prop · H80326 · 2020-10-13 00:00:00 — 28.As of , a total of 22 harmful tax regimes15 remained to be rolled back under criterion 2.1, 20 of which are under monitoring by the COCG16 and 2 by the FHTP17. A detailed overview may be found in the updated compilation of preferential regimes examined by the COCG since its creation in 199818. 29.This process of monitoring commitments continues in line with the procedural guidelines approved by the COCG in February 201819. 30.As a result of this monitoring process, a number of updates of were endorsed by the at its meetings of 10 October, and : 31.Namibia and having joined on 26 and 29 October 2019 the on transparency and exchange of information for tax purposes (hereafter "GF"), the COCG meetings of and agreed that they should be removed from section 1.2 of . 32.Morocco, the Republic of North and having ratified, respectively on 22 , and 30 2019, the Multilateral Convention on Mutual Administrative Assistance ("") as amended, the COCG meeting of agreed that they should be removed from section 1.3 of . These figures don't include the harmful tax regimes of the US (3) and (1), for which no sufficient high-level commitments to be monitored have been received yet. Regimes AG003, BZ006, CK001, CK002, CK004, CK006, CW005, CW006, FJ001, FJ002, FJ003, KN002, LC005, MA006, MV001, NA001, NA002, SC010, SC011, and TT001. Regimes AU001 and JO002. Doc. 9639/3/18 REV 4 (it will be issued in ). Doc. 6213/18 AS/AR/sg 33.Costa adopted on 15 2019 legislative amendments to its Free Zones regime (CR001). These were reviewed by the on Harmful Tax Practices (FHTP) at its 19-21 2019 meeting, which concluded that they are not harmful. The COCG endorsed this conclusion at its meeting of 10 2019. Considering that these legislative amendments also addressed the manufacturing activities falling under the free zones regime (CR002), the COCG concluded at its meeting of that had fully implemented its commitment to remove the harmful features of its Free Zones regime and should therefore be removed from section 2.1 of . 34.Mauritius adopted on 25 2019 its Finance 2019 and on 16 2019 additional regulations that amended the legislation applicable to its Freeport zone (MU012) and Partial Exemption (MU010) regimes. The COCG meeting of examined these amendments and concluded that had met its commitment to address the deficiencies identified in these two regimes: whilst the Freeport zone regime is no longer preferential, adequate substance requirements have been introduced in both regimes and the issue of lack of anti-abuse rules has been addressed. As a result, the COCG concluded that should therefore be removed from section 2.1 of . See outcome of proceedings: doc. 13207/19 See outcomes of proceedings: docs. 13208 and 13209/19 AS/AR/sg 35.Switzerland adopted its tax reform in October 2018 but the entry into force and entry into application of the legislation were postponed pending the outcome of the referendum in 2019 and for this reason was granted an additional year to comply with criterion 2.1 "due to genuine institutional or constitutional issues despite tangible progress in 2018". Following the positive outcome of this referendum, informed the COCG in 2019 that the official results had been published in the Official Gazette. As a result, the relevant legislation entered into force on 16 2019 and will enter into application on 1st January 2020, whilst had already announced that its federal regimes CH004 and CH005 had been closed to new entrants as from 1st January 2019. The COCG meeting of reviewed the situation and concluded that should therefore be removed from section 2.1 of on the basis that the necessary reforms had been adopted and gazetted22. 36.The COCG meeting of also agreed that the deadline of for complying with criterion 2.1 should be changed from to end 2019, which requires an amendment to . The objective was to align the deadline with that of other criteria and jurisdictions and respect national budgetary cycles. 37.Furthermore, , Bosnia and , Eswatini, and having joined the Inclusive Framework on BEPS respectively on 8 , 11 , 26 , 29 October and 9 2019, the Code of agreed on and that they should be removed from section 3.1 of . 38.As a result, , , , the Republic of North , and were removed entirely from . 