Why is Europe so obsessed with Pacific tax regimes?

Among the 9 jurisdictions singled out by the European Union for their “abusive tax practices”, no less than 6 are small Pacific island nations with underdeveloped economies. As unlikely as it may seem, Brussels’ obsession with the region seems to have less to do with the noble fight against tax evasion than with its own geopolitical interests.

Launched in 2017 and updated twice a year since, the EU’s ‘List of Non-Cooperative Jurisdictions for Tax Purposes’ (aka the Tax Blacklist) aims to combat fraud, evasion or evasion tax and money laundering by designating and shaming places that facilitate these activities and could erode tax revenues for EU members.

Surprisingly, with the sole exception of Panama, the tax blacklist does not include any of the top 70 corporate tax havens ranked by the Tax Justice Network in 2021, nor any of the jurisdictions flagged for harboring private wealth in the recent Pandora Papers ( except Samoa) . Instead, the EU only finds a risk of tax abuse in three jurisdictions in the Caribbean (Panama, US Virgin Islands, Trinidad and Tobago) and six in the Pacific.

The six – American Samoa, Fiji, Guam, Palau, Samoa and Vanuatu – are collectively home to 1,644,076 people, or 0.02% of human beings currently alive, who produce around 0.1% of global GDP. They are only a fly on the global economy by most financial measures. Yet the EU expects the public to seriously believe that this group of islands pose the most serious threat to the tax revenue base of its member states.

Easy targets

Why such a disproportionate focus on the Pacific? One explanation would be to view the Tax Blacklist as a tool not against tax evasion, but against tax insubordination. Any country that does not adopt the European principles of big government – ​​big taxes, big spending – becomes an adversary for the Union in the global competition for investment.

The EU would certainly face a backlash if it publicly challenged the fiscal policies of the large and powerful tax havens where EU citizens actually store their wealth. These of course include Hong Kong and the British Virgin Islands as well as its own members and neighbors such as Luxembourg, the Netherlands, Cyprus, Monaco and Switzerland, to name a few. Instead, Brussels is saving face by targeting smaller, emerging competitors that lack the resources or connections to defend themselves.

What these Pacific Islanders have in common is not an unlimited capacity to shelter themselves from taxation, but a helplessness in the face of European bullying. Ultimately, the Tax Blacklist only targets the low hanging fruits: weak nations that refuse to toe the EU line on taxation. The whole exercise is nothing but theater for the European taxpayer – with a hint of colonial-era nostalgia.

Not our tax cup

It goes without saying that sound fiscal policies in a large developed European nation do not necessarily make sense in small Pacific island countries. Depending on their situation and degree of development, they have a range of options for generating public revenue in the way that best meets their specific challenges.

Take Vanuatu. It has never had income tax, neither before nor after its independence in 1980. As a small offshore financial centre, it offers an attractive environment for foreign investors. For this isolated country with limited resources, attracting FDI is essential to diversify the economy and bring in foreign currency. This does not, however, make it a business destination of choice; the country’s GDP hovers below just $1 billion, and that’s pre-Covid.

In fact, the business-friendly regime is not even the main reason why Vanuatu waives income tax. In an underdeveloped, underbanked, and largely informal economy, where most citizens live off the land and have no electricity or modern plumbing, the cost of administering such a tax would far exceed the revenue it generates. The Vanuatu government instead relies on VAT and various royalty and licensing regimes.

The country’s revenue model is purely pragmatic and based on realistic assessments. Perhaps its leaders will one day find it relevant to adopt income taxation, but not before the development gap between the capital of Port Vila and the provinces has narrowed, and the country’s infrastructure has has reached a level of maturity that justifies the methods of big government.

As long as Vanuatu adheres to global standards of fairness and transparency – and it does, as a signatory to treaties such as the OECD Common Reporting Standard – the EU has no right to encroach on its sovereignty by dictating policies and tarnishing its global reputation and business prospects. .

Vanuatu’s problem is compounded by its monetary sovereignty. Along with Fiji, Samoa and Trinidad and Tobago, it is one of only four countries on the EU tax blacklist that controls its own national currency and therefore suffers significant consequences such as the loss of some of its corresponding banking facilities. The remaining five jurisdictions use the US dollar as their currency and therefore will not lose any of their capacity for international transactions.

The elephant in the room

Perhaps any discussion of the EU tax blacklist should address the ambivalent position of French Polynesia, New Caledonia and Wallis and Futuna. After Brexit, France became the epitome of Europe in the Pacific and the only EU member with interests at stake there. The three overseas collectivities add 7 million km² to France’s immense exclusive economic zone and make it the last empire where the sun never sets.

As the world looks to tomorrow’s ‘blue economy’, French policy makers are keenly aware of the growing importance of maritime resources such as fish, seabed minerals and deep-sea oil and gas. . Blinded by Anglophone alliances in the region, and threatened by recurring independence movements, the French Republic has no choice but to grant all economic advantages to its territories while denying them to potential competitors. In the balance is the very relevance of France in the Pacific – and therefore in the world.

The pot calling the black kettle

In addition to the EU tax blacklist, of which it is one of the main architects, France applies tax incentives in its three communities – as if the rules dictated to their neighbors did not apply to them. There is no personal income tax in French Polynesia; there is absolutely no tax of any kind in Wallis and Futuna (not even a VAT like in Vanuatu); and there is no personal capital gains tax in New Caledonia. One could say that these “abusive tax practices” deprive the poorest countries of the Pacific of the foreign investments which they desperately need. Alas, the EU tax blacklist exclusively targets non-EU countries.

For all its methodological controversies, the EU Tax Blacklist is purely a far-fetched attempt by France to play the role of global tax police in the eyes of its citizens, while clinging to its global relevance through a kind of neocolonial behavior that becomes more and more obsolete.

Hon. Sela Molisa is a former Member of Parliament and Minister for the Republic of Vanuatu, and former Governor of the World Bank Group for Vanuatu.

The opinions expressed in this article are those of the authors alone and do not necessarily reflect those of Geopoliticalmonitor.com

Mary I. Bruner