email@example.com.