22See outcomes of proceedings: docs. 13196-13202-13203-13205 and 13206/19 AS/AR/sg Procedural and political aspects of the monitoring process 39.A number of procedural issues had to be resolved by the Group since 2019, notably: •End of the general "two out of three" exception for tax transparency criteria (1.1, 1.2 and 1.3) at the end of 2019: the COCG concluded that all jurisdictions concerned met EU requirements. −Following the mandate received from the COCG, the Chair initiated an extensive dialogue with the US Treasury in respect of EU criterion 1.323 which concluded that the EOIR that has taken place to date between and the is effective and satisfactory by both sides. Furthermore, the Minister of Finance of received on an official letter from the US Treasury that stated that it would continue to exchange tax information with in line with international standards and the respective needs of both sides. As a result, the COCG meeting of concluded that the can be considered to fulfil the conditions to meet criterion 1.3. −Niue adopted the necessary legislation to implement the Common Reporting Standard (CRS) and activated AEOI bilateral exchange relationships with all relevant Member States by 2nd . On this basis, the COCG concluded that is compliant with criterion 1.1. −Other jurisdictions identified by the COCG as possibly affected by the end of the "two out of three" exception for tax transparency criteria (notably and ) had already complied at an earlier stage by activating AEOI bilateral exchange relationships with all EU Member States (except and for the time being, due to their non-reciprocal status for CRS). 23The were already deemed to meet EU criteria 1.1 and 1.2 in . AS/AR/sg •Coordination with FHTP on criterion 2.2: Following the mandate received from the COCG, the Chair also initiated a dialogue with the on a possible alignment of its new standard on no/only nominal tax jurisdictions (approved by the Inclusive Framework end 2018) and EU's criterion 2.2 with a view to establishing a single global standard in this field. Following a meeting with the FHTP Co- Chair and secretariat in 2019, the COCG meeting of 10 2019 concluded that: −In respect of high-risk IP cases, the COCG will maintain the EU standard for high-risk IPs for now, given that the FHTP has agreed to integrate the additional EU elements into the exchange of information documentation; −The COCG will review the situation after the first exchanges by 2.2 jurisdictions, to see if the two parallel standards pose any problems for the jurisdictions concerned; −Collective investment funds (CIVs) will remain an area of divergence between the EU and FHTP standards. •Assessment of compliance: At the COCG meeting of 10 2019, the question arose as to whether a jurisdiction has fulfilled its commitment upon adoption of the required legislation, or only once this has entered into application. The COCG meeting of concluded that: −For 2.1 jurisdictions, final assessment is triggered by adoption and entry into force (publication in the gazette) of the legislation. −Where there is a notable gap between adoption/entry into force and the entry into application, this should be considered in the final assessment, to ensure that there are no risks of continued harmful effects. −For 2.2 jurisdictions, the required entry into application date has been 1/1/2019 for jurisdictions with commitments for 2018. This should be applied retroactively to legislation adopted by these jurisdictions after that date. AS/AR/sg •New GF ratings for criterion 1.2: The COCG agreed on an approach for jurisdictions that receive a new rating of the on transparency and exchange of information (the ) under Round two of its process. At its meetings of 24 October and , the situation of jurisdictions that receive a more negative rating from the than they previously had was discussed. In this respect the COCG agreed that: −Developing countries without a financial centre that are downgraded to 'Partially Compliant' would need to address the identified deficiencies and request a supplementary review to achieve a new rating; −Jurisdictions eligible should commit at a high political level to request a supplementary review from the GF within 18 months of the date of their commitment. If the commitment is assessed as sufficient by COCG, the jurisdictions in question should remain on , pending the outcome of the supplementary review. −The above approach would not apply to jurisdictions which received a 'noncompliant' GF rating. −With respect to other jurisdictions, i.e. developed countries and developing countries with a financial centre, they will be included in when the new negative rating is confirmed by the GF. A jurisdiction could only be delisted from and included in once they have been granted a supplementary review by the GF. They would subsequently remain on pending the outcome of this supplementary review. It was noted in this regard that the granting of such supplementary review is only possible once the jurisdiction in question has taken sufficient steps to improve its overall rating or to address the deficient essential element. AS/AR/sg •Grandfathering under criterion 2.1: following a request sent by to the Chair, the COCG meeting of agreed