EU Blacklist Update

The British Virgin Islands (BVI) is one of several jurisdictions to be placed on the European Union’s list of non-cooperative jurisdictions for tax purposes, following the latest update of what is commonly known as the EU Blacklist.

Countries are added to this list by the EU Council, where they are deemed to have either not engaged in a constructive dialogue with the EU on tax governance or have failed to deliver on the necessary reforms. In its statement, while also adding Costa Rica, the Marshall Islands and Russia to the AML List, the EU Council said the BVI was listed because it was found not to be ‘sufficiently in compliance with the OECD standard on exchange of information on request’.

As is the case with most mainstream IFCs, like the BVI, the blacklisting not only has a negative impact on a jurisdiction’s reputation as an international financial centre, but the EU’s decision can also have a direct impact on the financial services industry.?

Blacklisting by the EU and other OECD bodies is more than slightly controversial because in some cases, several of the jurisdictions being 'blacklisted' or 'grey listed' are no worse, and often have regulatory frameworks which are in far better shape, than that of several EU/OECD members countries based on objective evidence. For more than 2 decades now, leadership in many IFCs and some onshore observers have argued that while some countries (both on and offshore) have not done enough to enhance their regulatory regimes, the reasons for the listings in several cases are more commercial/political than regulatory/technical.

Nonetheless, inclusion on this list means that any EU financial services provider will have to adopt enhanced due diligence measures for transactions involving the jurisdictions on the list, which tends to result in increased costs. Although the impact on the investment fund sector for blacklisted jurisdictions has been minimal thus far, the securitisation industry has been affected due to restrictions on EU investors participating in deals issued from a blacklisted jurisdiction.?

For the Marshall Islands, which is known for having a successful shipping registry, this latest blacklisting by the EU reflects what was described by the EU as a ‘lack of enforcement of economic substance requirements’. Concerns were raised over its zero or only nominal corporate tax rate, attracting profits without any real economic activity.?

In Costa Rica’s case, the jurisdiction was included because it ‘has not fulfilled a commitment to abolish or amend the harmful aspects of its foreign source income’. Russia was listed, meanwhile, for a failure to fulfil its commitment to address harmful aspects of its special regime for international holding companies. The situation there was further complicated by the invasion of Ukraine, which effectively brought dialogue on tax matters to a standstill.?

At the same time, four jurisdictions which had previously been on the EU’s ‘State of Play’ document, also known as Annex II or the EU Tax Grey List, were recognised as having successfully fulfilled their commitments. North Macedonia, Barbados, Jamaica and Uruguay have now therefore been removed from the Grey List.?

The EU’s quest against harmful tax practices and to promote what is deemed fair tax competition, currently has 16 jurisdictions labelled as non-cooperative: American Samoa, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos, US Virgin Islands and Vanuatu, in addition to the four just added. Revisions to the EU AML List take place twice per year, with the next update scheduled for October this year.