Slashed Corporate Rate Could Push U.K. Onto EU Blacklist

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By Ben Stupples

Oct. 25 — The U.K. may end up on the European Union’s blacklist of tax havens if it slashes its corporation tax by half the current rate to 10 percent, according to senior tax industry figures.

There is a “real risk” the EU would blacklist the U.K. if it implements a 10 percent corporation tax, Tove Maria Ryding, a tax justice coordinator at Brussels-based advocacy group European Network on Debt and Development, told Bloomberg BNA in an Oct. 24 telephone interview.

“Blacklists are an extremely political issue, decided behind closed doors, and I think at the moment there is a general feeling that if the U.K. decides to be provocative there will be consequences,” she said about the U.K.’s tax policy.

“The first principle of the EU’s blacklist is that no EU member state can be put on it, and the U.K. will no longer be protected once it leaves” the EU.

Along with seeing the U.K. on the EU’s blacklist, a 10 percent corporation tax may even result in the EU introducing sanctions on the U.K., Richard Murphy, a professor at City University London, told Bloomberg BNA in a Oct. 24 interview.

“There is a fundamental problem with this plan, which is that it could breach the basis on which measures against tax abuse have been measures since the late 1990s,” he said. “If we deliberately create a system that goes against EU code of conduct, I think the EU will say, ‘That’s fine, and we don’t think that’s reasonable,’ and they can impose sanctions like withholding taxes.”

U.K. Chancellor

The suggestion to reduce the U.K.’s corporation tax to 10 percent, originally reported Oct. 23 by the Sunday Times, follows Chancellor of the Exchequer Philip Hammond ruling out a corporation tax rate below 17 percent when he met with EU finance ministers in Slovakia last month.

At the Sept. 10 meeting, Hammond said the government would not continue with plans announced by former Chancellor George Osborne to reduce the U.K.’s corporation tax to 15 percent in a bid to sustain investment in the U.K. after the country voted June 24 to leave the EU.

In response to the U.K.’s latest proposal cut its corporation tax, a European Commission spokesman said it was “far too early” to comment and highlighted the “sovereign right” of EU member states to set their own corporation tax rates so long as they respect the rules of EU treaties.

“We would recall that the U.K. has been one of the strongest supporters of EU and international work at the level of G20/OECD to tackle tax avoidance and tax evasion in recent years,” the spokesman said in an Oct. 24 e-mailed statement. “This commitment was made clear when the U.K. lead the way for a pilot project for the exchange of information on beneficial ownership information at the G-20 in April.”

A spokesman for Her Majesty’s Treasury said the ministry keeps “all taxes under review.”

Free Trade Fears

The suggestion to slash the U.K.’s corporation tax from the current rate of 20 percent comes amid fears the EU will block a free-trade deal with the U.K. or refuse to give the U.K.’s financial services sector access to the European market, by way of key passporting requirements, in its negotiations on the U.K.’s post-EU future.

The move would aim to keep business in the U.K. and attract more firms to the country once it leaves the EU. The British government is expected to trigger the process to leave the 28-member trading bloc by the end of March 2017.

In January 2016, the European Commission launched a three-part process for a common EU list of non-cooperative tax jurisdictions worldwide as part of its plans to curb tax evasion and avoidance, which would target non-EU countries that refuse to comply with global tax standards.

Countries will be ranked on a scoreboard of indicators to determine the level to which they facilitate tax avoidance or evasion, the commission announced Sept. 15.

Any country that fails to meet the required standards will be given a chance to cooperate with the EU on their tax regime. The EU plans to blacklist jurisdictions that refuse to engage in the discussions.

“The EU list will be our tool to deal with third countries that refuse to play fair,” European taxation, economic and finance minister Pierre Moscovici said in the Sept. 15 press release.

Tax Haven Standards

At an Oct. 6 session is Brussels, the U.K., Estonia, Ireland and Malta criticized proposals to use low tax rates among the criteria to determine whether nations are blacklisted by the EU as tax havens.

In an effort to find a consensus on adopting corporate tax rates as part of the criteria for the EU’s blacklist, Slovakia, which holds the rotating EU presidency, proposed a compromise at the session that called for incorporating corporate rates combined with a burden-of-proof test.

A jurisdiction without a corporate tax system or one that applies low-to-zero rates must “be able to demonstrate it does not facilitate offshore structures aimed at attracting profits that do not reflect real economic activity,” according to the proposal seen by Bloomberg BNA.

Blacklist Competition

Other countries and global organizations, such as Brazil and the OECD, have their own blacklists for tax havens.

Last month, Brazil’s federal tax service labeled Ireland a “fiscal paradise” following the European Commission’s Aug. 30 ruling against Apple Inc., meaning that Brazilian firms receiving payments from Ireland will now face a higher Brazilian tax of 25 percent instead of the regular rate of 15 percent.

The EU’s failure to scrutinize member states for its blacklist and the lack of a definitive global list of tax havens to introduce consensus between countries and organizations means that these lists are “increasingly political,” Ryding said.

“It’s a huge problem that the EU is happy to blacklist everyone else, but not its members, so we’ve got one list for the EU and not for everyone else,” she said. “Instead of a global consensus, we’re seeing blacklists coming up all over the place, which is not very constructive.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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