to extend its grandfathering deadline by one year considering the one-year deadline extension which it had received in 2019 in consideration for its genuine institutional/constitutional issues. •Legislative changes in jurisdictions under criterion 2.2: Certain criterion 2.2 jurisdictions have sought to adjust their economic substance legislation and/or guidance - which had already been cleared by the COCG - in order to align with their main competitors. The COCG recognized that this creates a risk of "backtracking" by these jurisdictions under criterion 2.2. Against this background, the COCG meeting of 24 October 2019 agreed that jurisdictions should be encouraged to notify planned changes (to the legislative framework or related guidance) to the COCG before their adoption: −if a jurisdiction does notify the COCG, it would be granted a maximum of 3 months to address any possible concern raised by the COCG after the adoption of the said changes before a listing recommendation is made to the ; −in the contrary case (no prior notification) and provided that these changes are deemed to be harmful by the Group, the jurisdiction in question would be informed that it is recommended for inclusion in the EU list of non cooperative jurisdictions to the . •Exchange of information with criterion 2.2 jurisdictions: the COCG took note at its meeting of of a means to have a common approach for activating exchange of information with criterion 2.2 jurisdictions. This would entail opting-in to the FHTP Standardised Format and referring to particular EU legislation (tax avoidance directive - ATAD) and international standards (CRS) when indicating the "foreseeable relevance" of the information to be exchanged. AS/AR/sg •National defensive measures: following a request sent by to the Chair, the COCG stressed that issues related to national defensive measures should be followed up in bilateral contacts by the Member States concerned considering that they go beyond the mandate received by the COCG24 from the . •Transparency issues: the COCG meeting of agreed to systematically ask for the jurisdictions' consent to publish their commitment letters when seeking commitments to amend/abolish newly identified harmful measures: such consent had until now only been sought in specific cases. 40.The COCG also discussed the possibility of additional flexibility for developing countries without a financial centre under criterion 1.3, as well as the possibility of aligning on the timelines in respect of assessments and grandfathering, but deferred its recommendation to issues to the beginning of 2020. 41.Furthermore, the COCG Chair received a number of letters from jurisdictions and also held meetings or telephone conferences at political level with a number of them. The Chair also met in particular with several representatives of the in on 23 October 2019. Delegations were kept informed about these interactions, and in some cases response letters signed by the Chair were agreed by the Group. 24Except in relation to the jurisdictions included in the EU list of non-cooperative jurisdictions for tax purposes (see Council conclusions of , doc. 15429/17, paragraph 18) and to (see the 2014 Joint EU/Statement, doc. 6972/18 ADD 43, section 4). AS/AR/sg 3.Identification of new tax measures under criteria 2.1 and 2.2 Identification of new preferential regimes under criterion 2.1 42.The following 24 new preferential regimes were identified by the COCG since the last 6- month progress report under criterion 2.1: •AW014: Exempt companies25 (under FHTP monitoring); •AW015: Investment Promotion regime (under FHTP monitoring); •BW002: foreign source income exemption regime (under COCG monitoring); •CH006: patent box of the Canton of (under FHTP monitoring); •CH007: Notional interest deduction (NID) regime (under COCG monitoring); •CH008: intellectual property (IP) box (under FHTP monitoring); •CR003: foreign source income exemption regime (under COCG monitoring); •CV004: incentives for internationalisation (under COCG monitoring); •HK009: foreign source income exemption regime (under COCG monitoring); •MK001: Technological industrial development zone (under FHTP monitoring); •MU013: IP regime (under FHTP monitoring); •MV002: foreign source income exemption regime (under COCG monitoring); •MY015: foreign source income exemption regime (under COCG monitoring); •NA003: foreign source income exemption regime (under COCG monitoring); •NR001: foreign source income exemption regime (under COCG monitoring); Revision of the AW002 regime AS/AR/sg •PA008: foreign source income exemption regime (under COCG monitoring); •QA002: financial centre - QFC (under FHTP monitoring); •QA003: Free zone areas (under FHTP monitoring); •QA004: foreign source income exemption regime (under COCG monitoring); •SG013: foreign source income exemption regime (under COCG monitoring); •SZ002: foreign source income exemption regime (under COCG monitoring); •TH006: International business centre (IBC) (under FHTP monitoring); •UY008: foreign source income exemption regime (under COCG monitoring); •WS002: foreign source income exemption regime (under COCG monitoring). 