Saudi Arabia: Non-Cooperative Tax Jurisdictions: Ongoing Developments In Respect Of The European Union's Strategy On Governance

As you may be aware, yesterday, 5th December, the European Union ("EU") Commission produced a list of 17 countries identified for their perceived failures in regards to good tax governance. Please click here for more information.

Within the region, Bahrain and the UAE have been named as non-cooperative tax jurisdictions.

No other countries within the GCC appear on the list, although Oman and Jordan have made commitments to the EU. Specifically Oman has committed to improve transparency standards in relation to taxation, and Jordan has stated it will improve fair taxation and has committed to apply the Organisation for Economic Co-Operation and Development's ("OECD") Base Erosion and Profit Shifting ("BEPS") measures.

Why has the EU produced a list of countries?

The EU has stated that they have adopted this approach in order to streamline the EU's approach to countries outside the EU in regard to tax practices. The list is produced following the EU Commission's 2016 External Strategy for Effective Taxation, which was a plan to re-examine EU good governance criteria and developing a process for assessing foreign countries. Prior to this list, EU Member States had independently adopted their own approaches to foreign tax regimes, which resulted in a divergent approach.

The EU has proclaimed that the listing process shall provide an incentive for foreign jurisdictions and provides greater clarity for international partners as to the EU's approach to taxation.

What is a non-cooperative tax jurisdiction?

The States that have been listed by the EU as non-cooperative tax jurisdictions have been designated as such following an assessment, that was commenced formally in September 2016, from the EU Commission and the EU's Code of Conduct Group of the following:

• Compliance with international standards on the automatic exchange of information and information exchange on request;
• Ratification of the OECD's multilateral convention to implement tax treaty related measures to prevent BEPS, or in the alternative, bilateral agreements with all 28 EU Member States;
• Compliance of tax regimes with the EU's Code of Conduct or OECD's Forum on Harmful Tax Practices;
• Commitment to the OECD's BEPS standards;

What is the effect of being listed as a non-cooperative tax jurisdiction?

Currently, the EU has stated that the practical effect of the list is that any funds from the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI), and the External Lending Mandate (ELM) cannot be channelled through entities in any of the 17 listed countries, however it would appear that direct funding to the countries will be permitted.

What's next?

Whilst there are no current EU taxation sanctions in place against the listed countries, there are other legislative measures that by the EU that will refer to the list, such as the EU's Country-by-Country reporting proposal, whereby it is intended that there will be stricter reporting requirements for international entities with activities in listed countries.

The EU is encouraging its individual Member States to agree on a coordinated sanctions approach to apply on a domestic level against listed countries.

It is intended that the EU will provide a binding approach to sanctions against the listed States in 2018.

How this may affect you?

As the sole practical effect of this listing at this stage would appear to be limited to those who receive, or relay EU funding, through EFSD, EFSI, or ELM, there does not appear to be cause for alarm at this stage. The measures introduces are the first practical step in the EU's proposal for better governance of global taxation regimes.

Nevertheless, entities and individuals operating in the UAE and Bahrain must be cognisant of the current listing by the EU and the intention of the EU to introduce increased monitoring and auditing measures against those operating in the listed countries.

Furthermore, the EU has stated its intention to introduce greater reporting requirements for those entities with activities in the listed countries. It would appear that the EU intend to enforce automatic reporting of tax schemes routed through EU Member States.

As 2018 approaches, the EU will likely introduce further measures against listed countries such as documentation requirements, anti-abuse provisions, and withholding taxes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.