Tuesday, December 12, 2017

The List as Law: CARICOM, Cuba and the EU's Tax Haven List

Many have been arguing for some time that the nature and character of regulation has been changing dramatically over the last couple of decades.  While we all pay homage to the conventional forms of state based rule--the command imperatives of law and administrative regulation--neither is suitable for the more nuanced requirements of management based regulatory systems necessary to control the structures and integrity of global systems of finance and production. 

While many are aware of the use of these methods of management in the private sector (with some public sector value)--in the form of rating and ranking systems.  It is important to note the power of the list as an effective managerial device--especially where the object is to manage the behavior of states. (e.g., here, here, and here). These lists are made more legitimate by operation of law.  That is, traditional law or regulation  empowers the regulatory apparatus of a government to exercise their discretion (bounded only by the constraints set forth in stature) to produce and disseminate a list with legal effect.  

This post considers the effectiveness of "the list"--the use of watchlists and blacklists mandated by law or developed through the application of standards-- as a regulatory measure and as a technique of extraterritorial governance, focusing on the use of lists of national tax havens by the EU (The EU list of non-cooperative jurisdictions for tax purposes (15429/17; FISC 345; ECOFIN 1088)). It can raise a difficult issue, especially in the context of human rights in economic activity--multinational enterprises ought to have an obligation of fair tax apportionment along its production chain (see, e.g., here), though this issue can be complex.  Tax watch lists may also help combat systemic corruption built into the legal framework of tax haven states (or perhaps just the corruption that follows implementation in such states with weak governance systems) (see, e.g., here). Yet lists of tax havens produced by developed states and targeting low and middle income states to force them to change their own tax regimes (for whatever worthy reason may may think they have) may also have adverse human rights  effects in "north-south" relations. At least that is what some affected states are now saying. Yet, unless the issue of corruption is also confronted, and confronted as a human rights and rule of law issue, then there is little hope for a realistic dialogue on the underlying issue of tax apportionment for complex economic activity within global production and financing chains.  And thus the power of the "the list" as a regulatory device and as a tool of managing behavior beyond conventional law, and its challenge for fair management of behavior.  

Lists come in all manner of form.  Civil society has used lists with some effect.  Third party certification essentially uses lists (of enterprises that conform to its standards and that subject themselves to inspection and monitoring to that end) to identify conforming companies (e.g., here). But civil society also publishes lists of companies to fail to conform to standards--for example Oxfam produced a list (Naughty or Nice List)of companies that fail to publish the locations of at least 70% of their factories or 80% of the total value of their supply chain (e.g., here). 

But states have begun to use lists as a regulatory measure as well. The Norwegian Sovereign Wealth Fund, quite famously has developed a list of companies excluded from its investment universe as a consequence of the application of the rules imposed by law and rule  designed to have effect on excluded companies (see, e.g., here). States maintain lists of state sponsors of terrorism, OFAC's List of Specially Designated Nationals and Blocked Persons, blacklists of companies that violate overseas investment laws, and now lists of tax havens.
The European Union has published its first blacklist of tax havens, naming 17 territories including Saint Lucia, Barbados and South Korea. A "watchlist" of 47 countries promising to change their tax rules to meet EU standards has also been issued. The "grey list" includes several with UK links, including Hong Kong, Jersey, Bermuda and the Cayman Islands, as well as Switzerland and Turkey.  Both lists have been criticised as omitting the most notorious tax havens. The lists follow the leaking of the Panama Papers and the Paradise Papers, revealing how companies and individuals hid their wealth from tax authorities around the world in offshore accounts. (First tax havens blacklist published by EU, BBC News (5 Dec 2017))
Inclusion on the list has legal effect but the construction of the list (and the inclusion of states) remain an exercise in administrative discretion and the methodologies chosen to make inclusion determinations. "Oxfam lamented that some notorious tax havens -- the Cayman Islands, Bermuda and Jersey -- avoided the blacklist. Some did so by promising to clean up their act. "Although we recognize this is a step in the right direction, if EU leaders let too many tax havens off the hook we'll all lose out," said Oli Pearce of Oxfam." (Alana Petroff, EU names and shames 17 tax havens, CNN MOney (5 Dec 2017)). And, indeed, civil society organizations haver applied their own standards to establish their own list ((First tax havens blacklist published by EU ("The UK-based charity Oxfam last week published its own list of 35 countries that it said should be blacklisted"))