43.Furthermore, the COCG noted that it had identified by mistake 3 new regimes in the in . These 3 regimes26 were therefore removed from the COCG compilation set out in doc. doc. 9639/4/18. 26Patent box, Holding company regime, and Strategic industries incentives. AS/AR/sg Assessment of newly identified preferential regimes under criterion 2.1 44.The following assessments were furthermore agreed by the COCG in respect of the new preferential regimes that fall under its monitoring: •Belize's Fiscal Incentives Act (BZ003) is not harmful: see ADD 4; •Belize's General section 14 (BZ004) does not need to be assessed: see ADD 5; •Belize's Free zones Act (BZ005) is not harmful: see ADD 6; •Cabo 's Incentives for Internationalisation (CV004) is not currently harmful: see ADD 7; •Eswatini's Special economic zones (SZ001) is not yet operational; •Mongolia's Remote areas regime27 (MN002) is not harmful: see ADD 8; •Vietnam's Economic zones regime (VN004) is not harmful: see ADD 9; and •Vietnam's Disadvantaged areas regime (VN005) is not harmful: see ADD 10. 45.With regard to the other regimes falling under FHTP monitoring, the COCG endorsed the following assessments : •Cabo 's regime (CV003) is not harmful; •Mauritius' patent box (MU013) is not harmful; •Mongolia's Free trade zone regime (MN001) has been abolished; •Switzerland's patent box of the Canton of (CH006) is not harmful; and •Thailand's International business centre regime (TH006) is not harmful. tax credit regime for companies residing in isolated province () AS/AR/sg Identification of new measures under criterion 2.2 46.Since the 2019 ECOFIN, a number of the jurisdictions covered under criterion 2.2 have informed the COCG about (planned) changes to their regulatory framework. For traceability and transparency purposes, the COCG therefore agreed that it would be useful to attribute a code to each of these new measures, as is done for regimes under criterion 2.1 and publish outcomes of proceedings for each measure once the final legislation/guidance has been cleared by COCG and ECOFIN (as done recently for the ). 47.At the same time, some of these jurisdictions already had preferential regimes identified with codes under criterion 2.1, before that they moved to a criterion 2.2 situation. In these cases, the codes could follow the last one identified under criterion 2.1. 48.The following 8 new measures28 were identified by the COCG since the last 6-month progress report under criterion 2.2: •Bahrain: BH002 (new guidance); •Bermuda: BM003 (legislative amendments + new guidance); •British : VG007 (new guidance); •Cayman : KY003 (legislative amendments); •Guernsey: GG010 (new guidance); •Isle of Man: IM016 (new guidance); •Jersey: JE007 (new guidance); •Turks and : TC003 (legislative amendments); •UAE: AE003 (new guidance). 28The measures under criterion 2.2 already identified in 2017-2018 are not listed here but can be found in the updated COCG compilation. AS/AR/sg 49.In respect of the legislative changes that occurred in the (KY003), these amendments were examined by the COCG meeting of 20 2019 and COCG subgroup meetings of 5 and , which expressed concerns that the introduced features that could be considered as not compliant with EU requirements. Further legislative changes, gazetted on , were examined by the COCG meeting of , at which the Group concluded that the remains compliant with EU criterion 2.2 (except for what concerns collective investment funds30). This conclusion was endorsed by the at its meeting of 10 October 201931. 4.Screening and scoping issues 50.As requested by the Group, the Commission services started the screening of , and against the agreed EU listing criteria in the first semester of 2019. 51.The subgroup on external issues was regularly updated on the progress of this screening process and a final technical report on each of these jurisdictions was submitted to the COCG at the beginning of . However, further discussions will be needed on this issue at the beginning of 2020. The committed to addressing the concerns relating to economic substance in the area of collective investment funds and adapt its legislation by end 2019. See outcome of proceedings: doc. 7222/19 ADD 1. AS/AR/sg Foreign source income exemption regimes 52.The COCG, at its meeting of , consolidated in a new guidance its approach on foreign source income exemption regimes32, which was endorsed by 2019 (doc. 12284/1/19). This guidance is aimed at providing direction for the jurisdictions33 that have already taken a commitment to amend their foreign source income exemptions, due to harmful features identified by the COCG at the beginning of 201934. It acknowledges foreign source income exemption regimes as a legitimate approach to prevent double taxation, but at the same time identifies potentially harmful elements which could be present in such regimes. Such elements can result in double non-taxation. 