Barbados is being blacklisted by the European Union (EU). As one publication puts it, Barbados failed to implement changes to its tax exchange framework over the required period of 2015 to 2018. The changes were instead implemented by December 2019, too late to avoid a rating of "partially compliant" by the Organisation for the Economic Cooperation and Development (OECD). The EU subsequently added Barbados to its blacklist. There has been many public discussions since these development but what does any of this mean? If you are interested, stick around for a breakdown of the different components of this development.
What is the OECD's role in this process and what is the significance of their rating? The OECD is an intergovernmental organisation with objectives such as facilitating global economic progress and trade. One route through which this is done is via setting standards to manage international tax evasion, of interest to this concept of blacklisting. The OECD counts among its membership the world's leading powers so its decisions will inevitably have implications for non-members too. The renewed focus on tax ecosystems was crystallised in the aftermath of the 2008 financial crisis where tax evasion and tax avoidance were high priorities. Tax evasion is the deliberate underpayment of tax and is illegal while tax avoidance is exploiting legal gaps (much Like the US's 45th has done) to minimise the amount which is payable and is legal. However, the latter is still morally questionable. Lets refer to the recent disclosure that the 45th has paid significantly less taxes than the average working person. This was disturbing news to some because the 45th can shoulder tax responsibility, given the very publicised network of assets and resources. Taxes will always be a sensitive topic because they provide revenue for governments to fund public goods and services and influence how countries/businesses compete. That said, some of the different mechanisms emanating from the revised tax agenda include:
- Domestic tax base erosion and profit sharing (BEPS): this refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. The OECD notes that developing countries are disproportionately subject to such strategies (👀👀👀 refer to the story on the 45th above or consider which businesses were involved in the 2008 financial crisis).
2. Two standards for transparency and the exchange of information for tax purposes:
- Automatic exchange of information (AEOI) - This provides for the automatic exchange of a predefined set of information between tax authorities
- Exchange of information on request (EOIR) - This is a tool to ensure that taxpayers pay that which is required of them
The OECD's global forum will then monitor and review the implementation of the standards, in its members as well as non-members (because these smaller powers still have to interact with members) to assess their effectiveness in satisfying the requirements. A rating is issued at the end of the monitoring and evaluation exercise, issued only for the EOIR thus far. Barbados was granted a "partially compliant" which means that "The EOIR standard is only partly implemented. At least one material deficiency which has had, or is likely to have, a significant effect on EOIR in practice has been identified". In other words, Barbados tax eco-system was not given a clean bill of health because it has not satisfied all the OECD's requirements.
The EU added Barbados to its blacklist, in response to the OECD's ranking according to the publication referenced above. The EU's web-page lists the primary purpose of their blacklisting exercise as "to improve tax good governance globally to ensure that the EU’s international
partners respect the same standards as EU members do". The site also adds that the list is the result of screening and dialogue
with non-EU countries to assess against criteria for good governance. The
criteria include tax transparency, fair taxation, the implementation of BEPS
measures and substance requirements for Zero-tax countries. Countries which
refuse to cooperate with the EU to address the perceived shortcomings or fail
to make sufficient progress by pre-established deadlines are blacklisted. Essentially, another not so good judgement on the health of the Barbadian tax ecosystem.
What does any of these developments mean for Barbados? A few things. International development agencies may deny certain classes of funding; the country may be labelled as one which is a haven for nefarious financial dealings; negotiations in economic diplomacy may be set back. For small countries in the Caribbean with resource challenges, any of these outcomes will dent their ability to access resources outside their national borders, especially in the traditional forums. This would be especially difficult for Barbados which has lost access to concessional development funding because it has “graduated” to a higher level of development. Such outcomes also highlight the power dynamics on the global stage and the "rules" relevant to global interactions, with significant implications for development thrusts. While one can ask questions about the true nature of the tax ecosystem in Barbados, there are other questions which arise: How ethical is it to publish blacklists and damaging ratings during a pandemic? Is the same level of scrutiny applied to the more powerful, especially to those which were responsible for the 2008 financial crisis? If there are competing regulatory environments on tax accountability how do resource-constrained countries prioritise? I dont have the answers to these questions either 😅 but whenever my research reveals more I will update accordingly.
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