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19 December 2017 Bahrain 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 Bahrain, 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. Based on these criteria, the Council conclusions state that Bahrain: (i) does not cover all European Union (EU) Member States for the purpose of automatic exchange of information and has not signed and ratified the Organisation for Economic Co-operation and Development Multilateral Convention on Mutual Administrative Assistance as amended (OECD MAC); (ii) facilitates offshore structures and arrangements aimed at attracting profits without real economic substance; and (iii) does not apply the BEPS minimum standards and did not commit to addressing these issues by 31 December 2018. For the jurisdictions included in the listing, 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 Bahrain 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 Bahrain 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 United Arab Emirates. As noted, these jurisdictions are considered to have not met the relevant criteria established by the Commission focused on three main categories involving (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 on 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 (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. Bahrain was one of the 17 jurisdictions included in the listing. The Council conclusions state that Bahrain:
As regards Criterion 1, it is important to note that Bahrain is a member of the Global Forum on Transparency and Exchange of Information for tax purposes (Forum) and has already signed both the OECD MAC and the Common Reporting Standard (CRS) MCAA, which would allow Bahrain to collect information from its institutions and automatically exchange that information with other signatories of these multilateral agreements. However, in order to fully satisfy Criterion 1, Bahrain should complete the ratification process for the OECD MAC and ensure that the AEOI arrangement covers all the EU Member States. For the purpose of fully satisfying Criterion 2, it is expected that there will be continuing meaningful dialogue between Bahrain and the Code of Conduct Group to provide the necessary information or explanation required to prove that Bahrain does not facilitate offshore structures and arrangements aimed at attracting profits without real economic substance, under its current rules or practices. In this context, it is important to note that the absence of corporate income tax (CIT) or application of a nominal tax rate does not by itself result in non-compliance with this criterion. Further, Bahraini law contains mandatory financial information filing requirements for entities established by a foreign person/entity and penalties for non-compliance thereto, which facilitates monitoring of activities by the relevant Ministries. Bahrain is expected to be part of the BEPS Inclusive Framework in the future, to comply with Criterion 3, as announced in Bahrain's response to the listing (see the paragraph below). On 7 December 2017, Bahrain released an official statement5 expressing its resolve to be removed from the listing and stating that it cannot be considered a tax haven as it is globally recognized for the strength and transparency of its financial regulatory infrastructure. The key contents of the statement are as follows:
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 Bahrain. 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/pressrelease_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 Bahrain for the time being (until further official announcements of the EU Member States as well as further negotiations between Bahrain and the EU). If the defensive measures are implemented prior to Bahrain being taken off the listing, there are several implications that may arise. For Bahrain 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 Bahrain and EU Member States. In addition, the non-deductibility of cost can also be an issue. For companies headquartered in the EU with Bahrain-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 Bahrain 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 Bahrain 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 Bahrain 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 Bahrain, Bahrain 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 Bahrain may impact its reputation. Its inclusion in the list gives the impression that Bahrain is a tax haven, which Bahrain has continuously rejected through its efforts to participate 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.
Document ID: 2017-5046 |
