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13 December 2017 UAE included in EU list of uncooperative jurisdictions for tax purposes On 5 December 2017, the Council of the European Union1 (the Council or ECOFIN) published a listing of "uncooperative jurisdictions for tax purposes" (the listing), comprising 17 jurisdictions which were deemed to have failed to meet relevant criteria established by the European Commission (the Commission).2 The listing was part of the Council conclusions adopted on the same date, which included several annexes. The identified jurisdictions, including the United Arab Emirates (UAE), are considered to have not met the Commission's criteria involving (1) tax transparency, (2) fair taxation, and (3) implementation of the minimum anti-Base Erosion and Profit Shifting (BEPS) measures. The Council conclusions state that the UAE does not apply the BEPS minimum standards and did not commit to addressing these issues by 31 December 2018, which is the third criterion. Moreover, the UAE's commitment under criterion 1 on tax transparency will continue to be monitored for implementation. For the jurisdictions included in the listing, European Union (EU) Member States could consider applying one or more defensive measures, including both taxation measures and measures outside the field of taxation, aimed at preventing the erosion of their tax bases against the listed uncooperative jurisdictions. Businesses should be aware of other measures that may be introduced later.
The conclusions also refer to counter-measures in the non-tax area, including the non-award of the European Fund for Sustainable Development (EFSD) fund, EFSD Guarantee Funds or EFSD Guarantee. The listing is to be reviewed and updated at least once per year depending on new commitments made and the implementation of such commitments. A listed jurisdiction such as the UAE may be de-listed once it is considered to have sufficiently addressed the concern(s) raised by the Council. On 5 December 2017, the published Council conclusions included the UAE in the listing. Annex I of this document sets out the listing comprised of 17 jurisdictions, namely: American Samoa, Bahrain; Barbados; Grenada; Guam; Korea (Republic of); Macau; Marshall Islands; Mongolia; Namibia; Palau; Panama; Saint Lucia; Samoa; Trinidad and Tobago; Tunisia and the UAE. As noted, these jurisdictions are considered to have not met the relevant criteria established by the Commission focused on three main categories: (1) tax transparency, (2) fair taxation, and (3) implementation of the minimum anti-BEPS measures. Annex II mentions 47 jurisdictions3 that have made commitments to solve outstanding issues within the agreed deadline (December 2018). At this stage, they were not placed on the list of uncooperative jurisdictions for tax purposes. The listing is a result of the Commission's work relating to the ATAD package aimed at promoting good governance worldwide to maximize efforts to prevent tax fraud and tax evasion. As part of the ATAD package, the Commission published and presented a communication titled External Strategy for Effective Taxation and part of this strategy is the establishment of a list of third countries that do not respect the tax good governance standards, and coordinated defensive measures. Work on this specific listing began in July 2016 with the Council's working group responsible for implementing an EU Code of Conduct on Business Taxation (the Code of Conduct Group). The External Strategy for listing uncooperative jurisdictions is based on three steps: scoreboard/pre-selection, screening and listing. On 8 November 2016, subsequent to the scoreboard/pre-selection step, ECOFIN agreed on the criteria and the process for the establishment of an EU list of uncooperative jurisdictions. The countries selected for screening based on the scoreboard results will be assessed cumulatively under the following three criteria: Under the first criterion of the screening process, jurisdictions will be assessed whether they have committed to and started the legislative process to implement the OECD Automatic Exchange of Information (AEOI) standard, with first exchanges in 2018 (Criterion 1.1). They also will be assessed on whether they have a peer-review rating of at least "largely compliant" to the OECD Exchange of Information upon Request (EOIR) standard, with due regard to the fast track procedure (Criterion 1.2).4 And finally, they will be assessed on whether they have ratified, have agreed to ratify, are in the process of ratifying or have committed to the entry into force of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) (Criterion 1.3). As an alternative to this last criterion, a country could have a network of exchange