The Cayman Islands: white sands and the EU tax blacklist

Monday 2nd March 2020

In February 2020, just weeks after the UK’s departure from the European Union (EU), the EU has added the Cayman Islands – a British overseas territory – to its ‘blacklist’ of non-cooperative jurisdictions for tax purposes. The Cayman Islands joins Oman, Fiji, Vanuatu, Panama, Palau, the Seychelles and the US Virgin Islands (among others) on the blacklist. Interestingly, another British overseas territory – the British Virgin Islands – escaped the EU blacklist on this occasion, despite being added to France’s list of non-cooperative territories in tax matters earlier this year.

Charitable organisation Oxfam – which campaigns for tax reform – welcomed the move, but said that a number of other jurisdictions, including the British Virgin Islands and perhaps even some EU member states, ought to be on the blacklist.

Indeed, the blacklist included 15 countries in 2018 but now includes 12 jurisdictions (at the time of writing).

In March 2019, a report accepted in a vote of the European Parliament effectively likened Cyprus, Ireland, Luxembourg, Malta and the Netherlands to exhibiting the traits of a tax haven. It should be noted, however, that this vote on the aforementioned report is separate from the EU tax blacklist. These jurisdictions thus do not feature on the blacklist.

The EU said the Cayman Islands does not have "appropriate measures" to prevent abuse of aggressive tax planning and had not implemented the "economic substance" reforms sought by the EU.

Nevertheless, Alden McLaughlin – Premier of the Cayman Islands – said that the jurisdiction had indeed approved a number of the measures desired by the EU.

The Cayman Islands is often used as a point of entry for international (particularly Japan- and US-based) investors into the EU. The imposition of any sanctions against blacklisted countries remains a matter for individual EU member states. However, the Cayman Islands’ addition to the blacklist may have several financial impacts.

Of particular note, EU-based companies operating in blacklisted jurisdictions may be burdened with additional compliance measures. A recent briefing from global law firm Clifford Chance notes that this may create further financial reporting obligations for business carried on through/transactions involving Cayman Islands-based entities. Additionally, a separate briefing from international law firm Linklaters indicates that future consequences might involve special disclosure and/or documentation requirements, or even the implementation of withholding taxes, for taxpayers who make use of blacklisted jurisdictions’ taxation regimes.

The EU established the tax blacklist in 2017 and states that the initiative’s objective “is not to name and shame countries, but to encourage positive change through cooperation.”

Perhaps in light of the Cayman Islands’ governmental response outlined by Premier McLaughlin, the blacklist is serving that purpose. Premier McLaughlin also said that his government was already in contact with the EU in regard to having the Cayman Islands removed from the blacklist – a prospect that might, therefore, be reasonably expected in the near future.