DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions DESKTOP REVIEW: ANALYSIS OF THE PACIFIC ISLANDS FORUM MEMBERS INCLUDED IN THE EU LIST OF NON-COOPERATIVE JURISDICTIONS May 2024 Ana Rodríguez Calderón and Claudia Vargas Pastor 1 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Table of Contents Executive Summary 8 Context 10 The impact of the EU’s listing criteria on PIF members 12 2.1. The EU listing criteria 12 2.2. Application of the EU listing criteria to PIF members 17 2.2.1. Fiji 17 2.2.2. Palau 22 2.2.3. Samoa 24 2.2.4. Vanuatu 25 Key actions for PIF members to strengthen their international 28 tax framework Potential impact for PIF countries in the EU list 34 Conclusions and recommendations 37 Annex 1 – Relevant information on the EU list of non- 39 cooperative jurisdictions 2 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Acronyms and abbreviations ADB Asian Development Bank AEOI Automatic Exchange of Information AML Anti-Money Laundering APG Asia/Pacific Group on Money Laundering BEPS Base Erosion and Profit Shifting CFT Combatting the Financing of Terrorism CoCG European Union’s Code of Conduct Group FDI Foreign Direct Investment EBRD European Bank for Reconstruction and Development ECOFIN EU Council of Finance Ministers EFSD European Fund for Sustainable Development EFSI European Fund for Strategic Investments EOI Exchange of Information EOIR Exchange of information on request EU European Union EU list European Union’s list of non-cooperative jurisdictions for tax purposes FDI Foreign Direct Investment FHTP OECD’s Forum on Harmful Tax Practices ICA International Companies Act ICT Fiji’s Information Communication Technology Regime IF Inclusive Framework on BEPS IP Intellectual Property ISM Information Security Management 3 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions ITA Income Tax Act Global Forum OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes MI Marshall Islands MNE Multinational Enterprise MTI World Bank’s Macroeconomics, Trade and Investment Global Practice Multilateral Convention Multilateral Convention on Mutual Administrative Assistance in Tax Matters Multilateral Instrument Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting MNE Multinational enterprise OECD Organization for Economic Cooperation and Development PIF Pacific Islands Forum WBG World Bank Group 4 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Tax Glossary Automatic Systematic and periodic transmission of bulk taxpayer information by Exchange of the source country to the residence country without countries having to Information request for it. The Global Forum monitors the automatic exchange of financial account information (known as the Common Reporting Standard). Financial institutions are required to report account information held by non-residents to their tax authorities, who in turn automatically exchange this information with the tax authorities of the account holders’ country of residence. This exchange is underpinned by ensuring that the information is kept confidential and properly safeguarded and requirements on information security management are placed on jurisdictions to ensure this. Bearer shares Type of ownership interest in a company where the person who physically holds the share certificate is considered the owner of the shares. Ownership is transferred by delivering the physical certificate, without registration of the transaction by the issuing company. Beneficial owner The natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. Reference to ultimate ownership or control and ultimate effective control refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control. BEPS Base erosion and profit shifting refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, or to erode tax bases through deductible payments (such as interest or royalties). Although some of the schemes used are illegal, most are not. This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. BEPS minimum BEPS Actions identified as a priority and subject to monitoring through standards peer review processes to ensure the effective implementation of the BEPS package (see definition of BEPS package). 5 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions BEPS Package 15 BEPS Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance. These actions contain tools for countries to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. Country-by- Country-by-Country Reporting is part of the OECD’s BEPS Action Plan country reporting (Action 13). CbCR is a transparency and reporting requirement that multinational enterprises (MNEs) with a significant global presence are obligated to adhere to. The CbC report is an annual report filed by MNEs that breaks down key elements of the financial statements per jurisdiction in the MNE group. This report provides local tax authorities visibility to revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets, and activities. Country-by-country reports are exchanged among jurisdictions using an AEOI framework. Exchange of Information exchanged by tax administrations under an international legal information agreement. Jurisdictions use this information for domestic purposes, e.g. tax audits, criminal prosecutions, etc. Information can be exchanged upon request, automatically or spontaneously. Exchange of It provides a framework for tax authorities to request foreseeably relevant information on information from each other to progress on a tax investigation and/or request enforce its tax laws. Successful implementation of the EOIR standard requires three key elements: i) the transparency of banking and accounting records as well as beneficial ownership of entities and legal arrangements available within a jurisdiction; ii) access to this information by the tax administration; and iii) exchanging the information in a timely manner with relevant jurisdictions, based on international agreements in force. Information A set of governance arrangements, policies, procedures, practices and Security security controls. A security control is a specific measure to mitigate or Management eliminate a security risk: it could be a procedure, a hardware or software product, or other. The AEOI Standard contains requirements for a comprehensive ISM framework due to the sensitive nature, large volumes, and electronic means through which the information is exchanged. The ISM framework refers to the organizational structures and overarching information security principles, aimed at guiding tax administrations to achieve ISM objectives, following a risk-based approach. The ultimate accountability for the ISM framework should sit with the most senior officials within the tax administration. 6 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Mutual agreement A means through which tax administrations consult to resolve disputes procedure regarding the application of double tax conventions. This procedure, described and authorized by Article 25 of the OECD Model Tax Convention, can be used to eliminate double taxation that could arise from a transfer pricing adjustment. Preferential Tax Special tax regimes that offer a lower tax rate and simpler tax compliance Regime requirements to a target group, in comparison to the mainstream tax regime applicable to all taxpayers. Tax avoidance Any legal method used by a taxpayer to minimize their tax liability within the boundaries of tax laws and regulations. Tax evasion Illegal act of intentionally underreporting, concealing, or misrepresenting information to reduce the amount of taxes owed to the tax authorities. Tax evasion is a criminal offense and is considered illegal in almost every jurisdiction. Tax treaty A tax agreement between two or more countries that outlines the rules and procedures for taxing cross-border income and assets. Tax treaties are established to resolve issues involving double taxation (including double non-taxation), promote economic cooperation and to prevent tax avoidance and evasion. Tax ruling An official written binding statement issued by a tax authority that provides guidance and clarification on how specific tax laws and regulations apply a particular taxpayer, transaction or set of facts. Transfer Pricing A transfer price is the price charged by a company for goods, services or intangible property to a subsidiary or other related company at an arm’s length. The arm’s length principle is an international standard which states that, where conditions between related enterprises are different from those between independent enterprises, profits which have accrued by reason of those conditions may be included in the profits of that enterprise and taxed accordingly. Abusive transfer pricing occurs when income and expenses are improperly allocated for the purpose of reducing taxable income. Treaty shopping A tax planning strategy employed by taxpayers to exploit favorable provisions in tax treaties between countries. It involves structuring transactions or operations so as to take advantage of benefits and reduced tax rates offered in a tax treaty. The term is normally applied to a situation in which a person who is not a resident of either of the treaty countries establishes an entity in one of the treaty countries to obtain treaty benefits. 7 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Executive Summary The European Union (EU) aims to promote fair and transparent taxation among its Member States and in other countries that could have an impact on the EU. The EU’s Code of Conduct Group (CoCG) evaluates countries against the EU tax good governance criteria, which relates to tax transparency, fair taxation and measures against base erosion and profit shifting (BEPS). The EU expects jurisdictions to implement the international standard on exchange of information (EOI), including on request and automatically, as well as to have a wide EOI network that covers all EU Member States. Jurisdictions should not have harmful preferential tax measures or facilitate offshore structures seeking to attract profits without real economic activity. Lastly, jurisdictions should commit to the G20/OECD BEPS minimum standards concerning harmful tax measures, treaty shopping, country- by-country reporting and dispute resolution. Jurisdictions that do not comply with these criteria are listed in the EU’s list of non-cooperative jurisdictions for tax purposes. The listing process has risks for countries with potential sanctions which can impact investment and development supports. It could lead to increased scrutiny, potential financial sanctions, and damage to their reputation. This will most likely have adverse effects on their economies, particularly their financial sectors, as well as on their ability to attract investments and access international markets. EU Member States have committed to take defensive measures against listed countries which can include tax (withholding taxes, denial of deductions, enhanced CFC rules and switching off participation exemption) and non-tax factors including foreign policy development cooperation. Furthermore, certain EU funding rules now explicitly refer to the list. Funds from several EU instruments cannot be channeled through entities in listed countries, including funds from various EU funding programs. There are currently four members of the Pacific Islands Forum (PIF) in the EU list of non- cooperative jurisdictions: Fiji, Palau, Samoa and Vanuatu1. These countries have been involved in some way with the EU list since it was first published in December 2017. This note contains a technical assessment on the compliance of these jurisdictions against the EU listing criteria. It was conducted independently from the EU and it is based on publicly available information. This desktop review was prepared at the request of and in coordination with the PIF. This desktop review reveals that these four jurisdictions do not fully meet the EU listing criteria. The following table shows the areas where these jurisdictions should strengthen their tax systems to be able to comply with the requirements from the EU: 1 Based on the last Council’s update of February 20th, 2024. 