agreements covering all EU Member States. Pursuant to this criterion, the jurisdiction should have no preferential tax measures that could be regarded as harmful (Criterion 2.1) and should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction (Criterion 2.2). On the basis of this criterion, jurisdictions should commit by the end of 2017, to the agreed OECD anti-BEPS minimum standards and their consistent implementation (Criterion 3). The four BEPS minimum standards are: (i) countering harmful tax practices (Action 5); (ii) preventing treaty abuse (Action 6); (iii) imposing the Country-by-Country (CbC) reporting requirement (Action 13); and (iv) improving cross-border dispute resolution mechanism (Action 14). According to the Council conclusions, the listing shall be revised at least once a year. Subsequent to the publication of the list, the Council will monitor the implementation of the commitments made by these jurisdictions, and if warranted, de-list the jurisdiction that has undertaken to address the concern raised by the Council. The UAE was one of the 17 jurisdictions included in the listing. The Council conclusions state that the UAE does not apply the BEPS minimum standards, and did not commit to addressing these issues by 31 December 2018. It also noted that the Code of Conduct Group will continue to monitor the UAE's commitment to comply with Criterion 1.1. (on OECD AEOI) and 1.3. (on OECD MAC). The UAE is considered to have made a serious commitment at a high political level to resolve the outstanding issues in relation to the OECD Criteria 1.1 and 1.3. Nevertheless, the UAE has been included on the list of uncooperative jurisdictions for tax purposes due to the fact that it did not commit to apply the BEPS minimum standards by not committing to join the Inclusive Framework on BEPS within the deadline set (Criterion 3). On 7 December 2017, the UAE released an official statement5 expressing its surprise and disappointment over its inclusion in the listing. However, the UAE remains fully committed to international tax standards and has committed to a reform process which will be finalized by October 2018 and should result in the removal of the UAE from the listing. In addition, on the specific concern raised by the EU, the UAE commits to finalizing implementation of the BEPS Minimum Standards by October 2018 (including ratification by March 2019) to give enough time for ratification by the seven Emirates. As part of the defensive measures in non-tax area, in the context of the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM), if applicable, funds from these instruments cannot be routed through the UAE. However, it will still be possible to make a direct investment from the EU into the listed jurisdictions (i.e., funding for projects on the ground) to preserve development and sustainability objectives. (http://europa.eu/rapid/press-release_MEMO-17-5122_en.htm) Considering the administrative defensive measures in the tax area, businesses involved with the listed jurisdictions should be aware of reinforced monitoring of certain transactions and increased audit risks going forward. Implementation of the legislative defensive measures in the tax area is left to the competence of the EU Member States and currently no timeline was provided. However, according to the Commission, a more binding and definite approach to the defensive measures will be developed in 2018. As such, these defensive measures are not expected to have an immediate effect for the UAE for the time being (until further official announcements of the EU Member States as well as further negotiations between the UAE and the EU). If the defensive measures are implemented prior to the UAE being taken off the listing, there are several implications that may arise. For UAE companies with investments in the EU, the potential introduction of additional or more onerous withholding tax measures should be considered. However, it is expected that such measures would not override the existing double tax treaties that are in place between the UAE and 25 EU Member States.6 In addition, the non-deductibility of cost can also be an issue. For companies headquartered in the EU with UAE-based subsidiaries or branches, the possible effect relates to the application of CFC rules that could result in the inclusion of non-distributed income of a UAE subsidiary or a Permanent Establishment in the tax base of its EU parent company. Another possible impact is the potential limitation on the participation exemption on dividends and, or capital gains derived from the UAE subsidiary. It is expected, however, that in case of exclusion from CFC rules, the participation exemption would be granted to entities with genuine operations and substantive