Although Panama remains on the European Union (EU) list of non-cooperative jurisdictions, there are no immediate consequences for Panama. Provided no defensive measures are taken against Panama, the treatment of corporate structures including Panama and the application of double tax treaties signed with Member States of the EU will remain the same.

On 22 February 2021, the Council of the European Union (the Council) updated the EU list of non-cooperative jurisdictions for tax purposes (the EU list) and kept Panama on the list. For more information on the inclusion of Panama on the list, see EY Global Tax Alert, Panama included on EU list of non-cooperative jurisdictions for tax purposes, dated 19 February 2020.

Background

The list includes jurisdictions worldwide that either have not engaged in a constructive dialogue with the EU on tax governance or have failed to deliver on their commitments to implement the reforms necessary to comply with a set of objective “tax good governance” criteria related to tax transparency, fair taxation and the implementation of international standards to prevent tax base erosion and profit shifting.

The changes to the list take into consideration the ratings recently released by the Organisation for Economic Co-operation and Development (OECD) Global Forum for Transparency and Exchange of Information (Global Forum) on the exchange of information on request.¹ For purposes of the list, the EU requires jurisdictions to be at least “largely compliant” with the international standard on transparency and the exchange of information.

Updated list

Panama was included on the EU list of non-cooperative jurisdictions for tax purposes by the Council on 18 February 2020 and remains on the list because of the Council’s conclusions made on 22 February 2021. The Council concluded that Panama does not have a rating of at least “largely compliant” by the Global Forum and has not resolved this issue yet.

Barbados was added to the EU list in October 2020 after it received a “partially compliant” rating from the Global Forum. It has now been granted a supplementary review by the Global Forum and has therefore been removed from Annex I and moved Annex II (State of play of the cooperation with the EU with respect to commitments taken by cooperative jurisdictions to implement tax good governance principles).

The Council also added Dominica to Annex I of the EU list of non-cooperative jurisdictions² because it received a “partially compliant” rating from the Global Forum and has not yet resolved this issue.

With the 22 February 2021 update, there are 12 jurisdictions on the list of non-cooperative jurisdictions (Annex I): American Samoa, Anguilla, Dominica, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.³ The following countries are included under Annex II: Australia, Botswana, Eswatini, Jordan, Maldives, Morocco, Namibia, Saint Lucia, Thailand and Turkey.

Implications

Even though the list was adopted by the Council, there are no immediate consequences for Panama as a result of its inclusion on the list of non-cooperative jurisdictions. Therefore, the application of double tax treaties currently between Panama and the Czech Republic, Italy, France, Luxembourg, Netherlands, Portugal, Spain and the United Kingdom will not be affected by the inclusion of Panama on the list. The operation of corporate structures that include Panama also will not be affected.

Because of Panama’s inclusion on the EU list of non-cooperative jurisdictions, EU Member States may include Panama on their lists of non-cooperative jurisdictions for tax purposes under their domestic laws and may apply defensive measures. Under the CCG’s “Guidance on defensive measures in the tax area towards non-cooperative jurisdictions” and Council conclusions previously issued as part of a list of non-cooperative jurisdictions, Member States should apply at least one of the following administrative measures in the tax area:⁴

1. Reinforced monitoring of certain transactions

2. Increased audit risks for taxpayers benefiting from the regime at stake

3. Increased audit risks for taxpayers using structures or arrangements involving these jurisdictions

Additionally, Member States also should use the EU list to apply at least one of the following legislative measures:⁵

1. Non-deductibility of costs: deny deductions for otherwise deductible costs and payments when those costs and payments are treated as directed to entities or persons in listed jurisdictions

2. Controlled foreign corporation (CFC) rules: include in the tax base of the taxpayer the income of an entity resident or a permanent establishment situated in a listed jurisdiction, which may allow Member States to apply this measure in accordance with the Anti-Tax Avoidance Directive CFC rules

3. Withholding tax measures: apply a withholding tax at a higher rate on payments such as interest, royalties, service fees or remuneration, when these payments are treated as received in listed jurisdictions

4. Limitation of participation exemption on profit distribution: for Member States with rules that permit excluding or deducting dividends or other profits received from foreign subsidiaries or deny or limit such participation exemptions if the dividends or other profits are treated as received from a listed jurisdiction.

The EU transparency rules also were updated and include new reporting requirements for tax schemes involving listed countries.

The Council updates the list two times a year and is expected to update the list in October 2021.⁶

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited Corp., Panama City

• Luis Eduardo Ocando | luis.ocando@pa.ey.com
• Carlos Márquez | carlos.marquez@pa.ey.com
• Ana Clement | ana.clement@pa.ey.com

Ernst & Young LLP (United States), Latin American Business Center, New York

• Ana Mingramm | ana.mingramm@ey.com
• Pablo Wejcman | pablo.wejcman@ey.com
• Enrique Perez Grovas | enrique.perezgrovas@ey.com

Ernst & Young Abogados, Latin American Business Center, Madrid

• Jaime Vargas | jaime.vargas.c@es.ey.com

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

• Lourdes Libreros | lourdes.libreros@uk.ey.com

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

• Raul Moreno, Tokyo | raul.moreno@jp.ey.com
• Luis Coronado, Singapore | luis.coronado@sg.ey.com

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Endnotes

1. 2020 Global Forum Annual Report – Tax Transparency and Exchange of Information in time of COVID-19 (OECD).
2. 6329/21, FISC 33, ECOFIN 153, Outcome of Proceeding from General Secretariat of the Council to Delegations, Brussels, February 22, 2021, Annex I, page 5.
3. Taxation: EU list of non-cooperative jurisdictions. Please see the following link: https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/.
4. 14114/19, FISC 444, ECOFIN 1005, Report from General Secretarial of the Council to the Permanent Representatives Committee/Council, Brussels, November 25, 2019, ANNEX 4, paragraph 11, page 45.
5. 14114/19, FISC 444, ECOFIN 1005, Report from General Secretarial of the Council to the Permanent Representatives Committee/Council, Brussels, November 25, 2019, ANNEX 4, paragraph 12, page 45.
6. 6329/21, FISC 33, ECOFIN 153, Outcome of Proceeding from General Secretariat of the Council to Delegations, Brussels, February 22, 2021, page 3, Paragraph 7.