How Venezuela blacklisted itself as a tax haven

As you might have seen, the European Commission is proposing that EU Member States create a blacklist of countries that do not “apply minimum standards of good governance in tax matters. These countries would be subject to sanctions from EU member states, up to and including the termination of double tax treaties.The blacklisting approach is not new, and a paper by the Australian academic Jason Sharman, “Dysfunctional policy transfer in national blacklists,” offers a note of caution.

Sharman studies the diffusion of blacklists (‘policy diffusion’ – what causes a particular policy to spread from one country to another – is a hot topic in international relations right now) and finds that they are quite prone to errors.

First, the paper shows that attempts to use international lists have frequently been troubled. In 2003 Argentina adopted a blacklist drawn up in 2000 by the Financial Action Task, writing the names of seven jurisdictions into its legislation. But all seven soon managed to escape the FATF list.  The government of Colombia and the US Congress tried unsuccessfully to use the OECD’s “list of unco-operative tax havens” in anti-avoidance legislation, attracting criticism from the OECD’s Forum on Taxation in the process because that list, too, was intended to be dynamic.

Then there are what Sharman describes as the “unintended consequences”:

For example, a Brazilian company bought an interest in the airport in Curaçao, Netherlands Antilles, only to have to lobby for exemption from its government’s penalties for dealings with tax havens…Similarly, many European engineering companies interested in bidding for work on the expansion of the Panama Canal had to negotiate exemptions or suffer the penalties of transacting with Panama…A Chilean mining firm looking to buy equipment from Barbados had to go to the trouble and extra expense of setting up an intermediary to process the transaction.

But the pièce de résistance is a perfect example of policy emulation. Anomalies and typographical errors in Mexico’s blacklist included referring to ‘Patau’ instead of ‘Palau’ and blacklisting several islands that were no longer separate tax jurisdictions. These errors found their way into the blacklists of Argentina, Portugal and Venezuela, demonstrating that the scrutiny in each of these countries must have been fairly minimal. But the latter made an even worse error by forgetting to make fairly basic changes:

the Venezuelan legislation made reference to the wishes of the Mexican legislature and the need to be consistent with the Mexican constitution. Worse still, the original Mexican list had included Venezuela, and thus by copying the Mexican list, Venezuela succeeded in blacklisting itself.

The EU approach is a more dynamic list, with only criteria, rather than jurisdictions, written into the communication so far. This would hopefully avoid some of the problems described above. But the notorious difficulty of defining “a tax haven”, especially for a group of countries several of which are frequently regarded as tax havens themselves, will make the reaction to the Commission’s proposals very interesting.