8 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions EU list – PIF jurisdictions listed as non-cooperative for tax purposes Tax Transparency Fair Taxation Anti-BEPS measures Fiji X X X2 Palau X Samoa X Vanuatu X X There is no indication that PIF member countries with preferential regimes or offshore structures have any intention to promote harmful competition by attracting profit without real economic activity. Fiji, Samoa and Vanuatu established their preferential tax regimes several years ago with the aim of encouraging investment, without fully recognizing the potential harmful tax consequences. A jurisdiction included in the EU list of non-cooperative jurisdictions has an opportunity to strengthen its international tax system to tackle tax fraud, avoidance and evasion, which will in turn result in increased domestic resource mobilization. The implementation of the international tax standards will most likely lead to increased tax compliance, a fairer distribution of the tax burden, enhanced confidence of the taxpayers in the tax system and increased revenue for investment in public services. The PIF members in the EU list can take a number of actions to improve their tax systems and implement the international tax standards. These actions include joining international forums, signing and ratifying international instruments, making political commitments that will entail technical challenges, amending legislation and ensuring effective implementation of the existing legal framework. Implementing international tax standards can pose challenges, but what countries need is a combination of political will and technical support from international organizations with strong technical expertise. There is a lot of experience from international organizations working in the region on international tax topics, most notably the Asian Development Bank (ADB), the International Monetary Fund and the World Bank. In addition to the expertise by the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), the development banks offer technical assistance on the tax transparency standards and on the BEPS minimum standards. The support that these development banks can give the PIF members included in the EU list could be very valuable considering that the listing process is dynamic, and the standards evolve at a rapid pace. 2 The OECD announced on May 27th, 2024, that Fiji joined the Inclusive Framework on BEPS and committed to participate in the implementation of the BEPS package. It is likely that Fiji will be considered as meeting the anti-BEPS measures criteria once the updated EU list is published in October 2024. 9 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 1. Context Pacific Island Forum Economic Ministers have raised concern on the inclusion of some PIF members in the EU list of non-cooperative jurisdictions for tax purposes (EU list)3 During a PIF meeting in 2022, the Ministers considered that inclusion on this list has a detrimental and disproportionate effect on the small islands’ economies, which in turn impacts the ability to attract foreign direct investment (FDI) and access international financial services. The ECOFIN Council established the EU list of non-cooperative jurisdictions for tax purposes in 2017 to encourage positive changes in tax legislation and practices beyond the EU. The European Union’s Code of Conduct Group (CoCG) on business taxation, assisted by the General Secretariat of the Council, carries out the technical work leading to the regular revision by the Council of the EU list of non-cooperative jurisdictions for tax purposes. This list is regularly revised by EU finance ministers, who conduct a comprehensive review of commitments from all third-country jurisdictions participating. The EU CoCG includes an international aspect, which aims at promoting fair and transparent taxation in countries that could affect the EU. For this reason, the CoCG identifies tax measures that could be harmful to the tax bases of other member states and the European economy, cooperates with third-country jurisdictions to promote and strengthen tax good governance and conducts the technical work -based on a set of established criteria- to update the EU list. The CoCG consists of high-level representatives of both Member States and the European Commission responsible for monitoring potentially harmful measures within the EU Member States. The CoCG works under the political guidance of ECOFIN. PIF countries have a long history with the EU list since 2017, when it was first published. The EU list of non-cooperative jurisdictions is published as an annex to the EU Council conclusions (annex I). Annex II of these Council conclusions contains what is known as the state of play, which refers to jurisdictions that have taken commitments to implement the EU’s international standards of tax good governance (commonly referred to as the gray list). The lists are an on-going project and are updated and revised every six months. Cook Islands, Fiji, Marshall Islands (MI), Palau, Samoa and Vanuatu have all had some degree of involvement in the EU list since it was first published. 3 Based on the last Council’s update of February 20th, 2024, Fiji, Palau, Samoa and Vanuatu will be considered in this review. 10 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions The objective of this desktop study is to enhance the overall implementation of the international standards in the region and gain a better understanding of their technical assistance needs. This independent assessment concerning the technical challenges affecting the PIF members in the EU list has been requested by the PIF and completed by the World Bank Group (WBG). The desktop review has been prepared with public sources cited throughout the report. An interview with the Secretariat of the European Commission’s Directorate General for Taxation and Customs was also conducted. Section 2 of this note contains the evaluation of Fiji, Palau, Samoa and Vanuatu; countries listed in the February 2024 update, against the EU tax good governance criteria. This section clearly identifies the situation of each country in respect of the criteria considered not met by the EU Council. The assessment was conducted exclusively using publicly available sources. Section 3 contains the main actions that each country must undertake to strengthen its international tax system, in accordance with the challenges identified in section 2. Technical assistance from international organizations can facilitate the completion of these actions. The WBG has strong expertise in the implementation of the tax transparency standards and the BEPS minimum standards within the Macroeconomics, Trade and Investment (MTI) Global Practice. In addition, WBG works closely with other international organizations that offer assistance in these topics. Lastly, section 4 outlines the potential consequences faced by PIF countries for being in the EU list. However, this impact does not include quantification of FDI losses, as it is out of scope of this desktop review. 11 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 2. The impact of the EU’s listing criteria on PIF members 2.1 The EU listing criteria The CoCG evaluates countries against the EU’s tax good governance criteria which relates to tax transparency, fair taxation and anti-base erosion and profit shifting (BEPS) measures. According to these criteria, in order to be considered cooperative for tax purposes by the EU, a jurisdiction should: a. implement the international standards on exchange of information (EOI) and have a wide exchange network that covers all EU Member States; b. not have harmful preferential tax measures or facilitate offshore structures or arrangements to attract profit without real economic activity; and c. implement the BEPS minimum standards of the Organization for Economic Cooperation and Development (OECD). To comply with the transparency criterion, jurisdictions should be able to exchange tax information with EU members in accordance with the OECD standards. This includes exchange of information on request (EOIR) and automatic exchange of information (AEOI) on financial accounts. Jurisdictions must obtain a satisfactory rating, i.e. compliant or largely compliant, when reviewed by the Global Forum, and expect to address any deficiencies identified in these peer reviews. Jurisdictions are also required to be a party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters4 (Multilateral Convention) or have a network of exchange arrangements in place that covers all EU member states. 4 https://www.oecd.org/tax/the-multilateral-convention-on-mutual-administrative-assistance-in-tax-matters-9789264115606-en.htm 12 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions The fair taxation criterion prevents the so-called “race to the bottom”, where governments change their business or tax regimes to attract or retain investments within their jurisdictions. Jurisdictions should refrain from having harmful preferential regimes or facilitating offshore structures or arrangements aimed at attracting profits without any real economic activity. This means that any incentive offered by a government should be free of harmful features, such as ring-fencing, lack of transparency, or economic substance. Countries without corporate taxes are not automatically regarded as potentially harmful. To determine whether a structure or arrangement promotes harmful tax competition, the detrimental features associated with preferential regimes are similarly considered. The EU CoCG also draws on the work of the OECD´s Forum on Harmful Tax Practices (FHTP) in evaluating preferential tax regimes and the substance requirements in jurisdictions with either no or only nominal taxes. In its Resolution of December 1st, 1997, on a code of conduct for business taxation5, the EU Council established five factors to determine if measures are harmful: i. whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents; ii. whether advantages are ring-fenced6 from the domestic market, to prevent an impact on the national tax base; iii. whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax benefits; iv. whether the rules for profit determination within a multinational group of companies departs from internationally accepted principles, notably those agreed upon within the OECD; and v. whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent manner. The criterion on anti-BEPS measures requires countries to implement the BEPS minimum standards to prevent tax avoidance. Countries, regardless of OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) status, are expected to commit to the OECD anti-BEPS standards which include amending or abolishing harmful tax measures (BEPS Action 5), preventing treaty shopping (BEPS Action 6), exchanging transfer pricing information through country-by-country reports (BEPS Action 13) and improve the resolution of tax-related disputes (BEPS Action 14). The CoCG will again take into account the results obtained by countries in the different peer reviews concerning each of the actions. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.C_.1998.002.01.0002.01.ENG&toc=OJ%3AC%3A1998%3A002%3ATOC 5 Ring-fencing focuses on the legal or administrative barriers to participation in the domestic economy. 6 13 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Table 1 below lists the specific elements required under each criterion. TABLE 1. Specific elements required under each criterion: EU list – PIF jurisdictions listed as non-cooperative for tax purposes Transparency • Jurisdictions should exchange financial account data with all EU members through automatic exchange of tax information. The CoCG takes into account the work of the Global Forum, asking jurisdictions to rectify negative determinations made by the Global Forum. In the future, the CoCG will take into account the AEOI peer review ratings issued by the Global Forum. • Jurisdictions should be able to exchange information on request in compliance with OECD standards. The CoCG looks at the Global Forum’s peer reviews and lists jurisdictions that have received ratings of “partially compliant” or “non-compliant”. • Be a party of the OECD Multilateral Convention or have a network of exchange arrangements in place that covers all EU member States. • The CoCG is currently developing criteria for assessing the implementation of beneficial ownership requirements. Fair taxation7 • Jurisdictions should not have harmful preferential tax measures. The CoCG evaluates potentially harmful regimes and general tax features against various criteria, such as ring-fencing and economic substance, to determine whether they lead to unfair tax competition that impacts a company’s choice of business location. • Jurisdictions should not facilitate offshore structures or arrangements seeking to attract profits without any real economic activity. This criterion pertains to jurisdictions with little or no corporate income tax. A jurisdiction with a zero or very low tax rate should ensure the presence of requirements related to economic substance (e.g. a minimum number of employees, operating expenditures, etc.) and the ability to exchange information. Anti-BEPS measures • Jurisdictions should commit to the OECD anti-BEPS standards concerning harmful tax measures, treaty shopping, country-by-country reporting and dispute resolution. Jurisdictions are required to become members of the Inclusive Framework or implement the BEPS minimum standards. • Jurisdictions should have in place arrangements to exchange country- by-country reports with all EU member States and receive positive assessments in the peer reviews on the standard’s implementation. 