economic activity supported by staff, equipment, assets and premises. Lastly, all businesses would need to be prepared to increased disclosure, documentation and reporting obligations that would be required with respect to cross-border arrangements involving listed jurisdictions. With respect to UAE companies with operations in the United Kingdom (UK), even though the UK will leave the EU on 29 March 2019, businesses should be aware of the new corporate criminal offense of failing to prevent the facilitation of tax evasion that came into effect in the UK on 30 September 2017. Based on the above, it appears that anti-BEPS measures have had an effect in the defensive measures developed by the EU, and are therefore not an unexpected consequence. According to the OECD, the anti-BEPS measures are aimed to ensure that "profits are taxed where economic activities generating the profits are performed and where value is created." Prior to the 2015 release of the BEPS Final Reports on the 15 Actions, countries were already taking action in anticipation of the OECD recommendations, and there has been significant BEPS-driven legislative and tax administration activity around the world since the OECD initially issued its Action Plan on BEPS in July 2013. In particular, the administrative measures mentioned above can be considered as an outcome of the BEPS project where transactions and structures are already being strictly scrutinized to avoid BEPS. Insofar as the legislative measures are concerned, most of these have also been covered by the BEPS Actions including: limitation of deductibility of interest expense (Action 4), CFC rules (Action 3), withholding tax measures (Action 6 on treaty abuse), limitation of the participation exemption (Action 2 on hybrid mismatches), and mandatory disclosure of aggressive tax planning arrangements (Action 12), among others. The reversal of the burden of proof as well as imposition of special documentation requirements could be considered as more procedural in nature. The inclusion of a switch-over clause in the EU ATAD was highly debated and was subsequently excluded from the final version of the ATAD. Based on the reaction of the UAE, the UAE is expected to quickly proceed with addressing the concerns raised by the Council to be removed from the listing as soon as possible. Apart from the potential application of the above-mentioned defensive measures, the listing of the UAE has primarily impacted its reputation. Its inclusion in the list gives the impression that the UAE is a tax haven, which the UAE has continuously rejected through its extensive effort in expanding its treaty network and participation in international tax initiatives and developments. Businesses should monitor official statements made by the EU Member States to determine the potential implications on operating structures involving EU jurisdictions. 1 The Council is a body within which government ministers from each EU Member State meet to discuss, amend and adopt laws, and coordinate policies. The Council exists in ten different configurations, with the Economic and Financial Affairs Council configuration (ECOFIN) being the configuration that most commonly looks at taxation issues. The ministers have the authority to commit their governments to the actions agreed on in the meetings. Together with the European Parliament, the Council is the main decision-making body of the EU. 2 See EY Tax Alert, Council of the European Union publishes list of uncooperative jurisdictions for tax purposes, dated 6 December 2017. 3 Albania, Andorra, Armenia, Aruba, Belize, Bermuda, Bosnia and Herzegovina, Botswana, Cabo Verde, Cayman Islands, Cook Islands, Curacao, Faroe Islands, Fiji, Former Yugoslav Republic of Macedonia, Greenland, Guernsey, Hong Kong SAR, Isle of Man, Jamaica, Jersey, Jordan, Labuan Island, Liechtenstein, Malaysia, Maldives, Mauritius, Montenegro, Morocco, Nauru, New Caledonia, Niue, Oman, Peru, Qatar, Saint Vincent and the Grenadines, San Marino, Serbia, Seychelles, Swaziland, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Vanuatu and Vietnam. 4 The Global Forum on Transparency and Exchange of information for Tax Purposes adopted a special fast-track procedure to enable it to evaluate, on a provisions basis, progress made by a jurisdiction in implementing the 2010 EOIR Standard. 5 http://www.cpifinancial.net/news/category/economics/post/43766/uae-government-official-statement-on-eu-list-of-non-cooperative-tax-jurisdictions; https://www.khaleejtimes.com/business/economy/uae-disappointed-at-inclusion-in-tax-haven-blacklist-confident-of-swift-removal-in-2018. 6 The tax treaty with Croatia is pending while the UAE currently has no tax treaty with Denmark and Sweden. Document ID: 2017-5033 |