While the use of lists for regulatory effect--to change behaviors of entities that wish to remain off a list--is potent, its effect in recasting international relations may be more so.  This is particularly true of states names to the EU's tax haven watchlist.  Indeed, the EU did little to hide its objective--to put pressure on sovereign states to change their laws (that is to induce the representatives of the people of those states to force their representatives to amend domestic law at the behest of a foreign power) to conform to the expectation written into the domestic laws of the foreign power. Reports noted that "Dozens more countries avoided censure by pledging to improve their tax rules, transparency and information sharing. "(Alana Petroff, EU names and shames 17 tax havens).  Others noted that "The EU is encouraging member states to take what it calls "defensive actions" against those countries that do not reform their tax systems." (First tax havens blacklist published by EU).

Cuba and CARICOM, the Caribbean Community have felt the effects of the turn to "the list" as a method of transnational law making (or extraterritorial legal regimes).  In its communique on the closing of the 6th CARICOM -Cuba Summit (8 Dec 2017) the parties:
Express deep concern about the inclusion of CARICOM Member States in the lists of non-cooperative tax jurisdictions generated by many partner states in the hemisphere and beyond, including in the EU list of non-cooperative jurisdictions for tax purposes published on December 5, 2017 by the Council of the European Union, and call for a change to this approach which serves to negatively impact the economies of small vulnerable states that have implemented recognized international standards and have demonstrated a commitment to engage in cooperation and dialogue to find solutions that are mutually beneficial. (DECLARATION OF ST. MARY’S ON THE OCCASION OF THE SIXTH CARICOM-CUBA SUMMIT.  ST. MARY’S, ANTIGUA AND BARBUDA, 8 DECEMBER 2017)
And, indeed, that is certainly true (and for a criticism of the blacklist policy see here).  The effect of the list is to pressure states that may feel its effect.  It avoids the need for negotiation, or treaty, or the ordinary and somewhat cumbersome modalities of conventional law-regulation. It merely lists; but by listing it does more than "name and shame"--it is a means of regulatory governance  that uses transparency not to name but to judge.  And in the judging to produce legal effects on those who then become entangled with the judged.  That is the value of these lists, and the source of their regulatory power--that the act of listing itself produces quite targeted effects with regulatory consequences. The view from the perspective of those listed follows. And yet, unless the issue of corruption is also confronted, and confronted as a human rights and rule of law issue, then there is little hope for a realistic dialogue on the underlying issue of tax apportionment for complex economic activity within global production and financing chains. 
CARICOM-Cuba leaders condemn EU tax haven list
The Gleaner
10 Dec 2017
ST. JOHN’S, Antigua, CMC – Cuba and Caribbean Community (CARICOM) leaders have criticised the European Union over its latest list of global tax havens that has included four Caribbean countries.

Earlier this week EU financial ministers named St Lucia, Grenada, Barbados and Trinidad and Tobago among 17 countries worldwide, which they claimed had done little to improve their status as tax havens.

Caribbean countries have in the past been very critical of being included on these lists insisting that they have done everything as outlined by various European organisations like the Organisation for Economic Cooperation and Development (OECD).

Following the sixth CARICOM-Cuba summit that ended Friday night, the leaders issued a joint statement expressing “deep concern about the inclusion of CARICOM member states in the lists of non-cooperative tax jurisdictions”.

The EU said that the new list was compiled through a three-step process including the pre-selection of 216 countries worldwide using more than 1600 indicators and that all jurisdictions chosen for screening were formally contacted, to explain the process and invite them to engage with the EU.

St Vincent and the Grenadines is listed as a jurisdiction with improved fair taxation while Bermuda and the Cayman Islands are listed as jurisdictions which introduced substance requirement.

The EU said that as a first step, a letter will be sent to all jurisdictions on the new list, explaining the decision and what they can do to be de-listed.

But in their joint statement, the CARICOM and Cuban leaders called for a change in the EU practise of listing countries as tax havens, saying “this approach …serves to negatively impact the economies of small vulnerable states that have implemented recognised international standards and have demonstrated a commitment to engage in cooperation and dialogue to find solutions that are mutually beneficial”.

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