The External Strategy sets out a three-step process for developing a common EU list:

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1 ROOM DOCUMENT # 1 Code of Conduct Group (business taxation) - Subgroup on third countries 15 July 2016 ORIGIN: Commission Services ETERNAL STRATEGY COMMON EU APPROACH TO LISTING THIRD COUNTRY JURISDICTIONS: THE PRE-ASSESSMENT 1. Context The Anti-Tax Avoidance Package of January 2016 included an External Strategy for Effective Taxation 1 to promote tax good governance internationally. In the External Strategy, the Commission proposed a new EU listing process to identify and act against third country jurisdictions that fail to comply with tax good governance standards. The External Strategy sets out a three-step process for developing a common EU list: 1. Pre-assessment of all third country jurisdictions to determine their risk of facilitating tax avoidance, on the basis of a scoreboard of indicators. 2. Member States should agree on a short-list of priority third country jurisdictions, and launch the screening process and dialogue with these jurisdictions. The third country jurisdictions should be screened against clear and internationally recognised tax good governance criteria. Other factors (including the level of development of the third country) will also be taken into account. 3. Following the screening/dialogue process, the Commission will recommend which third country jurisdictions should be blacklisted, and explain why. Member States should endorse the final list in ECOFIN. At the ECOFIN meeting of 25 May 2016 EU Finance Ministers endorsed the EU listing process and called on the Commission and the Code of Conduct Group to begin the process for developing the list. The Council asked that the EU list be ready in The Council requested that the Code of Conduct Group should start work on the EU list by September With the current document and its annexes the Commission is presenting the scoreboard preassessment data and method to the Code subgroup on third country jurisdictions. On this basis, the Code Group will be able to identify in September a list of third country jurisdictions that merit further screening. The methods used and the reasoning behind the choices made in the pre-assessment were discussed at the FISCALIS workshop that took place in Brussels on 28 June COM (2016) 24, See Council Conclusions in 8792/1/16 FISC 73. 1

2 It is important to stress that the scoreboard prepared by Commission services will provide only a preassessment. The list of jurisdictions based on the scoreboard will be the basis for an agreement between Member States on a short-list of third country jurisdictions. The scoreboard will not constitute an assessment of the jurisdictions concerned but merely establishes a list based on selected indicators to facilitate the next steps of the process. 2. The Scoreboard As corporate tax avoidance is a complex and multi-faceted phenomenon it is necessary to rely on a range of indicators that are able to capture various aspects of tax avoidance. In this respect, a wide range of indicators has been identified as relevant for producing a useful scoreboard. The indicators have been grouped into three dimensions: (1) economic ties with the EU, (2) financial activity and (3) institutional and legal factors, as presented to the Code of Conduct group in June. 3 It is important to stress that each potential single indicator cannot in itself suffice to draw conclusions on whether a country should be prioritised for screening. Moreover, a clear distinction has to be made between the indicators used in the scoreboard and the criteria that will be used for assessing and screening relevant third country jurisdictions Scope of the scoreboard The scoreboard covers third country jurisdictions as well as dependent or associated territories. It does not however cover territories that are considered to be part of the Member State such as those covered by Article 355(1) TFEU. The Commission suggests that third country jurisdictions with which the EU has already engaged in a dialogue on tax good governance, or with whom a transparency agreement has been signed, should not be included in the pre-assessment list. Currently, this covers Switzerland, Liechtenstein, Andorra, Monaco and San Marino. All five of these jurisdictions have signed transparency and exchange of information agreements with the EU over the past 2 years. In addition, there has been a dialogue with both Switzerland and Liechtenstein within the framework of the Code of Conduct. For Switzerland, Member States agreed on a joint statement in 2014, following the Code of Conduct dialogue, and this is now being monitored. For Liechtenstein, the Code of Conduct dialogue is ongoing. Including these five countries in the pre-assessment list could jeopardise the results of the good cooperation on tax good governance issues so far. However, if they fail to respect the commitments made through the transparency agreements and Code of Conduct dialogues, these jurisdictions could be included at a later stage. The scoreboard will also not consider least developed countries (LDC). Currently, 48 countries fall under this definition. They are listed in Annex I. To sum up, of the 215 third country jurisdictions that were potentially included, and after excluding the 48 countries listed in Annex I and the five countries that have signed transparency and exchange 3 See in particular for a detailed description the room document #8 and its annex meeting 02/06/

