The EU and Tax hypocrisy – a new tax haven blacklist

Post by James at Taipan-International.com.

Yet another tax haven blacklist – this time from the EU, or… hang on a moment… the European Commission said “The list should not be viewed as a central blacklist since the list of 30 names is merely a consolidation of national lists” despite referring to it themselves as the “pan-EU list”.  

So what is this EU blacklist?

Each of the 28 EU member states are free to prepare their own blacklists of countries that it views as ‘non cooperative’ on tax matters (in plain English they don’t do enough to stop EU nationals from using them to pay less tax). Where a jurisdiction appears 10 time on a national blacklist it then appears in the ‘consolidated list’ which is put out as ‘official’ thus providing easy targets for the media, and various commentators to vent their spleen against those who don’t pay their ‘fair share of taxes’, whilst no doubt enjoying a sumptuous lunch on expenses. Interestingly at least 5 of the EU black-listers have themselves failed to meet EU tax obligations – it is hard to imagine that the Netherlands, Luxembourg and Ireland would not have appeared on an independently produced blacklist. The UK and Cyprus would also be there.

The most prolific ‘list makers’ are the former Soviet Bloc countries - notably the Baltic’s which do a roaring trade in offshore (read tax free) banking [including Latvia: corporate tax rate 15%, Lithuania 15%, Estonia 20%, and Bulgaria 10%]. Perhaps these territories are hoping that business currently in the BVI might suddenly transfer to them, as their tax rates are considerably lower than the European average.

Even the OECD, that august group of 35 high tax countries that do their best to put out of business any country that dares to levy a lower rate of tax than their members on the spurious grounds of ‘unfair tax competition’ believe this EU list ‘is a mistake’. 

So what does this list mean and what effect can it have? 

Actually, the list means very little and will have very little effect.

Firstly, some of the jurisdictions listed clearly should not be there

(a) Hong Kong, which has a tax rate of 16.5% - in excess of two of the three Baltic’s, Bulgaria, Cyprus and Ireland.

(b) Guernsey that even the EU says should not be on the list due to a misunderstanding by the Polish government of the relationship between Guernsey and its dependencies (Sark and Alderney).  We must comment here that in their efforts to grovel to the OECD (and HMG) that the Channel Islands (Jersey, Guernsey etc) will soon be back to cut flowers and potatoes having effectively destroyed their ‘finance centre’ business.

(c) Nauru, which effectively pulled out of the offshore business a decade ago and does not have any banks operating in the country. (Likewise Niue with one bank)

Secondly, it (quite deliberately in our view) attempts to blacken the reputations of the named jurisdictions; it puts the listed jurisdictions on to bank compliance ‘risk’ software.  On this point we wonder how the UK might react to being blacklisted for shielding corrupt oligarchs’ ill-gotten gains., or Ireland, Luxembourg  and the Netherlands for creating accounting/taxation fictions that have the effect of shielding US multinationals from actually paying any meaningful tax on their European earnings.

Our opinion on the EU blacklist

It seems to us that the governments (of the OECD & EU)  want to have their cake and eat it. Free competition when it suits them ... but not when somebody else offer something better, but wasn’t it always so.

A noticeable omission however from the list (below) of jurisdictions is the United Arab Emirates (Dubai and RAK primarily). RAK for example offers entirely tax-free companies (as indeed it might as there are no corporate or personal taxes levied in the Emirates). RAK does not cooperate in exchanging data with the EU or anybody else and, we understand, has no plans to do so. Why therefore does it not appear on the list? Could it be because of oil and the related fact that if the Emirates are sufficiently upset by perceived bullying, they might just sell their oil to non-EU countries? As we all know the Middle East does not take kindly to extra-territorial ‘legislation’ or similar where it affects their interests. 

For those readers interested in RAK, further brief information is available at Dragon Registrars , and more detailed information at TMS FZE.

This EU blacklist is just the latest in a long line of attempts by overspending high tax countries to bully and coerce smaller jurisdictions who’s livelihoods depend in part on corporate services and the fact that they see no reason to levy venal and unreasonable taxes on businesses. It is all connected with the ‘initiative’ for ‘greater tax transparency’ (i.e. abolishing privacy) started by the OECD and its offshoot FATF founded in 1999 by the G7 to force tax havens out of business.

What binds FATF, the OECD and the EU together in this case are ‘TIEAs’ (Tax Information Exchange Agreements) which the OECD has decreed (extra territorially) must be signed by each tax haven with at least 12 other (generally high tax) jurisdictions or countries. These agreements generally prohibit ‘fishing expeditions’ (random enquiries) and, unsurprisingly have yielded little in the five to seven years most have been in force. The next phase is or will be automatic exchange of (tax) information.  The EU has had practice of this with the EU Savings Directive, adopted in 2003 and in force since 2005 with new regulations coming into force in 2016-17. 

To conclude...

The world is becoming smaller and privacy is being eroded. Whereas in the 1950s it was enough to set up a company in Tangier and operate entirely tax free, now careful planning is required to keep the tax man away from your door.

This often means multiple structures involving low tax as well as zero tax jurisdictions and sometimes ‘hiding in plain sight’... for example using tax transparent entities (LLPs etc) with the ownership (and thus dividends) being passed through to tax free companies which themselves do not trade.  

For further information please contact James via the Taipan International contact page.

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With thanks to the Economist Newspaper from where the inspiration for this blog post emanated.

