Sunday 5 April, 2020

What impact will the EU blacklisting have on Cayman?

This has not been a good two weeks for Cayman. First it was announced that the EU would be placing us on the blacklist of non-compliant tax jurisdictions and then we ranked as number one on the 2020 Financial Secrecy Index.

But although it all sounds very ominous, what does this really mean?

“The purpose of the list is to encourage cooperation and positive change and not to name and shame,” said Eugen Teodorovici, minister of public finance of Romania in 2019.

Easy for him to say.

Countries are placed on the blacklist or the less severe gray list, based on the following factors: transparency, information exchange standards, signed bilateral agreement for exchange, fair tax competition, no harmful tax regimes/practices, and the implementation of standards through country reporting.

If a country gets placed on the blacklist, it is assumed that they are allowing widespread tax evasion by corporations and individuals.

And what about sanctions? Are direct sanctions imposed on blacklisted countries?

According to Lexology.com:

  • Members States are encouraged to apply additional administrative measures, e.g., increased transaction monitoring and increased audit risk for taxpayers who benefit from a regime in a blacklisted jurisdiction or who use structures that involve a blacklisted jurisdiction.
  • EU Member States are requested to take at least one legislative measure against blacklisted jurisdictions by 1 January 2021. These potential measures include:
    • denying tax deductions for payments to entities in blacklisted jurisdictions;
    • amending CFC rules to target CFCs in blacklisted jurisdictions;
    • applying withholding taxes at higher rates on interest, royalties and other payments received in a blacklisted jurisdiction;
    • denying or limiting the “participation exemption” to dividends or profits from blacklisted jurisdictions.
  • Stricter reporting obligations under the EU Directive on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC 6). Where a payee is resident in a blacklisted jurisdiction, the “main benefits” test for reporting deductible cross-border payments is effectively deemed to be satisfied. There will also be stricter reporting requirements for country-by-country reporting (imposed by EU legislation).
  • The non-tax defensive measures include restricting access to EU funding for groups taking advantage of blacklisted jurisdictions.

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