7 The screening of jurisdictions’ preferential tax regimes is carried out in coordination with the OECD´s Forum on Harmful Tax Practices (FHTP), which performs a very similar exercise in parallel to that of the CoCG. Unlike the FHTP, the CoCG also subjects regimes that cover manufacturing activities, regimes that exempt incomes from a foreign source from taxation and regimes that provide for notional interest deductions to a screening to determine whether these regimes have any harmful features. If either the CoCG or the FHTP finds a regime of a jurisdiction to be harmful, that jurisdiction is then asked to make a commitment to amend the regime’s harmful aspects or to abolish the regime. Jurisdictions that do not make or do not fulfil the commitment are then proposed for inclusion on the EU list. 14 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions International cooperation has become essential in enforcing tax legislation and countering international tax avoidance and evasion. Each specific criterion in the table above is related somehow to administrative assistance and international cooperation. The Multilateral Convention facilitates international cooperation through various forms of administrative cooperation for the assessment and collection of taxes between participating jurisdictions. These types of cooperation range from EOI (on request, automatic and spontaneous) to the recovery of foreign taxes through assistance in collection and service of documents. There are currently 147 jurisdictions participating in the Multilateral Convention8, covering all of the EU member States. Accordingly, the Multilateral Convention enables a country to acquire a big number of EOI partners through one international instrument, instead of having to negotiate in a bilateral manner with many different countries. A jurisdiction can only become a party to the Multilateral Convention if it is a member of the Global Forum. Members of the Global Forum commit to implementing the transparency and EOI standards, which include EOIR and AEOI. For this, members are required to participate in and contribute to the peer review process, which monitors the implementation of the standards. Members also have to pay an annual membership fee. Becoming a member of the Global Forum also offers several advantages, including enhanced international visibility as a trusted business location, expansion of the country’s EOI network, and access to technical assistance from the Global Forum Secretariat. EOI serves as a powerful tool against various forms of tax evasion, including illicit financial flows, ultimately leading to increased domestic resource mobilization. The Multilateral Convention will serve as the international legal framework for EOIR and AEOI. 8 There are 10 PIF members that participate in the Multilateral Convention: Australia, Cook Islands, Nauru, New Caledonia (through extension by France), New Zealand, Niue, Papua New Guinea, Marshall Islands, Samoa and Vanuatu. 15 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions BOX 1. How to become a Party to the Multilateral Convention? • Request to be invited: written request addressed to the OECD Secretary-General through diplomatic channels. Must be accompanied with a confidentiality questionnaire to demonstrate that the applicant country meets the minimum requirements. • Decision of the Parties to Invite: taken by consensus by the Parties of the Multilateral Convention, considering the confidentiality rules and whether the country is a member of the Global Forum. • Invitation to become a Party: formal letter of invitation to sign the Multilateral Convention. • Signature: arrangements are made with Depositories of the Multilateral Convention • Ratification: completion of the country’s domestic procedures for ratification, acceptance, or approval. • Deposit: instrument of ratification, acceptance or approval must be deposited with one of the Depositaries. The EOIR standard is met when a country can ensure that there is ownership, accounting and bank information available in the jurisdiction that can be accessed by the EOI competent authority and exchanged with all relevant partners. Ownership information includes legal and beneficial ownership information of companies, partnerships, trusts, foundations and similar arrangements. Accounting records must be reliable, i.e. correctly explain the transaction, enable the determination of the financial position with reasonable accuracy at any time and allow for the preparation of financial statements. Exchanges must occur in a timely manner and under a legal mechanism that enables that such information be obtained and exchanged. If any of these elements are missing, information exchange will not be effective. The implementation of the AEOI of financial accounts requires a jurisdiction to take several steps to ensure that financial institutions collect and report the necessary information. Additionally, it requires that their tax administration has the capacity to receive, hold and exchange this information properly. The main requirements for a country to implement AEOI of financial account information are: 1. Enacting domestic legislation to require financial institutions to report the information to the tax administration, including provisions for the effective implementation, i.e. sanctions and similar measures. 2. Having an international legal framework in place to be able to exchange information with the country´s interested appropriate partners. 16 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 3. Having an appropriate information security management (ISM) framework to ensure the confidentiality of the information exchanged. The ISM system includes human resource controls, physical and logical access, appropriate IT security systems, protection levels of the information, managing risk and business continuity and incident monitoring. The CoCG requires countries, not only Inclusive Framework members, to commit and implement the BEPS minimum standards. Four of the BEPS actions were identified by the Inclusive Framework members as a priority, resulting in minimum standards. The Inclusive Framework agreed that these actions would be monitored through a peer review process. The BEPS minimum standards are as follows: • Action 5: address harmful tax practices, including rules on preferential regimes and transparency through the international exchange of tax rulings; • Action 6: prevent tax treaty shopping through anti-abuse provisions and clarifying the purpose of tax conventions (not only prevent double taxation but also double non-taxation); • Action 13: exchange of key transfer pricing data on the operations of multinational enterprises through country-by-country reports, which allow for more effective risk assessment by tax administrations; and • Action 14: improve the effectiveness of cross-border tax dispute resolution between tax administrations through mutual agreement procedures (MAP). The Multilateral Convention is also useful for governments as it enables them to act together in addressing BEPS and restoring trust in both domestic and international tax systems. The OECD estimates that BEPS practices cost countries 100-240 billion USD in lost revenue annually, which is equivalent to 4-10% of the global corporate income tax revenue9. More than 140 member countries work together in the Inclusive Framework to implement 15 actions to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment. The implementation of these 15 actions aims at ensuring that profits are taxed in the jurisdictions where economic activities generate those profits and where value is created. The goal of these tools is to also give businesses greater certainty by reducing disputes over the application of international tax rules and standardizing compliance requirements. 2.2 Application of the EU listing criteria to PIF members The following subsections will review in detail how each of the listing criteria applies to the PIF jurisdictions currently included in the EU list. 2.2.1 Fiji Fiji has been included in the EU lists since it was first published. Fiji was listed under Annex II of the conclusions adopted by the Ecofin Council in December 2017 as it did not comply with all the EU listing criteria but had committed to i) amend/abolish by end of 2018 the preferential tax regimes regarded as potentially harmful by the EU Council, and ii) become a member of the Global Forum and the Inclusive Framework by the end of 2019. 9 https://www.oecd.org/tax/beps/ 17 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions In March 2019, Fiji was moved to the EU list of non-cooperative jurisdictions (Annex I). This was a result of not amending the preferential tax regimes by the end of the 2018 deadline. Fiji’s commitment to become member of the Global Forum and the Inclusive Framework were not met by the end of 2019 deadline either. The CoCG recognizes Fiji’s progress towards implementing the tax transparency standards. On November 16th, 2023, Fiji joined the international fight against tax evasion as the 169th member of the Global Forum. As a member of the Global Forum, Fiji will be scheduled for review on its implementation of the EOIR standard. Accordingly, for the time being Fiji is considered to comply with the tax transparency criterion. Fiji is expected to obtain a satisfactory rating of Largely Compliant or Compliant once its EOIR review has been completed. Despite progress on tax transparency, Fiji remains in the EU list of non-cooperative jurisdictions as of February 2024 because it did not comply with its IF commitment and it has harmful preferential tax regimes in place. This most recent update of the list states that “Fiji has harmful preferential tax regimes (Exporting Companies, Income Communication Technology (ICT) Incentive, Concessionary rate of tax for regional or global headquarters), and has not become a member of the Inclusive Framework nor implemented the BEPS minimum standards, and has not resolved these issues yet.”10 Fiji has since, joined the IF. The OECD announced on May 27th, 2024, that Fiji joined the IF and committed to participate in the implementation of the BEPS package. It is likely that Fiji will be considered as meeting the anti-BEPS measures criteria once the updated EU list is published in October 2024. Transparency Global Forum membership As Fiji has recently become a member of the Global Forum, it will be subject to the peer reviews on the EOIR and AEOI standards. Similar to other members, Fiji will actively contribute to the decisions of the Global Forum on an equitable basis and will have to work towards the implementation of the internationally agreed standards of EOIR and AEOI in the fight against offshore tax evasion. Becoming a Global Forum member also allows it to join the Multilateral Convention. Fiji will need to address several issues on the availability of legal and beneficial ownership11 information to secure favorable EOIR rating from the Global Forum. As a member of the Global Forum, Fiji will undergo a peer review to assess its implementation of the EOIR standard. In order for the EU Council to determine that Fiji meets the tax transparency criteria, Fiji must achieve a rating of at least “Largely Compliant” in its EOIR review. To attain this rating, the jurisdiction must make certain information available, including details related to beneficial ownership, banking, and accounting. 10 https://www.consilium.europa.eu/media/70365/st06776-en24.pdf FATF defines the term “beneficial owner” as the natural person(s) who ultimately owns or controls a customer and/or the natural 11 person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. Reference to ultimate ownership or control and ultimate effective control refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control. 