Table of EU list of ‘non-co-operative’ tax jurisdictions

(The blue highlighted links are jurisdictions we cover, please click on them to be redirected to Dragon-Registrars.com. For tax and structuring information, please visit Taipan-International.com)

Caribbean Anguilla Antigua and Barbuda Bahamas Barbados Belize British Virgin Islands Grenada Montserrat St Kitts & Nevis St Vincent & the Grenadines Turks & Caicos Islands US Virgin Islands Europe Andorra Guernsey Liechtenstein Monaco

Pacific Cook Islands Marshall Islands Nauru Niue Vanuatu Asia Brunei Hong Kong Maldives Africa Liberia Mauritius Seychelles Americas Bermuda Panama

EU VAT chargeable on electronic supplies

The background to TBES

For several years, VAT registered suppliers in all EU countries have been obliged to charge their domestic rate of VAT to their non VAT-registered customers living elsewhere in the European Union. This also applied to TBES (telecommunications, broadcasting and electronically supplied services) which were bound by the same rules.  This lead to certain multinationals choosing countries with the lowest VAT rate, e.g. Luxemburg with its then 15% rate compared to, say, Hungary, with its 27% rate.

The problem

From 1st of January 2015, it became obligatory for businesses to charge VAT at the customers domestic rate. In theory, requiring even the smallest company to have to account for 28 different VAT offices at least quarterly. Quite simply, this is an administrative nightmare. Added to which countries such as UK with high VAT registration thresholds (currently £82,000) are obliged to account for VAT on ALL sales to other EU countries even though they are not obliged to register for sales to domestic customers… The EU's Commissions' reasoning' for not allowing the same threshold exemptions was that 'the UK had a high threshold for registration' … a somewhat specious and circular argument.  To 'simplify' the collection of VAT EU wide: it is possible to register for 'MOSS' a supposed 'One Stop Shop' whereby individual businesses calculate the VAT due across all 28 member states and pay it to their local VAT office who presumably settle up with the other 27. So much for the EU cutting red tape! For obvious reasons, several small businesses have ceased selling to consumers outside their territory.

How to avoid being caught up in this bureaucracy ?

With only a small amount of lateral thinking, the solution is obvious.  - Sell electronic supplies from outside the EU. The EU, like the USA, enjoys imposing extra-territorial legislation and then tries to claim that non-EU companies selling to European consumers 'must' register for VAT. This is entirely unenforceable and only companies, which have some presence in Europe, have been persuaded to 'voluntarily' register for European VAT. The first example of this back in the '90s was CompuServe a US company offering email and dialup internet services.  The vast majority of non-EU sellers of electronic services (mostly US based) do not register for VAT nor have any interest in doing so, any more then they would register for Singapore's GST (VAT equivalent) for electronic sales they make there.

The practical solution

There are several countries located in 'respectable jurisdictions' where VAT either does not exist at all or is a localised form with no connection to European VAT. This blog is primarily about avoiding the onerous obligations of the European VAT scheme rather than reducing tax bills (although that is also possible). Assuming that the reader is already selling an electronic service, his first question is (or should be) 'If I transfer my business abroad, what will my local tax office do?'. For this reason, we would suggest structuring this properly. Let us take, for example, an SEO service that is fully automated – analysing websites and producing SEO reports in return for a monthly subscription. This is just the kind of business that is caught under the new regulations.

 

An owner of such software could licence it to a third party - at commercial rates and paying tax on the licence income so received.  The licensee would have a sales agreement allowing sales to all territories other than the home territory of the licensor. The licensee company would be formed in a low tax country outside the EU (e.g. Hong Kong, Singapore or possibly even RAK in the UAE).   The licensee would pay either a licence fee to the licensor OR hold the non-local rights outright for, say a one-off fee or even an annual fee.  The choices are almost limitless.

 

Provided the transfer of the IP (intellectual property) is a fair value, there would be few grounds on which to challenge the transfer as it could be commercially justified.  If tax saving were also a goal, then the Licensee company might be well advised to operate at arm's length (with the licensor not 'connected' to the licensee in any way).   Management & Control of the Licensee Company would also need to be considered.  

 

At its most basic, the EU based Licensor would exchange huge amounts of paperwork and variable pricing, for a simple monthly, quarterly etc. receipt of a licence fee.  Using the example of a service being charged at £10 per, month + VAT (which from the EU would cost the European consumer variously between £11.70 and £12.70), the licensee would sell at £10 making the service much more attractive.  

A 'win - win' situation perhaps?

Please contact James at Tai Pain International to discuss your particular requirements informally, or visit our website.

A very brief outline of our services to professional advisors

If you are a professional advisor (e.g. lawyer, accountant, business consultant or corporate service provider etc.) we would be happy to work with you in some or all of the following areas:

Structuring and Tax Planning

We give impartial advice on both tax planning and structuring taking into full account your client's needs and requirements.

Companies and Jurisdictions

We offer a wide range of jurisdictions in classic tax haven IBCs (International Business Companies) in jurisdictions such as Belize, BVI, Dominica, Seychelles, St Vincent, St Lucia etc. These jurisdictions are often best used for asset holding and discreet trading.

We also offer a number of low tax jurisdictions e.g. Hong Kong, RAK (UAE), Singapore and for EU trading Cyprus and Ireland. All of these are respectable jurisdictions but with low tax rates (maximum 17%).

Offshore Banking

Advice on banking matters is provided, ensuring the most appropriate choice for your clients given their circumstances. We, The TMS Group, are authorised agents for a number of offshore and onshore banks.

Services to Professional Advisors

For further information, please look at our Services to Professional Advisors - in summary we are happy to work as your ‘back office’ with all correspondence being via yourselves. Alternatively, we can take on your client directly but copy you in as required.