53.This guidance also served as a basis for the preliminary screening of other jurisdictions with similar regimes. The Commission services presented the result of this screening to the subgroup on external issues on 16 October 2019 and these results were subsequently also discussed at the COCG meeting of 24 October 2019. 54.As a follow-up, the COCG meeting of agreed to recommend the of to start the assessment of the newly identified foreign source income exemption regimes listed above (see paragraph 42). This assessment will initially focus on the nine jurisdictions that are either developed countries or developing countries with a financial centre, in order to assess whether the regimes concerned contain harmful elements. These nine jurisdictions have previously been assessed on specific regimes, but not on these foreign source income exemption rules. 55.Regarding the foreign source income exemption regimes that have been identified in four developing countries without a financial centre35, the COCG agreed to engage in a dialogue on this matter with the jurisdictions concerned and assess these regimes in a second stage. See updated compilation of COCG agreed guidance in doc. 5814/5/18, pages 154-157. , , and have pending commitments regarding such regimes. See doc. 5981/19. BW002, MV002, NA003 and SZ002. AS/AR/sg Exemption of developing countries without a financial centre from criterion 1.1 56.The COCG meeting of 24 October 2019 agreed that developing countries without a financial centre should continue to be exempt from EU criterion 1.1, including those which have decided to implement AEOI on a voluntary basis. 57.The COCG agreed at the same time that, if a developing country without a financial centre is identified as a jurisdiction of relevance by the GF, it should nevertheless be considered for the application of criterion 1.1. The COCG will follow the timeline of the in order for a jurisdiction to implement the standard. Future criterion 1.1 (AEOI ratings) 58.The COCG meeting of 24 October 2019 agreed to wait for the availability of GF ratings on AEOI before starting to apply future criterion 1.1 (as set out in the Council conclusions of ). Future criterion 1.4 (beneficial ownership) 59.The EU listing criteria approved by the in (doc. 14166/16) included the following reference: "1.4 Future criterion: in view of the initiative for future global exchange of beneficial ownership information, the aspect of beneficial ownership will be incorporated at a later stage as a fourth transparency criterion for screening". 60.Discussions on this future criterion took place in the subgroup on third countries meetings of 18 and 25 January 2019 but were subsequently put on hold due to questions related to ongoing discussions on possible changes to the peer review methodology under the new mandate of the GF. AS/AR/sg 61.At its meeting of 24 October 2019, the COCG agreed to resume discussions at subgroup level at the beginning of 2020 on criterion 1.4. 62.These discussions will also consider whether standalone beneficial ownership transparency requirements should be established under criterion 2.2 or whether a comprehensive approach could be found under future criterion 1.4. Follow-up scoping issues under criterion 2.2 63.In respect of mandatory disclosure rules, the COCG meeting of 24 October 2019 agreed to explore the feasibility of aligning with the work in this area. 64.With regard to the treatment of partnerships, the COCG agreed at its meeting of on an activity-based approach as well as on a set of questions to be sent to the relevant jurisdictions, to identify partnerships that would fall under the economic substance requirements of criterion 2.2. See 3 to the present report. 5.Further coordination of defensive measures in the tax area towards noncooperative jurisdictions 65.The COCG continued its work on further co-ordination of defensive measures, as it has been requested by , in its Conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes of 12 2019, "to finalise discussions on further coordinated defensive measures, without prejudice to Member States' obligations under EU and international law"36. This request was also reiterated by the Council in its 14 2019 conclusions37.