18 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Additionally, it should ensure that this information is accessible to the tax administration and have the capacity to exchange this information with its treaty partners. From the review of publicly available sources, Fiji will have to review and most likely amend its legislation to ensure that all legal and beneficial ownership information of entities and arrangements is available, and kept for a minimum period of five years, even in cases where the entity or arrangement has ceased to exist. The last assessment completed by the Asia/Pacific Group (APG) on Money Laundering on Fiji´s anti-money laundering and counter-terrorist financing (AML/CFT) system12 concluded that Fiji laws on the collection of beneficial ownership are limited. In addition, it reached the following conclusions: • There are no requirements for legal entities to keep beneficial ownership information. The Companies Act only requires the collection and recording of the direct owner of shares. • The Companies Act allows the issuance of share warrants to bearer. In addition to these warrants, the Companies Act does not prohibit the issuance of bearer shares in Fiji, allowing companies to issue them. However, there are no mechanisms in place to guarantee the transparency of beneficial ownership for bearer instruments. • The Companies Act permits nominee directors and shareholders, and there are no legal provisions requiring the disclosure of nominator’s identity to the company or the Registrar. • There is no requirement in Fiji law (whether common law or statute law) for trustees of express trusts to obtain and hold adequate, accurate and current information on the identity of settlors, trustees, protectors (if any) and beneficiaries of trusts, including any natural person who exercises ultimate effective control over a trust. Accordingly, beneficial ownership information for trusts is not available in Fiji. Despite APG acknowledging some progress in the area of beneficial ownership, it has not led to any changes in their FATF ratings. On January 15th, 2020, the Companies (Budget Amendment) Act 23 of 2019, that amends the Companies Act 2015,13 came into effect. Under this Act, companies are required to maintain up-to-date information regarding shares held non-beneficially. Non-listed companies are required to specify any shares not held beneficially by a member and disclose the name of the beneficial owner of the share.14 In addition, companies must maintain information on the beneficial owners of shares in their membership register.15 Finally, companies must set up and maintain the register, which encompasses beneficial ownership information.16 Although Fiji’s competent authority possesses sufficient authority to acquire information from any taxpayer, it remains uncertain whether this authority extends to information safeguarded by bank secrecy. Based on provisions in the Tax Administration Act, it appears that the competent authority has enough powers to obtain information from any individual, as required by the Chief Executive Officer of the Tax Administration. However, from publicly available sources, it was not possible to ascertain whether Fiji maintains bank secrecy for tax purposes or whether Fiji is in a position to exchange information regardless of whether the requesting jurisdiction requires the information for its own tax purposes. 12 https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-fiji-2016.html 13 https://www.parliament.gov.fj/wp-content/uploads/2019/07/Act-23-Companies-Budget-Amendment.pdf 14 Section 251 (8) of the Companies Act 2015 15 Section 7 of Companies (Budget Amendment) Act 2019 and section 82 of the Companies Act 2015 16 Section 81 of the Companies Act 19 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Some of Fiji’s bilateral tax treaties, which include provisions for EOI, do not adhere to the current EOIR standard. The EOIR standard requires that a jurisdiction should ensure effective EOI with all relevant partners. Fiji has 11 treaties providing for EOI, but some of these agreements are outdated and do not align with the current EOIR standard. This issue can be rectified by signing and ratifying the Multilateral Convention. AEOI implementation As a member of the Global Forum Fiji has committed to implement the OECD´s AEOI standard, and to do so, it will need to take a number of steps to ensure that financial institutions in Fiji collect and report the necessary information, and that their tax administration has the capacity to receive this information and exchange it with its partners, see section 2.1. Developing countries that do not host a financial center, as is Fiji’s case, are not required to commit to start AEOI by a specific date. In practice, countries take some time to evaluate AEOI implementation timelines before committing to a specific date. Accordingly, Fiji will only be reviewed for AEOI purposes and be assigned an AEOI rating once it has enacted legislation for the mandatory reporting by financial institutions. Signing and ratifying the Multilateral Convention Fiji is not in a position to exchange information with all EU member States to comply with the EU criteria listing. Fiji’s EOI network is composed of 11 partners, none of which are members of the EU. Signing and ratifying the Multilateral Convention can ensure EOI with all relevant EU partners. As mentioned before, now that Fiji is a Global Forum member it has the opportunity to become a party to the Multilateral Convention. Fair taxation Three preferential tax regimes were considered by the EU Council as potentially harmful in Fiji because they are either ring-fenced, lack economic activity, or both. These preferential regimes are contained in Fiji´s Income Tax Act (ITA)17 as follows: i) exporting companies regime; ii) information communication technology (ICT); and iii) concessionary rate of tax regional or global headquarters. i. The exporting companies regime is regulated through section 25 (8) of the ITA. The provision provides for a deduction for a person exporting goods or services. The deduction is currently set at 60% of the export income18 (90% for agriculture, forestry and fisheries sectors). By applying only to export, it is clear that this regime is ring-fenced from the domestic market to avoid affecting the national tax base. In addition, there are no substance requirements for companies using this benefit. ii. The ICT regime is regulated through Part 9 of the ITA. The income of an ICT operator that obtains a license after January 1st, 2009, is exempt from corporate income tax for a period of 13 years from the date of issue of the license. ICT business includes many forms of geographically mobile activities19, which increases the risk of tax avoidance and evasion. The expenses incurred by an ICT start-up involved in application design or software development and accredited ICT training 17 https://www.frcs.org.fj/wp-content/uploads/2019/10/Income-Tax-Act.pdf 18 Export income means chargeable income derived by a taxpayer from business of exporting goods and services but exclude re-exports. ICT business means services provided by a person which are Information Communications Technology enabled such as 19 software development, call centers, customer contact centers, engineering and design, research and development, animation and content creation, distance learning, market research, travel services, finance and accounting services, human resource services, legal services, compliance and risk services or other administration services, but does not include an internet café or any retail or wholesale of information technology products or the repair, sale or service of any such products. 20 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions institutions qualify for a 150% deduction. A 250% deduction is allowed for research and development expenses incurred in the ICT industry. Effective August 1st, 2021, new ICT infrastructure investment incentives are available with income tax exemption for up to 20 years depending on the level of capital investment and other conditions. From public information dated 201820, this regime seems to have ring-fencing features for those operating in Kalabu, having to export at least 60% of its total services. There were also insufficient economic substance requirements, with an obligation to employ at least 50 employees during any 6 months within the income year. More recent public information does not seem to include requirements on minimum exports and minimum employees. However, it was not possible to determine if there were legal amendments to remove this. From the information contained in the ITA, there does not seem to be sufficient economic substance requirement for ICT operators, making the regime potentially harmful under the EU criteria. Furthermore, the ICT regime also offers benefits to income from intellectual property (IP). The EU CoCG draws on the work of the OECD´s FHTP for IP regimes. Accordingly, to consider that the ICT regime has enough economic substance, it will have to comply with the nexus approach detailed in the 2015 BEPS Action 5 report.21 The nexus approach requires a link between the income benefiting from the IP regime and the extent to which the taxpayer has undertaken the underlying activities that that generated the IP. In implementing the nexus approach, jurisdictions will need to include a formula in its legislation, comprised of two elements: a first part which determines the amount of eligible income which can benefit from a lower tax rate, and a second part which is a consequence for the non-eligible income which is then taxed at the normal (higher) tax rate. iii. The concessionary rate of tax regional or global headquarters was a ring-fenced regime, where a reduced corporate tax rate was provided for income derived by regional or global headquarters from the provision of qualifying services as prescribed to its offices, associated companies and other persons, outside of Fiji. The 2022 – 2023 Fijian National Budget provided that the concessionary tax rate together with the 150% deduction for capital expenditures of headquarters relocating to Fiji, ceased to apply from the year 2023. Accordingly, the CIT rate to an approved global or regional headquarters has been increased to the general corporate tax rate of 20% from the 2023 tax year. 20 https://www.frcs.org.fj/wp-content/uploads/2018/02/80.Talk-Tax-Housing-Development-and-ICT-Incentives-FS.pdf https://www.oecd.org/tax/countering-harmful-tax-practices-more-effectively-taking-into-account-transparency-and-substance- 21 action-5-2015-final-report-9789264241190-en.htm 21 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Anti-BEPS measures Fiji has recently committed to implement the BEPS minimum standards. The OECD announced on May 27th, 2024, that Fiji joined the IF. This means that it will be subject to the peer review process, in addition to paying an annual membership fee. To implement the BEPS minimum standards, Fiji should: • Action 5: amend or abolish the potentially harmful features of its preferential tax regimes, including those identified by the EU and discussed above. • Action 6: Fiji signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting22 (Multilateral Instrument) on June 7th, 2017. If Fiji ratifies the Multilateral Instrument, it would be sufficient to implement the minimum standards to counter treaty abuse and to improve dispute resolution mechanisms. • Action 13: enact legislation related to country-by-country reporting23 and sign the Multilateral Convention. This is a type of AEOI, which means that the ISM framework should be in place for reciprocal exchanges. • Action 14: there is no public information on Fiji’s experience concerning MAP. In general, countries are required to implement MAP guidance to provide more clarity to taxpayers and also to streamline their processes to resolve MAP cases in a timely matter. 2.2.2 Palau Palau was included in the EU list in December 2017, since it was first published. At that time, the EU Council determined that Palau was facilitating offshore structures and arrangements aimed at attracting profits without real economic substance (criterion 2.2.). In addition, Palau was asked to commit to the following: • Implement the OECD’s AEOI standard; • Become a member of the OECD’s Global Forum; • Sign the OECD’s Multilateral Convention; and • Implement country-by-country reporting in accordance to BEPS Action 13 if and when this becomes relevant. Palau immediately committed to the EU’s requests to comply with their criteria. Palau submitted a letter with the commitments mentioned above to the CoCG dated December 1st, 2017, signed by the then Minister of State, Ms. Faustina K Rehuher-Marugg. The EU Council acknowledged these commitments and agreed to monitoring them. As a result, and after Palau provided clarifications to the EU Council on criterion 2.2, it was de-listed in December 2018. At the same time, the EU Council agreed to include Palau in Annex II of the EU list to monitor these commitments, with a deadline of December 31st, 2019. 