3 of information agreements with the EU, 162 third country jurisdictions have been assessed on the basis of the multidimensional scoreboard Economic data and ranking method The importance of (1) economic ties with the EU and the evaluation of the (2) financial activities are measured by economic indicators. The FISCALIS workshop discussed these economic indicators in more detail, presented their distribution and gave an explanation of the methodology to summarize them for the pre-selection. Economic ties with the EU The listing of third countries should focus on those jurisdictions with which the EU effectively engages economically. Therefore, the scoreboard relies on indicators such as trade data, bilateral FDI flows and stocks between the EU and third country jurisdictions, and the number of affiliates abroad controlled by a resident of the EU. Taken together these indicators are able to provide a nuanced picture of the importance of the economic ties between a third country jurisdiction and the EU. It can be expected that neighbouring and associated countries, as well as OECD members will likely make it to the top of the list when economic ties are considered, but other jurisdictions of potential interest would also rank high. Financial activity Third countries and jurisdictions that are used in tax avoidance structures are generally characterized by a high degree of specialisation in the export of financial services (Zoromé, 2007). The scoreboard aims at capturing any indication of potential tax avoidance activities and in particular the possible disconnection between financial and real economic activities through the analysis of financial activity indicators, including total FDI, and specific financial income flows stemming from FDI (i.e. interest, dividends and royalties). This is complemented by statistics about foreign affiliates (number, turnover and employees) and their comparisons to other economic data. A comparable pattern to the one observed for economic ties is observed for financial activity indicators. The distribution across countries is even more extreme. This very unequal distribution across countries is certainly symptomatic of a marked specialisation in exporting financial services and can therefore be exploited for the purpose of preselecting third country jurisdictions before establishing the common EU list. Data treatment and ranking The scoreboard will establish a first list of third country jurisdictions based on a pre-assessment. The following steps are to be followed: (i) In the first step, the economic indicators (EU ties and financial activity) are (a) scaled (by GDP or population), (b) The values of each indicator are averaged over time to account for structural characteristics rather than detailing outliers. 3

4 (c) These averages across time are ranked, with low values indicating a high rank and a high potential for pre-selection. This will give a scoreboard with a unique ranking for each indicator. (ii) The second step is to summarise all indicators of each dimension separately: importance of EU ties and financial activity. The highest ranked indicator in each dimension is to be used as final ranking for that dimension. This reduces the risk of omitting relevant jurisdictions because even if only one indicator is "flashing" this will be sufficient for the jurisdiction to rank high overall (e.g. very high royalties paid which would have led the third country to rank among the top ten jurisdictions for that indicator cannot be 'offset' by values closer to the centre of the distribution for the other indicators). (iii) The third step reviews missing data. Data may not be available for a variety of reasons such as the irrelevance of a given indicator for a given country, weak administrative capacity of small or least developed countries to deliver some data, but also opacity in the jurisdiction that may be an indication of some possible tax avoidance activities. Countries which display missing values will be reviewed separately. Third countries jurisdictions with missing data overall and which are not uninhabited or very poor (LDC) will be marked with a "zero" ranking that allow the jurisdiction not to be inadvertently overlooked in the ranking-based pre-selection. (iv) A last step is to summarize the two economic dimensions. One possibility is to apply the same rule as the one used for summarising the different indicators along one dimension (see (ii) above) - that is to preselect all the countries which are high ranked in any of the two dimensions, whatever the value in the other dimension. Another possibility is to only list jurisdictions that rank high enough on both dimensions. A variant of the latter is the possibility to give priority to the financial activity dimension, as suggested at the FISCALIS workshop and supported by economic literature. In this case, the pre-selection threshold for the two dimensions would be different and stricter for the financial activity indicator Institutional and legal factors As has been discussed at the meeting of the Code Group of 2 June 2016 there are institutional and legal factors that facilitate or are necessary for engaging in tax avoidance. Transparency and exchange of information (both on request and automatic) are essential to effectively fight tax abuse. These elements are at the core of the good governance standards in tax matters. A lack of transparency and exchange of information may facilitate tax avoidance, and is therefore reflected in the scoreboard. A transparency indicator will reflect the status (implementation/commitment) of jurisdictions with regard to the exchange of information on request (EOIR) as well as automatic exchange of information (AEOI). For that purpose, the work of the OECD / Global Forum on EOIR and AEOI will be taken into account. Some features of a tax system are particularly relevant to identify whether a country might be used for tax avoidance purposes. Some jurisdictions operate harmful tax measures to attract foreign businesses i.e. measures which provide for a significantly lower level of taxation (including zero taxation) than those levels which generally apply in the third country in question. Within the EU those measures are covered by the Code of Conduct on Business Taxation which also sets out the criteria to assess whether 4

