The damage caused by “blacklisted” Caribbean countries


At the end of 2017, the European Union (EU) began publishing a list of countries it said had not done enough to tackle international tax evasion and profit shifting. The list of ‘non-cooperative jurisdictions for tax purposes’ was implemented as part of the EU’s attempt to tackle tax evasion following the revelation of widespread evasion schemes used by businesses and high net worth individuals to reduce their tax burden.

The EU’s blacklist mainly includes small economies like Palau and Samoa, although territories better known for their offshore activities, including Panama and the Cayman Islands, are on it. The list is constantly updated as countries comply with EU standards and recommendations based on three criteria: the proximity of their economies to the EU, the size of their financial sector and the quality of their governance.

Alicia Nicholls Says Blacklist Has ‘Significant Impact’ on Caribbean Economies

“There are actually two lists, the Blacklist itself and Annex II, which includes jurisdictions that do not yet comply with all international tax standards but are committed to reform,” said Alicia Nicholls, Barbados-based international trade specialist in Nearshore Americas.

Although many countries within the EU do not meet the criteria on the list, they are excluded from the design review. The list has drawn criticism for giving a laissez-passer to European territories – despite the fact that several EU member states, including Cyprus, Ireland, Luxembourg, Malta and the Netherlands, present indicators economies typical of tax havens – while being arbitrary and excessively punitive against small developing economies.

“The blacklist has a significant impact at all levels. If you produce goods or get involved in fashion or music industries, it will affect you. The list affects the economies of the Caribbean even as tourist destinations, mainly due to additional difficulties for the corresponding bank connections, ”said Deodat Maharaj, executive director of the Caribbean Export Development Agency.

Impacts of the blacklist

Several financial institutions in various Caribbean jurisdictions have lost important correspondent banking relationships, defined as bilateral agreements between banks, due to their blacklisting as non-compliant in tax matters. This trend is compounded by various factors, including the increasing pressure on banking institutions to increase their capital, streamline their business models and reassess their risk exposure. While the Caribbean region relies heavily on international trade, remittances, offshore banking, and tourism, correspondent banking relationships are a central component of their economies due to the constant need to secure fast, cross-border transactions.

Although many countries in the EU itself do not meet the criteria for the list, they are excluded from screening by design.

“We have banks that have completely cut off correspondent banking connections. It is not a great situation. This has major implications for attracting investment, ”said Nicholls.

Beyond the risks to a country’s reputation, the direct consequences of the blacklist include various sanctions imposed by EU member countries, ranging from withholding at source to a higher rate on payments received in blacklisted jurisdictions to limit the ability of these countries to access funds from international development programs and controls on transactions with the EU. The EU is also stepping up the monitoring of transactions and stepping up audits of taxpayers who benefit from listed schemes.

“Many jurisdictions are becoming less attractive to investors due to being blacklisted. And then the transactions take longer to pass; that has an impact on trade and supply chains. Considering the reputational risks arising from inclusion on such a list, it could reduce the attractiveness of a jurisdiction for investors who wish to create or have already established knowledge services businesses in that jurisdiction. This is especially true for companies established in the financial services industry and professional services firms, ”said Nicholls.

Deodat Maharaj says region’s recent economic decline is due to pandemic

Covid-19 relief has been limited

Despite the consequences of being blacklisted, recent data does not suggest a significant long-term effect on foreign direct investment in Caribbean economies. “The recent decline in investment in the region is more related to the economic effects of the Covid-19 pandemic,” Maharaj said.

However, the EU has also considered banning companies with subsidiaries based in blacklisted jurisdictions from being eligible for Covid-19 economic relief. These measures deter EU companies from investing in blacklisted countries.

There are no conclusive studies on the effects on Caribbean exports, but blacklisting could have significant effects on the long-term development plans of Caribbean countries, as many focus on development. and the export of services. “The Caribbean countries, with perhaps a few exemptions, cannot compete in the mass production of commodities. We need to focus on areas such as business outsourcing and knowledge services, as well as leveraging the ingenuity of our people, digitization and technology.

The Caribbean offshore banking sector has been hit hard by the implementation of the EU blacklist. The Cayman Islands, a British overseas territory, were listed between February and October 2020 due to the presence of investment funds that “did not reflect real economic activity”. This decision was based on the assumption that this practice could lead to the creation of investment vehicles to reduce taxes in other jurisdictions and illustrates the danger for the Caribbean economies which depend heavily on offshore banking as a main sector. economic.

“Different governments have pushed back, but we haven’t seen a change in the EU’s approach” – Deodat Maharaj

“The response from Caribbean countries has been mixed. We must respect and preserve financial relations, but our governments are also trying to engage politically with the EU, ”added Nicholls.

Many governments in the Caribbean have tried to maintain a balance. With the support of international organizations such as Oxfam International and the Tax Justice Network (TJN), the Caribbean authorities have questioned the accuracy and morality of this list. A TJN report found that countries on the European Union’s blacklist cause less than 2% of global tax losses, while EU member states generate 36%.

“Different governments have fought back, but we haven’t seen a change in the EU’s approach,” Maharaj said.

Despite some success in terms of policy and transparency, it is so far difficult to measure the overall effect of this list in the fight against international tax evasion. At the same time, the impact on the economies of the Caribbean has not yet been fully explored. For Alicia Nicholls, we “just need empirical evidence to move forward”.

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