22 https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm There is model legislation available in the Country-by-Country Reporting Implementation Package published by the OECD: 23 https://www.oecd.org/ctp/transfer-pricing/beps-action-13-country-by-country-reporting-implementation-package.pdf 22 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Palau became the 160th member of the OECD’s Global Forum in January 202024. However, Palau has not yet implemented AEOI or signed and ratified the Multilateral Convention. Accordingly, Palau was added back to the EU list in February 2020. There have not been any changes since February 2020 and Palau continues to be in the EU list for not having implemented AEOI or signed and ratified the Multilateral Convention. Transparency Exchange of information on request As a member of the Global Forum, Palau should take measures to implement the EOIR standard to ensure a largely compliant rating on its upcoming peer review. The implementation of EOIR and AEOI standards will be monitored by the Global Forum through a peer review mechanism. Indeed, Palau‘s EOIR peer review has been scheduled for the third quarter of 2024, and according to the Global Forum methodology25, it will cover the period from April 1st, 2021, to March 30th, 202426, which has already begun. The rating of this peer review will be published by the Global Forum in the second or third quarter of 202527, and will be considered by the EU Commission. Palau will need to address several issues on the availability of legal and beneficial information found by a 2017 APG assessment to secure a favorable EOIR rating from the Global Forum. The first formal assessment completed in 2017 by the APG on Palau’s anti-money and counter-terrorist financing measures28 reached to the following conclusions: • In regard to corporations for profit and foreign corporation doing business in Palau, there is no legal requirement to maintain updated legal ownership information at the Public Registrar or for the entity to maintain a shareholders register. • Palau relies on AML legislation for the availability of beneficial ownership information of legal entities. There is no requirement in Palau to maintain beneficial ownership information beyond the legal ownership of shares. Palau would not be in a position to exchange adequate, accurate and current beneficial ownership information with an EOI partner. • For legal arrangements, Palau relies on U.S. common law. However, there are no clear requirements for trustees to ensure that beneficial ownership information29 is available to their competent authorities in respect of express trusts. • For both legal persons and arrangements, there does not seem to be minimum retention periods, enforcement measures or adequate supervision. 24 https://www.oecd.org/tax/exchange-of-tax-information/viet-nam-and-palau-join-the-global-forum-on-tax-transparency.html 25 The practical implementation of the EOIR standard will be assessed over a three-year period ending on the last day of the quarter, two quarters prior to the launch date of the review. See: https://www.oecd.org/tax/transparency/global-forum-handbook-2016.pdf 26 https://www.oecd.org/tax/transparency/documents/schedule-of-reviews.pdf The exact date for the Global Forum to publish ratings will depend on when the meetings of the Peer Review Group are 27 scheduled. 28 https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-palau-2018.html Beneficial ownership information includes information on the identity of the settlor, trustee(s), protector (if any), all of the 29 beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust. 23 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Based on information from public sources, Palau does not appear to have broad enough powers to obtain information in accordance with the EOIR standard. The EOIR standard requires that competent authorities have the power to obtain and provide ownership, accounting and financial information, even when held by third parties (i.e. not in possession of the tax administration or the taxpayer). A competent authority should be able to obtain information disregarding if it relates to a taxpayer that is currently under examination by the requested jurisdiction or not. The Revenue and Taxation Title of the Palauan National Code30, establishes the following: • the Director has “the power to inspect and examine the records, books of account, bank statements, and any other pertinent data of any person for the purpose of enabling him to obtain the information necessary to enforce the provisions of this division” (section 1801(d)) • “the Director may make available to the properly authorized tax officials of any state, information contained in tax returns or any audit of a taxpayer, provided such state grants a like privilege to the national government” (section 1801). Palau does not have legal instruments allowing for EOI with any of the EU member states or any other relevant partner. The EOIR standard requires that a jurisdiction provide for effective EOI with all relevant partners. Palau will not be able to obtain a satisfactory EOIR rating if this situation is unchanged. As stated above, this can be addressed by signing and ratifying the Multilateral Convention. AEOI implementation As a member of the Global Forum, Palau has committed to implement AEOI. However, Palau has not yet committed to a specific date for first AEOI exchanges. For Palau to implement the AEOI standard, it will need to take a number of steps to ensure that financial institutions in Palau collect and report the necessary information, and that their tax administration has the capacity to receive this information and exchange it with its partners, see section 2.1. As Palau has not been reviewed for AEOI, there is not an AEOI rating available for Palau. Signing and ratifying the Multilateral Convention Palau’s EOI network is null, no bilateral tax treaty or tax information agreements are in place. This means that Palau is not in a position to exchange tax information with all EU member States. Once Palau signs and ratifies the Multilateral Convention it will be in a position to exchange information with more than 145 jurisdictions, including the EU member States. 2.2.3 Samoa Samoa was included in EU list of non-cooperative jurisdictions in December 2017 and has never been removed. Samoa is in the list for having a harmful preferential tax regime, known by the EU as the Offshore Business regime. 30 https://palaulegal.org/palau-national-code/titles-40-42/title-40-revenue-and-taxation/ 24 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Fair taxation Samoa’s Offshore Business is ring-fenced, and it lacks economic substance. The regime is regulated by the International Companies Act31 (ICA) of 1998, as amended in 2009. Section 232 of the ICA establishes a restriction on membership interest in an international company, denying the possibility for citizens, residents and persons domiciled in Samoa to become shareholders or guarantee members of an international company. In addition, section 249 of the ICA sets out the exemptions and privileges of international companies, clearly stating that income is exempt from taxes except when the income is derived from carrying business in Samoa. Furthermore, the ICA is silent about substance requirements. However, there is a provision33 that prohibits against carrying on business when the international company has no members. Notwithstanding, the provision refers to liability over debts and it also establishes a sanction but only after six months of having carried out business without members. This means that it would be possible for a company to have no members any period under six months. It is clear that there are no substance requirements to ensure that the benefits are granted to a core income generating activity that has adequate number of employees and expenditures. Samoa is in the process of enacting legislation to remove the harmful features of its Offshore Business regime. There is an expectation that this legislation will be in place by the next EU list update in October 2024 and Samoa will therefore be excluded from Annex 1. 2.2.4 Vanuatu Vanuatu was unable to meet its CoCG commitments from 2017 and ended up listed as non- cooperative in March 2019. Vanuatu was first listed in December 2017 under Annex II for concerns relating to entities operating without economic substance in Vanuatu. At that time, Vanuatu committed to address this issue by the end of 2018. Vanuatu did not meet its commitment and was included in the EU list of non-cooperative jurisdictions in March 2019. Vanuatu continues to be in the list for not meeting the fair taxation criterion and most recently, also the transparency criterion. According to the EU, Vanuatu continues to facilitate offshore structures and arrangements aimed at attracting profits without real economic substance. In addition, as a result of the EU Council exercise to constantly monitor that jurisdictions do not backtrack on its commitments and reforms, Vanuatu has also been considered not to meet the transparency criterion because of the partially compliant rating obtained in its 2019 EOIR review. Vanuatu is currently waiting for a supplementary review by the Global Forum to improve its EOIR rating. 31 https://www.sifa.ws/assets/Uploads/International-Companies-Act-1988.pdf No natural person who is a citizen or resident of or domiciled in Samoa and no company incorporated or registered under the 32 Companies Act 2001 except a trustee company may either individually or with another person or persons and whether directly or indirectly and whether in consequence of any trust or similar arrangement or otherwise, be or become a shareholder in or guarantee member of an international company under this Act or foreign company that has the center of its administrative management in Samoa unless that foreign company is registered under the Companies Act 2001. Prohibition against carrying on business when no members – (1) Subject to subsection (2), if at any time an international 33 company has no members and carries on business for more than 6 months while it has no members, an officer, servant, employee or agent of that company during the time that it so carries on business after those 6 months who know that the company has no members is liable, and if more than one, jointly and severally, for the payment of the whole of the debts of the company contracted during the time that it so carried on business after those 6 months, and the company and the officer, servant, employee or agent commit an offence if the company so carries on business after those 6 months; so long as debentures of the kind referred to in section 57(1)(d) or 57(3) are issued and not redeemed the company, is taken , for the purposes of this section, to have 1 member. 25 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Fair taxation The absence of corporate tax, as is the case for Vanuatu, is not regarded by the EU Council as potentially harmful per se. To determine if the system is potentially harmful, the five factors identified in the Resolution of December 1st, 1997, on the code of conduct for business taxation should be applied by analogy to assess whether the criterion on fair taxation is met34, see section 2.1. Through the ICA, Vanuatu facilitates offshore structures aimed at attracting profits without real economic substance. The Vanuatu ICA35 offers the opportunity to form an international company provided that it is incorporated in the country. However, in accordance with section 10 of the ICA, international companies cannot carry on business36 in Vanuatu. When applying by analogy the factors considered by the CoCG concerning preferential tax regimes, this provision meets the ring-fencing criteria in its broad form. In addition, the ICA fails to establish substance requirements for these companies incorporated in Vanuatu but conducting business abroad. It seems that it is even possible to have a functioning international company in Vanuatu with at least one member37. There are no provisions on minimum employees, initial investment, minimum expenditures, accounting reporting, etc. Transparency Exchange of information Vanuatu only partly implements the EOIR standard. In 2019, Vanuatu underwent the OECD’s Global Forum peer review38, which identified several deficiencies that led to a rating of partially compliant. Achieving a rating of partially compliant or non-compliant is not considered satisfactory to meet the EU Council transparency criterion. The main deficiencies identified in the 2019 report relate to the availability of beneficial ownership and accounting records, and are as follows: • Vanuatu is unable to ensure that beneficial ownership information of all legal entities is available. Requirements were introduced for new domestic companies and partnerships to identify and report beneficial ownership information, but there is no requirement to report changes to this information for local companies. In addition, there is no requirement for domestic companies that existed before the introduction of the beneficial ownership requirement. • There is no clear definition of beneficial ownership applicable to trusts, making it unclear how this concept is implemented in practice. This lack of clarity also extends to banking information, i.e. the beneficial ownership information of account holders. • Under the laws of Vanuatu, it is not mandatory to keep the beneficial ownership information for the beneficiaries in a foundation. This also applies to banking information, i.e. the beneficial ownership information of account holders. • In practice, deficiencies appear in the quality of the beneficial ownership information kept by AML-obliged professionals. The Global Forum peer review report identified limited supervision on the international companies’ obligation to retain beneficial ownership information. 