In a press statement, the EU said, “These jurisdictions did not implement the tax reforms to which they had committed by the agreed deadline.”

The Cayman Islands had committed to address by the end of last year EU concerns over economic substance in the area of collective investment funds.

At the last review of the list in March 2019, the European body concluded that Cayman, as well as the Bahamas and the British Virgin Islands, needed further technical guidance from the EU Code of Conduct Group on Business Taxation and had until the end of 2019 to adapt local legislation.

The technical guidance was issued in May last year and stated that Cayman funds legislation would be assessed in four areas: the authorisation and registration of funds; supervision and enforcement; valuation, accounting and auditing of funds; and depositary rules.

Cayman’s Legislative Assembly amended the Mutual Funds Law and passed a new Private Funds Law accordingly, implementing new rules for the registration, administration and supervision of funds at the end of January 2020.

However, it appears this was too late. The council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes simply stated the Cayman Islands “does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles”.

The EU said its Code of Conduct Group would continue to monitor the enactment of reforms and remove jurisdictions from the list once the commitments are met. The tax list is updated twice a year with the next review scheduled for October.

Listed countries face reputational damage, greater scrutiny in their financial transactions and the loss of EU funding. Transactions with listed countries will be subject to stricter monitoring and taxpayers who benefit from listed regimes or use structures or arrangements involving these jurisdictions are more likely to be audited.

In November 2019, the council invited member states to use the EU list to apply controlled foreign company (CFC) rules, withholding tax measures, the non-deductibility of costs, or to limit the participation exemption on profit distribution.

The council suggests that member states should use one or all these legislative defensive measures regarding listed jurisdictions from the beginning of next year.

Premier Alden McLaughlin said government has already contacted EU officials to begin the process of being removed from the EU list of non-cooperative jurisdictions as soon as possible.

McLaughlin said the EU’s decision was “deeply disappointing”, noting that over the past two years, Cayman had cooperated with the EU to deliver on its commitments to enhance tax good governance.

Since 2018, Cayman has adopted more than 15 legislative changes in line with EU criteria.
McLaughlin said the EU was notified that Cayman would pass its funds-related legislation by 31 Jan. “However, it appears that the listing stems from Cayman’s legislation not being in force by 4 February, which was the date of the EU’s Code of Conduct Group (CoCG) meeting to advise the EU Finance Ministers, prior to the Finance Ministers’ decision regarding the listing today.”

The Private Funds and the Mutual Funds (Amendment) laws came into force on 7 Feb.

He added, “While Cayman consulted with a number of stakeholders on our legislation, including our financial services industry, the principal components of our new and revised laws were shaped by the EU’s criteria.”

The EU council decision echoes a similar listing of Bermuda last year, after that jurisdiction failed to implement legislation in time for the tax-list review. Bermuda was taken off the list two months later.

McLaughlin said the Cayman Islands will continue to constructively engage and remains fully committed to cooperating with the EU to see Cayman removed from the list.

The EU’s screening and monitoring process continues to be criticised both for being arbitrary and for not including countries that are typically considered tax havens, including EU member states.

Tax transparency campaigners on Tuesday lauded the blacklisting of the Cayman Islands, but said the list was falling short because the EU removed other offshore centres from the screening process.

Chiara Putaturo, Oxfam’s EU Policy Advisor on Tax and Inequalities, said in a press statement, “We are glad to see that EU governments added Panama, the Cayman Islands and the Seychelles to the tax haven blacklist, as they should be. However, the list still proves inadequate: EU governments have let the Bahamas, Bermuda and the British Virgin Islands – some of the world’s most harmful tax havens – off the hook.”

She said the jurisdictions were running an unfair tax competition that led to a race to the bottom in corporate tax by offering zero-, or very low-, tax rates, which in turn meant companies could avoid paying their fair share.

“What’s more, the credibility of the blacklisting process continues to be undermined by the EU’s own tax havens. They are exempted from the screening despite failing the EU criteria and offering sweetheart tax deals to companies,” Putaturo added.

“The EU needs to strengthen its blacklisting criteria, put its own house in order and push for an ambitious and effective minimum tax rate at global level.”

Such a worldwide minimum level of corporate tax is currently being negotiated by the OECD and the Inclusive Framework on BEPS, a group of 137 countries and jurisdictions.