5 potentially harmful measures have to be considered as effectively harmful. A specific indicator will reflect the existence of potentially harmful measures, as identified by the Commission on the basis of the available information, in particular IBFD and official national web sites. In addition a very low rate of business taxes has been identified as the main and obvious characteristic, which is expected to increase foreign direct investments and attract tax bases from other jurisdictions. Another indicator will therefore reflect the existence of a tax system with no corporate income tax or a zero corporate tax rate. A last indicator will indicate whether the jurisdiction has an issue in relation to the Financial Action Task Force on Money Laundering (FATF). These institutional and legal indicators will be used alongside the results of the indicators on economic ties and financial activities, to help classify jurisdictions according to risk and prioritise those for screening. They will be displayed in the scoreboard to be presented to the Member States (see annex II for an illustration). It is important to point out that they do not pre-empt the in-depth analysis of tax systems planned for the screening process of those jurisdictions on the short-list agreed by Member States. Rather, these indicators merely attempt to provide as complete information as possible as a basis for drawing up a list. 3. From the scoreboard to a short list of third country jurisdictions The scoreboard indicators have been grouped into three dimensions described in section 2.2 and 2.3. While the first two (economic) dimensions can be summarised, this is not possible to the same extent for the institutional and legal indicators. The proposed approach is therefore made of two steps: the first will create a list of third country jurisdictions based on the indicators relevant for the economic analysis, while during the latter, the other indicators shall allow Member States to make a well-informed decision on the short-list of jurisdictions which are to be screened and with whom to start a dialogue The table in Annex II illustrate the outcome of this process : the list of jurisdictions (in alphabetical order) which have been found most relevant on the basis of the first two dimensions will be accompanied by indications of the status of the four indicators of transparency, possible harmful tax practices, no or zero-rate CIT, and issues with FATF. 4. Conclusion The presentation of the structure of the first phase of the process for developing a common EU list is in conformity with what has been agreed by the ECOFIN Council. Once Member States have agreed on the methodology and the structure of the pre-assessment of third country jurisdictions on the basis of a scoreboard of indicators, the Code of Conduct Group is to agree on a short list using the preassessment as a basis. 5

6 Do Member States agree with the methodology of the scoreboard performed by the Commission services? In particular do they agree on a two-step process, with the first pre-selection based on economically relevant indicators, followed by an assessment on the basis of the institutional and legal factors leading towards a shorter list? Annex II gives an illustration of the expected outcome of the scoreboard. Do Member States have any comments on the presentation and content of the table? Do Member States agree that the five EU third country jurisdictions with which a dialogue in the framework of the Code of Conduct has been completed or is under way or which have signed transparency and exchange of information agreements with the EU should not be included in the initial short-list? Do Member States agree to exclude the 48 least developed countries listed in Annex I from the scope of the scoreboard? 6

7 Annex I: List of Least Developed Countries (excluded from the scope of the scoreboard). Source: 1. Afghanistan 2. Angola 3. Bangladesh 4. Benin 5. Bhutan 6. Burkina Faso 7. Burundi 8. Cambodia 9. Central African Republic 10. Chad 11. Comoros 12. Dem. Rep. of the Congo 13. Djibouti 14. Equatorial Guinea 15. Eritrea 16. Ethiopia 17. Gambia 18. Guinea 19. Guinea-Bissau 20. Haiti 21. Kiribati 22. Lao People's Dem. Rep. 23. Lesotho 24. Liberia 25. Madagascar 26. Malawi 27. Mali 28. Mauritania 29. Mozambique 30. Myanmar 31. Nepal 32. Niger 33. Rwanda 34. Sao Tome and Principe 35. Senegal 36. Sierra Leone 37. Solomon Islands 38. Somalia 39. South Sudan 40. Sudan 41. Tanzania 42. Timor-Leste 43. Togo 44. Tuvalu 45. Uganda 46. Vanuatu (*) 7

8 47. Yemen 48. Zambia (*): Vanuatu is the only country in the list of the 48 Least Developed Countries that also appears on the "Off-shore Financial Centers" list (Zoromé, 2007) 8

9 Annex II: Illustrative scoreboard outcome Third Country Jurisdictions Preselection based on EU ties and financial dimensions A Importanc e of EU ties synthetic indicator* Financial Activity synthetic indicator* Transparenc y Potentially Harmful Tax Practices No CIT or Zero CIT rate FATF Z (*) 0 value means missing data; low values indicate higher ranking and either closer ties or higher financial activity 9