34 https://data.consilium.europa.eu/doc/document/ST-6325-2017-INIT/en/pdf 35 Laws of the Republic of Vanuatu, Chapter 222. International companies are not allowed to carry on banking business, trust business, insurance business or company 36 management business. 37 Section 10 of the International Companies Act indicates in its section (1)(g) that an international company “shall not at any time have less than one member.” https://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-vanuatu- 38 2019-second-round_dd70b774-en 26 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions • Sanctions on the reporting obligations for beneficial ownership were not consistently applied by all relevant authorities in cases of non-compliance. • Vanuatu introduced a Record Keeping Order in March 2017. It is not clear who is responsible for keeping records if an entity ceases to exist. Consequently, it remains unclear who would be subject to sanctions in these cases. In addition, there has been no supervision by Vanuatu authorities to ensure the effective implementation of the Record Keeping Order. • There are no express provisions in the Right to Information Act that would enable the competent authority to refuse to provide treaty-protected information to the public. Accordingly, Vanuatu cannot guarantee the observance of relevant confidentiality rules in all cases. Having obtained a supplementary review, it can be concluded that Vanuatu has addressed a significant number of the deficiencies mentioned above. According to the Global Forum´s methodology for EOIR peer reviews, for a jurisdiction to qualify for an EOIR supplementary review, it must demonstrate actions likely to result in an upgrade of an essential element to “compliant” or an improvement in its overall rating, as assessed against the 2016 Terms of Reference. Considering Vanuatu’s current ratings of the individual essential elements of the EOIR review, an overall rating upgrade can be anticipated. There is no public information from the supplementary review as it is currently ongoing. The EU Council informed that it requires that the overall rating of largely compliant or compliant be published by the Global Forum before making any changes to the EU list of non-cooperative jurisdictions. However, there have been cases where a country has been granted a supplementary review by the Global Forum and consequently, removed from annex I and transferred onto annex 2 for monitoring. For Vanuatu to obtain such treatment, it would need to fix the other issues as well, notably the issue of facilitating offshore structures to attract profit without real economic substance. 27 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 3. Key actions for PIF members to strengthen their international tax framework Being listed by the EU can be seen as an opportunity to strengthen a country’s international tax framework to tackle tax fraud, avoidance and evasion, which is likely to result in increased domestic resource mobilization. For some jurisdictions, being included in this list has created unprecedented momentum to enact tax reforms and gain international recognition for cooperation and advocacy of tax good governance by adhering to international standards. The Cook Islands is one example within PIF countries of successful implementation of international standards. In 2017 after committing to abolish harmful regimes, it was included in annex II of the EU list and subject to monitoring. The Cook Islands opted to fully participate in the Global Forum and the OECD/G20 Inclusive Framework on BEPS. It has implemented the tax transparency standards, and most importantly, it honored its commitment to abolish all preferential tax regimes with harmful measures: international companies, captive insurance, international banking, international insurance companies, as well as incentives on certain public works and development investment incentives. Importantly, it has never been included in annex I of the EU list. The Marshall Islands (MI) serves as another notable example of a country dedicated to strengthening its international tax system. MI has a history of being listed and de-listed by the EU, the process initiated in 2017 due to its facilitation of offshore structures and arrangements aimed at attracting profits without real economic substance. MI also faced issues concerning the transparency criterion after receiving an unsatisfactory EOIR rating by the Global Forum in 2016.39 In response, MI amended its Economic Substance Regulations40 to introduce an economic substance test for relevant activities, and made the necessary changes to obtain a satisfactory rating of Largely Compliant in its 2019 review on EOIR41. However, in February 2023, it was again listed after being unable to demonstrate the 39 https://read.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer- reviews-marshall-islands-2016_9789264258815-en#page45 40 https://www.register-iri.com/corporate/legal/economic-substance-regulations-2018/ https://www.oecd.org/ctp/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-marshall-islands-2019- 41 second-round-89b5f984-en.html 28 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions compliance actions and related statistics to the enforcement of the Economic Substance Regulations. By October 2023, MI was delisted after demonstrating significant progress in meeting the economic substance requirements. All PIF members on the EU list need to pass legislation to align with international tax standards, a process that can be streamlined with appropriate technical assistance. Beyond legislative adjustments, enhancing administrative practices may also be necessary for the effective implementation of these standards. PIF members can benefit from the experience of international organizations active in the region, particularly the Asian Development Bank (ADB) and the World Bank. Both development banks offer technical assistance on the tax transparency standards monitored by the Global Forum and on the BEPS minimum standards. In fact, ADB and World Bank have collaboratively provided technical assistance to some PIF members seeking to strengthen their international tax framework. This type of assistance is also extended by the Global Forum Secretariat (on tax transparency), the OECD Secretariat (on BEPS minimum standards), and the EU Commission. Any country removed from the EU list must continue monitoring compliance with all the EU listing criteria. For instance, both the Cook Islands and MI will undergo a robust peer review process of the effectiveness of their AEOI standard in practice. This review process will assign a rating of compliant, largely compliant, partially compliant, or non-compliant. The EU Council will use these ratings to assess their criteria when adopting conclusions on the list of non-cooperative jurisdictions. The Cook Islands and MI should ensure that the shortcomings identified in the latest peer reviews from 2022,42 that included an initial review of their effectiveness of the AEOI standard in practice, be addressed to upgrade their current partially compliant ratings and avoid classification as non-cooperative for tax purposes by the EU. PIF members currently included in the EU list of non-cooperative jurisdictions can undertake various actions to improve their international tax frameworks. These actions refer specifically to the technical issues related to tax transparency, fair taxation and anti-BEPS actions discussed in section 2 and are listed as follows: 1. Request to be invited to sign the Multilateral Convention. Jurisdictions will need to prepare a letter, which can be based OECD´s Global Forum template, available in Annex A of the Toolkit for Becoming a Party to the Convention on Mutual Administrative Assistance in Tax Matters.43 The letter should be accompanied by the questionnaire on tax confidentiality for countries that request to become a Party to the Multilateral Convention.44 The Global Forum has prepared an annotated questionnaire for countries to understand what is expected from them when filling out the questionnaire, available in Annex B of the aforementioned toolkit. See Box 1 on the process to become a Party to the Multilateral Convention. Technical assistance throughout this process can be provided by international organizations such as the Global Forum, ADB and the World Bank. https://www.oecd.org/publications/peer-review-of-the-automatic-exchange-of-financial-account-information-2022-36e7cded- 42 en.htm 43 https://www.oecd.org/tax/transparency/documents/MAAC-toolkit_en.pdf https://www.oecd.org/ctp/exchange-of-tax-information/Questionnaire on Tax Confidentiality for Countries that Request to 44 Become Party to the Amended Convention on Mutual Administrative Assistance_2014.pdf 29 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 2. Ratify the Multilateral Convention. The EU Council of Finance Ministers will only recognize the Multilateral Convention after it has been ratified. 3. Conduct an EOIR pre-assessment. As member of the Global Forum, jurisdictions will have to undergo a peer review on the implementation of EOIR. A mock EOIR assessment can allow jurisdictions to understand the shortcomings in its legislations and practices to prepare for their EOIR review. International organizations can assist with this exercise. 4. Collaborate throughout the EOIR supplementary review procedures. Jurisdictions initially receiving unsatisfactory ratings in their EOIR peer reviews can enhance their ratings through a supplementary review. Requested by interested jurisdictions, this review assesses progress in implementing standards for public recognition. If approved, the jurisdiction must collaborate closely with the Global Forum to secure acknowledgment of improvements since its last review, aiming to upgrade its overall rating. 5. Conduct a preliminary assessment on its ISM framework. An understanding of a country´s ISM framework is the first step to determine a realistic action plan to implement AEOI. The preliminary assessment will focus on i) the legal framework to ensure confidentiality and proper use of the exchanged information; ii) the overall ISM system (human resource controls, physical and logical access, appropriate IT security, protection levels of the information, managing risk and business continuity and incident monitoring); and iii) enforcement provisions and processes to address confidentiality breaches. This will be also useful for the pre, and post exchange assessments of confidentiality and data safeguards frameworks conducted by the Global Forum.45 Having a strong ISM framework is beneficial not only for EOI but also for domestic purposes. It is highly recommended that all countries measure their confidentiality practices against the international standards. If a country is not able to guarantee that the confidentiality of exchanged information is preserved (through a review by the Global Forum), this country will not receive information from its partners. Some countries have opted for a non-reciprocal approach, i.e., they will send information but not receive. A non-reciprocal approach would not require to fully comply with the confidentiality/ISM requirements. The Global Forum has published the Confidentiality and Information Security Management Toolkit.46 It provides detailed guidance on implementing the building blocks of a legal and ISM framework that adheres to internationally recognized standards or best practices, including practical examples. 