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Global Perspectives
A Tax Odyssey - The EU Code of Conduct Group (Business Taxation)
The European Union has, for over two decades, maintained oversight on the business taxation practices of its member countries. This scrutiny extends even to third-party countries perceived to harbour harmful tax systems that might distort the EU's internal market. The longevity of this oversight showcases its significance in the Union's economic framework.
However, the Code Group's extra-territorial purview and apparent leniency towards Member States and major global players like the United States and China, have spurred debates. Some stakeholders have branded the approach as both politicised and protectionist. Despite such critiques, the Code Group remains undeterred in its mission. Twice a year, they release insights on countries under Annex I (commonly known as the "Blacklist") and Annex II (often referred to as the "Greylist").
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Established in 1998 by the EU's Economic and Financial Affairs Council (ECOFIN), the Code of Conduct Group on Business Taxation was primarily set up to evaluate tax measures. They sought to identify those that might harm the internal market by tilting the scales of competition through preferential tax systems. Their role has been pivotal in examining tax regimes within the EU for possible adverse effects on competition. Scrutiny encourages a transparent and equitable tax competition landscape within the EU and nudges countries to rectify or eliminate detrimental tax measures.
One of the EU's most notable strategies to foster global tax propriety is maintaining a list of non-cooperative tax jurisdictions. This list categorises countries or territories based on their adherence to established tax good-governance standards. While Annex I houses non-cooperative jurisdictions showing little or no commitment to compliance, Annex II accommodates those displaying a commitment but still falling short of full compliance.
To further illustrate, the EU list of non-cooperative jurisdictions ratified by the Council on 14 February 2023 includes American Samoa, Panama, Russia, and the US Virgin Islands, among others. These jurisdictions are under the vigilant eye of the EU, with each country's status subject to change based on their tax governance evolution.
But why does this listing process matter so profoundly to third countries? Simply put, being on the list invites a slew of 'defensive' measures from the EU. These are tactical moves designed to challenge the offending jurisdictions. Such actions can range from non-deductibility of costs, penalty withholding taxes and the imposition of Controlled Foreign Corporation (CFC) rules to enhanced monitoring and audits. The overarching goal is to protect the EU's tax base and advance the principles of sound tax governance globally.
The decision to implement these defensive measures remains at the discretion of individual Member States. However, the EU ardently champions a harmonised approach, urging all members to adopt these measures robustly against the listed jurisdictions. The underlying hope is that introducing these counter measures will push non-cooperative jurisdictions to elevate their tax governance standards and strive for de-listing.
Over the years, the Code Group's operations have been subject to controversy. Detractors often point out perceived flaws, such as its limited scope, which they feel narrowly focuses on specific tax measures at the expense of broader systemic issues. Concerns have also arisen regarding the Group's non-binding recommendations, which some believe dilute its impact. Issues of transparency and alleged selective targeting further cloud its reputation.
On the flip side, proponents of the Code Group commend its consistent promotion of fair tax competition. They appreciate its global influence in championing tax governance principles and laud its flexibility in approach, which allows for tailoring solutions per Member State. They also value the Group's consensus-driven decision-making process, which, albeit slower, ensures broader acceptance among Member States.
Peering into the future, the Code Group has ambitious plans. On 3 October 2023, they unveiled a multi-annual work package until 2028. The programme includes:
- Extensions of economic substance requirements.
- Broadening the geographical scope of countries under review.
- Strengthening the EU listing process, including reference to the Pillar Two rules on Global Business Taxation, once fully implemented, and in coordination with the OECD.
In wrapping up, the EU Code of Conduct Group on Business Taxation, while universally lauded for its efforts in fostering fair tax competition and transparency, has its critics. Balancing political, economic, and social imperatives is a testament to the challenges and rewards of tax regulation and oversight. As the Group gears up for its latest presentation to the EU Council on 17 October 2023, countries under Annex I and II will be watching keenly.
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Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