45 Pre-exchange assessments are conducted to ensure jurisdictions meet the confidentiality and data safeguard requirements, prior to the exchange of information with other jurisdictions. Post-exchange reviews, including of the operational frameworks actually used for the exchanges, are also conducted for all jurisdictions exchanging information, to provide assurance that the requirements continue to be met. 46 https://www.oecd.org/tax/transparency/documents/confidentiality-and-information-security-management-toolkit.html 30 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Advice on ISM is provided by international organizations. Assistance by the World Bank includes carrying out the preliminary assessment, supporting the country in putting together an action plan to address the shortcomings identified in the assessment, and assistance throughout the implementation of the action plan. The action plan is likely to include every step needed to implement the AEOI standard (e.g., enacting legislation, international legal framework), including country-by country reporting. 6. Commit to AEOI with a specific date. The ISM preliminary assessment will be key to determine when a jurisdiction can be ready to start exchanging information. After this assessment, a jurisdiction will be able to set a potential date for first exchanges under the AEOI standard. 7. Monitor AEOI implementation. Jurisdictions that underwent an assessment of the AEOI legal framework and an initial review of the AEOI effectiveness in practice should address the recommendations from the latest peer review from 2022.47 They also will need to be prepared for the further peer review process on the effectiveness in practice as the AEOI standard becomes more mature. This process will involve a more detailed assessment of the effectiveness of each jurisdiction’s administrative compliance framework, including deeper verification methods, particularly in relation to ensuring the effective implementation of the requirements by financial institutions. This review process will result in a rating of compliant, largely compliant, partially compliant, and non-compliant. The EU Council will use these rating in assessing their criteria when adopting conclusions on the list of non-cooperative jurisdictions. 8. Amend or abolish the existing regimes with harmful features. Jurisdictions can decide to amend the legislation to remove the harmful features (ring-fencing and lack of real economic substance) from existing preferential regimes. A decision on a grandfathering period before the benefits cease to apply should be made. The grandfathering period has to be reasonable.48 Alternatively, jurisdictions can decide to abolish the preferential tax regimes. In this case, grandfathering provisions may also apply. 9. Inform the EU Council that preferential tax regime was abolished or amended. Jurisdictions should approach the EU Secretariat and inform them about any amendments to the existing preferential tax regimes. Ratify the Multilateral Instrument. 10. https://www.oecd-ilibrary.org/docserver/db9eca26-en. 47 pdf?expires=1685946802&id=id&accname=ocid195787&checksum=6586B5ABE27463B4EC27EA8178214786 48 There is no specific guidance issued by the EU Code of Conduct Group on grandfathering of preferential regimes with potentially harmful features. The EU Commission has advised that they would often follow OECD guidelines, which range between 1 – 2 years. See Annex B of the 2017 Progress Report on Preferential Regimes – Harmful Tax Practices: https://www.oecd-ilibrary.org/docserver/9789264283954- en.pdf?expires=1685943825&id=id&accname=ocid195787&checksum=00F2FB26C1CDED773C262940D60A343B 31 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions In the chart below, we have listed the actions specific to each of the PIF members on the EU list can undertake to strengthen their transparency, fair taxation and anti-BEPS frameworks, discussed in section 2: Measures Fiji Palau Samoa Vanuatu 1.Request to be invited to sign the Multilateral Convention X X 2.Ratify the Multilateral Convention X X 3.Conduct an EOIR mock assessment X X 4.Collaborate throughout the EOIR supplementary review X procedures 5.Conduct a preliminary ISM assessment X X 6.Monitor AEOI implementation X X 7.Commit to AEOI with a specific date X X 8.Amend/abolish harmful preferential tax regimes X X X 9.Inform the EU Council about the amendments to X preferential tax regimes 10.Ratify the Multilateral Instrument X Some specifications for each of the PIF countries studied: Fiji 1. In relation to Fiji’s existing harmful preferential regimes, Fiji can decide to abolish the preferential tax regimens or amend them to remove the harmful features (ring-fencing and lack of real economic substance) from the exporting companies’ regime and the ICT regime (through the nexus approach or by excluding benefits for income derived from IP). In either case, Fiji will need to give careful consideration to the application of grandfathering provisions. 2. Regarding the revised tax concession rate for the regional or global headquarters regime, Fiji should contact the EU Secretariat and communicate that the concessional tax rate for the regional or global headquarters regime is no longer applicable from 2023 onward. 3. Ratify the adoption of the Multilateral Instrument, which Fiji signed in 2017, as it is expected to adequately fulfill the requirements for complying with BEPS Action 6, aimed at preventing treaty abuse. Palau 1. It is advisable that Palau conducts a preliminary assessment of its EOIR implementation in anticipation of the upcoming peer review scheduled for the third quarter of 2024. The review period has already begun, and Palau should proactively address any existing shortcomings in its legislation and practices to ensure they are reflected during the review. 32 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Samoa 1. Concerning Samoa’s Offshore Business regime, similar to Fiji, Samoa has the option to either abolish it or introduce amendments to eliminate its harmful features such as ring-fencing and the absence of real economic substance. In either scenario, careful consideration must be given to the application of grandfathering provisions. 2. Monitor the AEOI implementation. In 2023, the Global Forum launched a more robust peer review process on the effectiveness of AEOI in practice. Countries, like Samoa that underwent an initial review of its AEOI in practice, will be reviewed again before 2025. The AEOI peer review process, covering both legal assessment and practical effectiveness, underwent by Samoa in 202249, determined that Samoa has legislation in place, requiring reporting financial institutions to conduct due diligence and reporting procedures as well as the international legal framework to exchange the information with all of Samoa’s interested appropriate partners. In terms of the practical effectiveness of AEOI, Samoa’s implementation is on track. This includes ensuring that reporting financial institutions correctly carry out due diligence and reporting procedures and exchange information in an effective and timely manner. Samoa should continue its implementation efforts accordingly, to maintain its ongoing effectiveness and prevent any negative rating. Vanuatu 1. Regarding Vanuatu’s potentially harmful regime, there are two options: either amend or abolish it. Vanuatu can choose to modify the ICA to allow international companies to be able to carry out business in Vanuatu. This would entail imposing appropriate economic substance requirements, sanctions and a procedure for striking off non-compliant companies. Alternatively, Vanuatu may opt to eliminate the international companies altogether. In this case, grandfathering provisions may also apply. 2. Monitor the AEOI implementation. Vanuatu should ensure that the shortcomings identified in the latest AEOI peer review from 202250 be addressed to upgrade the current rating of non-compliant in the forthcoming review on the AEOI effectiveness in practice. The peer review determined that Vanuatu has legislation in place, requiring reporting financial institutions to conduct due diligence and reporting procedures as well as its international legal framework to exchange the information with all of Vanuatu´s interested appropriate partners. However, on the effectiveness of AEOI in practice, Vanuatu´s implementation is non-compliant. There are fundamental issues with respect to ensuring that reporting financial institutions correctly conduct the due diligence and enforcing the reporting obligations. https://www.oecd-ilibrary.org/docserver/db9eca26-en. 49 pdf?expires=1685946802&id=id&accname=ocid195787&checksum=6586B5ABE27463B4EC27EA8178214786 https://www.oecd-ilibrary.org/docserver/edb78c24-en. 50 pdf?expires=1685947320&id=id&accname=ocid195787&checksum=A84E080E500881E374213FEEE64D08AF 33 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 4. Potential impact for PIF countries in the EU list There are a number of negative consequences for countries included in the EU list of non- cooperative jurisdictions, that could be tax-related or not. Jurisdictions frequently face external pressure from the international community and businesses to take the necessary measures to be excluded from the list. This section specifically addresses the potential repercussions faced by countries included in the EU list of non-cooperative jurisdictions. However, it is important to note that estimating the potential loss in Foreign Direct Investment (FDI) in Fiji, Palau, Samoa and Vanuatu due to their inclusion in the list is beyond the scope of this desk review. Reputational risk Being listed as a non-cooperative jurisdiction can severely damage the reputation of a jurisdiction. It signals to the international community that the jurisdiction may not be fully committed to adhering to the international tax standards and cooperating in the global effort against tax evasion, avoidance, illicit financial flows and corruption. This, in turn, can lead to a loss of trust from investors, businesses, and international partners, potentially impacting economic growth and FDI. Additionally, there may be repercussions for the financial system, as countries labeled “high risk” may experience difficulties in maintaining Correspondent Banking Relationships. The classification of “high risk” typically applies to jurisdictions found deficient in multiple areas of Anti Money Laundering (AML) /Combatting the Financing of Terrorism (CFT) compliance, as well as those subject to sanctions or identified as tax havens/offshore centers.51 Tax consequences Countries in the EU list face tax defensive measures from both EU members and other countries. In December 2017, the EU Member States agreed to implement appropriate administrative measures in the tax area.52 This provides a coordinated action among EU Member States, aiming to prevent using the legislation, policies and administrative practices of listed jurisdictions for aggressive tax planning, evasion or abuse. Additionally, other countries have unilaterally opted to enforce defensive tax measures against countries listed as non-cooperative by the EU. 51 Rice, T., von Peter, G. and Boar, C. 2020. On the global retreat of correspondent banks, in BIS Quarterly Review March 2020, https://www.bis.org/publ/qtrpdf/r_qt2003g.pdf 52 https://data.consilium.europa.eu/doc/document/ST-15429-2017-INIT/en/pdf 34 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions To ensure a coordinated action, EU Member States agreed to apply effective administrative measures. These measures are designed to prevent the utilization of legislation, policies and administrative practices of listed jurisdictions for purpose of aggressive tax planning, evasion or abuse. The tax administrative measures include: • Reinforced monitoring of certain transactions; • Increased audit risk for taxpayers benefiting from the regimes at stake; and • Elevated audit risks for taxpayers employing structures or arrangements involving these jurisdictions. Every EU member is obligated to implement at least one legislative measure to encourage positive change that contribute to the removal of a jurisdiction from the list. In 2017, the Council recommended several legislative defensive measures in the tax area. Further guidelines were approved in 2019.53 In principle, every EU member is expected to enact at least one legislative measure. Moreover, a Member State has the option to enhance the effects of any of the defensive measures by employing a reversal of the burden of proof and imposing special documentation requirements, all while respecting national laws that allow the taxpayer to provide counter evidence. The legislative tax defensive measures are designed to increase a company’s tax burden. The potential tax defensive measures of legislative nature that can be applied by EU member countries include: • Non-deductibility of costs: Deny deduction of costs and payments that would otherwise be deductible for the taxpayer when these costs and payments are considered directed to entities or persons in listed jurisdictions. • Controlled Foreign Company (CFC) rules: Include in the taxpayer’s tax base the income of an entity resident or a permanent establishment situated in a listed jurisdiction. This measure must be applied in accordance with the rules in Articles 754 and 855 of the Anti-Tax Avoidance Directive (EU) 2016/1164. • Withholding tax: Apply withholding tax at a higher rate, for example, on payments such as interest, royalties, service fees or remuneration when these payments are treated as received in listed jurisdictions. • Limitation of participation exemption on profit distribution: Member States with rules that permit excluding or deducting dividends or other profits received from foreign subsidiaries (e.g. holdings), could deny or limit such participation exemptions if the dividends or other profits are treated as received from a listed jurisdiction. 53 https://data.consilium.europa.eu/doc/document/ST-14115-2019-INIT/en/pdf 54 https://www.legislation.gov.uk/eudr/2016/1164/article/7 55 https://www.legislation.gov.uk/eudr/2016/1164/article/8 35 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions The implementation of tax defensive measures varies among EU member states. As of 31 January 2023, all EU member States apply at least one of the four legislative defensive measures.56 The most popular legislative defensive measures among EU members are the rules on controlled foreign companies and on non-deductibility of costs. However, in general all four legislative defensive measures are applied, with six countries57 having decided to adopt all suggested legislative tax measures. These measures can highly affect investment decisions when considering increased taxes, e.g. in some instances some countries apply withholding taxes of 75% to payments made to listed jurisdictions. Non-tax consequences The influence of the EU list of non-cooperative jurisdictions extends beyond tax-related issues. The EU Council has encouraged both EU institutions and member states to consider this list in foreign policy, development cooperation and economic interactions with third countries. An illustration of this integration into development cooperation is evident in Regulation (EU) 2017/1601 of the European Parliament and the Council dated 26 September 2017.58 This regulation establishes the European Fund for Sustainable Development (EFSD), along with the EFSD Guarantee and the EFSD Guarantee Fund.59 The EFSD is not the sole entity being influenced by the EU list in formulating its policies. Numerous examples, as the one of EFSD, illustrate this impact. Several EU instruments prohibit the possibility of channeling funds through entities located in listed countries, including: • European Fund for Strategic Investments (EFSI);60 • External Lending Mandate;61 • General framework for securitization.62 Development banks also rely on the EU list. The ADB, the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank and the World Bank (including the International Finance Corporation) consult the outcomes of the EU listing exercise when extending loans to the private sector or undertaking similar operations. Implementation costs Jurisdictions need to evaluate whether implementation expenses outweigh the consequences of being placed on the EU list of non-cooperative jurisdictions. Many of the PIF members, which have been on the list for an extended period, possess ample information to conduct a thorough assessment of whether the effort and associated costs are justified. Nevertheless, it is important to note that adhering to international standards will be beneficial for any tax administration and tax system, extending its benefits even to jurisdictions with little or no nominal tax rates. 56 https://data.consilium.europa.eu/doc/document/ST-9875-2023-INIT/en/pdf 57 France, Germany, Latvia, Lithuania, Portugal and Spain. 58 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32017R1601 59 Article 22 of Regulation (EU) 2017/1601 contains a link to the EU list of non-cooperative jurisdictions: “In addition, the eligible counterparts shall not enter into new or renewed operations with entities incorporated or established in jurisdictions listed under the relevant Union policy on non-cooperative jurisdictions, or that are identified as high risk third countries pursuant to Article 9(2) of Directive (EU) 2015/849 of the European Parliament and of the Council (13), or that do not effectively comply with Union or internationally agreed tax standards on transparency and exchange of information.” 60 https://eur-lex.europa.eu/legal-content/en/TXT/?uri=celex:32017R2396 61 https://eur-lex.europa.eu/legal-content/en/TXT/?uri=celex:32018D0412 62 https://eur-lex.europa.eu/legal-content/en/TXT/?uri=celex:32017R2402 36 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions 5. Conclusions and recommendations The EU listing process is a dynamic endeavor based on rapidly evolving tax good governance standards. Small jurisdictions, like the PIF members examined in this paper, struggle to keep up with the international tax developments. Frequently, these standards are in many cases unknown to these countries, adding complexity to their ability to promptly adjust to the changing rules and practices. The main technical issues affecting Fiji, Palau, Samoa and Vanuatu relate to tax transparency and fair taxation standards. Samoa and Vanuatu have made a lot of progress in implementing the tax transparency standards. The current focus should lie in monitoring the exchange of information processes in place. For Fiji and Palau, the journey on tax transparency seems longer, but their recent membership to the Global Forum demonstrates the shared determination to strengthen their international tax framework against tax evasion and avoidance. Most developing countries have yet to implement AEOI; often regarded as more complex due to the required IT infrastructure. Nevertheless, considerable progress on AEOI is evident among PIF members. Samoa and Vanuatu started AEOI exchanges in 2018 and they should vigilantly monitor the effectiveness in practice of the AEOI standard to sustain its benefits ensure a positive rating. Failure to do so may result in a negative rating that will be reflected in the listing exercise. This monitoring recommendation also applies to countries no longer on the list but subject to ongoing scrutiny by the EU to ensure compliance with the tax good governance criteria. There is no indication that PIF member countries with preferential regimes or offshore structures have any intention to promote harmful competition by attracting profit without real economic activity. Fiji, Samoa and Vanuatu established their preferential tax regimes several years ago with the aim of encouraging investment, without fully recognizing the potential harmful tax consequences. However, recent changes in Fiji indicate a shift towards addressing harmful tax features and tax competition. The EU is not demanding the complete abolition of preferential tax regimes, but rather the elimination of aspects that make them harmful. The suggestion is to follow this path and contribute to strengthening the tax system in combating tax avoidance, tax evasion, illicit financial flows and corruption. 37 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions To successfully implement these international tax standards, countries require both political will and technical assistance from international organizations with strong expertise in this field. The process of implementing these standards can be complex and overwhelming, particularly to smaller jurisdictions. Fortunately, there are many possibilities for obtaining technical assistance from international organizations working in the region, notably ADB and the World Bank. The World Bank provides technical assistance to developing countries, helping them strengthen their international tax systems by focusing on areas such as tax transparency, fair taxation and addressing BEPS. The World Bank works in coordination with ADB, the Global Forum Secretariat and the OECD Secretariat to assist countries in the region that have demonstrated a strong commitment to driving positive change. The key however, will be the strong commitment from the countries and the ownership of the action plans to deliver on the reforms needed. The process of establishing a robust international tax system for Fiji, Palau, Samoa and Vanuatu is expected to require a significant amount of time, spanning several months or even years. The upcoming EU list of non-cooperative jurisdictions is set to be published in October 2024. The specific timelines to fully implement the necessary changes to establish robust, transparent, and fair systems will depend on the specific issues for each of the PIF members, as they face unique challenges. It is unlikely that all technical issues affecting each of these jurisdictions will be fully resolved by October 2024. As highlighted in section 3, addressing these specific issues can be a lengthy process, taking several months or even years to develop. The pace and effectiveness of addressing these issues will also be influenced by factors beyond technical considerations, including the presence of political will, the availability of human resources within tax authorities, and the level of assistance provided by development agencies. 38 DESKTOP REVIEW: Analysis of the Pacific Islands Forum members included in the EU list of non-cooperative jurisdictions Annex 1- Relevant information on the EU list of non-cooperative jurisdictions 1. What is the EU list of non-cooperative jurisdictions? In November 2016 the EU Council mandated the CoCG to carry out preparatory work to establish a list of non-cooperative jurisdictions for tax purposes. The CoCG initially screened 92 jurisdictions on the basis of their economic ties with the EU, the institutional stability and on the importance of the country’s financial sector. To be considered cooperative for tax purposes, jurisdictions are screened on a number of criteria established by the EU Council. The criteria have been designed to evolve over time and related to tax transparency (exchange of information), fair taxation (harmful tax measures) and implementation of BEPS measures (minimum standards). According to the EU, the list “is not to name and shame countries, but to encourage positive change in their tax legislation and practices through cooperation.” The list is published as an annex (annex I) of the conclusions adopted by the ECOFIN Council. Jurisdictions that do not yet comply with all international tax standards but have committed to implementing reforms are included in a state of play document (annex II). Jurisdictions are removed from the list when they meet all their commitments and when they comply with the international standards as defined in the listing criteria. 2. Which countries are currently included in the EU list of non-cooperative jurisdictions? The EU list of non-cooperative jurisdictions (annex I) was last updated on February 20th, 2024, and includes the following jurisdictions: American Samoa, Anguilla, Antigua and Barbuda, Fiji, Guam, Palau, Panama, Russian Federation, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. The following jurisdictions have made commitments and are currently included in the state of play document (annex II): Armenia, British Virgin Islands, Costa Rica, Curacao, Eswatini, Malaysia, Turkey and Vietnam. 3. When is the list updated? The list has been regularly updated and revised since it was first established in 2017. The list is updated twice per year when the Economic and Financial Affairs Council meets. However, jurisdictions that are included in annex I or annex II can report progress at any point in time. The last revision of the list took place February 20th, 2024. The next revision will be in October 2024. To be removed from the list, a jurisdiction must fully implement the standards and fulfill its commitments. 39