How do countries get into the offshore list?

In its classic sense, offshores are jurisdictions that offer low or no taxation at all, as well as a high level of confidentiality. And earlier such zones were used by businessmen to avoid paying taxes or hide their assets. Now offshore companies are under increased monitoring of international organizations that identify the conditions of unfair taxation in countries and include such jurisdictions in the list of offshore companies with all the ensuing consequences.

Today we will tell you what lists of offshore zones exist, how countries end up on these lists, what factors and criteria play a key role in determining the status of an offshore, and what difficulties arise when working with a country that is included in an offshore list.

Lists of offshore zones

Thus, there are a number of international organizations that are engaged in compiling lists of offshore countries and general tax control. The most prominent of these organizations is the Financial Action Task Force on Money Laundering (FATF). FATF is an international organization that was established in 1989 to develop and implement international standards to combat money laundering, terrorist financing and other financial crimes. The FATF annually updates its list of offshore zones that do not cooperate in order to combat tax evasion. The inclusion of a country in such a list is of global importance for the economy of the offshore state.

In addition to the FATF, one of the important lists of offshore companies is also maintained by the EU, namely the Organization for Economic Cooperation and Development (OECD). Such a list of offshore companies is referred to as the “EU Black List” or as the “Tax Haven List”. Often, the EU offshore list and the FATF list contain the same jurisdictions, but they are not identical, although the international community is considering combining these lists into one. The EU blacklist is also regularly updated. Being blacklisted by the EU has a number of implications for the jurisdiction, including banning trade in the EU, restricting access to the capital market, and imposing restrictions on investment from/to the EU.

Other organizations that compile lists of offshore countries are:

• Organization for Security and Cooperation in Europe (OSCE)
• Organization of American States (OAS)
• Organization of Islamic Cooperation (OIC)
• Financial Reporting Standards Development Group (G20 Group)
• BRICS
• Lists of offshore countries that make up the countries

What is important, in addition to international organizations, the lists of offshore countries are also made up of individual countries. For example, the USA, Great Britain, Ukraine, Kazakhstan and other countries have their own lists of offshore zones.

Such lists may differ in the criteria for inclusion of countries and the consequences of offshore recognition. But, in any case, the inclusion of a jurisdiction in the offshore list can have serious consequences for the economy and international relations with this country. Countries that are included in the list of offshore zones may be subject to sanctions by the country that made the list, and may also lose access to the capital markets of this country. As a result, the offshore economy may suffer and its international relations deteriorate.

Ukrainian list of offshore companies

In Ukraine, there is a list of offshore zones at the state level, approved by the Order of the Cabinet of Ministers of Ukraine dated February 23, 2011 No. 143 “On Classifying States to the List of Offshore Zones”. The list as of August 2023 includes the following jurisdictions:

1. American Samoa
2. Anguilla
3. Andorra
4. Antigua and Barbuda
5. Aruba
6. Bahamas
7. Barbados
8. Belize
9. Bermuda
10. British Virgin Islands
11. Vanuatu
12. Virgin Islands (US)
13. Gibraltar
14. Grenada
15. Guam
16. Cayman Islands
17. Liberia
18. Republic of Maldives
19. Marshall Islands
20. Monaco
21. Montserrat
22. Namibia
23. Nauru
24. Netherlands Antilles
25. Niue
26. Guernsey
27. Jersey Island
28. Isle of Man
29. Alderney Island
30. Cook Islands
31. Palau
32. Panama
33. Puerto Rico
34. Samoa
35. Seychelles
36. Saint Vincent and the Grenadines
37. Saint Kitts and Nevis
38. Saint Lucia
39. Sint Maarten
40. Commonwealth of Dominica
41. Turks and Caicos
42. Trinidad and Tobago
43. Fiji

This list of offshore zones is used for the purposes of taxation, currency control and anti-money laundering and is constantly reviewed. The inclusion of a country in the list of offshore zones may have negative consequences for both the owners of registered companies in these jurisdictions and their counterparties. For example, Ukrainian companies cannot conduct financial and economic relations with companies registered in offshore zones without the permission of the National Bank of Ukraine. Moreover, in Ukraine, the use of offshore schemes for tax evasion is punishable by law. This is punishable by a fine of up to 100% of the amount of tax evasion.

Therefore, it is important to keep track of which countries are included in the offshore list in order not to fall under restrictions or sanctions.

Criteria and factors for inclusion in the list of offshore zones

Different organizations and countries have their own criteria for including jurisdiction in offshore lists. However, there are several general factors that are often taken into account when compiling such lists.

Thus, countries can be recognized as offshore if they demonstrate the following characteristics:

1. Complicated Taxation System. The country has a complex taxation system with many benefits and exemptions for foreign investors, or no corporate taxation system at all.
2. Minimal participation in international tax treaties. Countries do not actively participate in international tax treaties, do not exchange financial information and do not cooperate with other countries in the field of combating tax evasion.
3. Lack of Accountability. Lack of transparency in financial transactions and reporting may raise suspicions of potential tax evasion.
4. Lack of transparency in beneficial ownership. Jurisdictions maintain a high level of secrecy and do not maintain public beneficial ownership registries or do not store or collect data on the ultimate owners of legal entities at all.
5. Lack of Substance. The jurisdiction does not require foreign companies to have a real business presence in the country, which leads to the existence of shell companies and money laundering.
6. Lack of capital controls. Offshore zones usually do not have strict restrictions on the movement of capital and foreign exchange controls, which facilitates the free movement of illegal funds.

Consequences of being in offshore list

Countries that are included in the offshore list may face various consequences:

• International pressure – offshore countries may face international pressure to tighten tax regimes and increase transparency. Thus, international organizations will send their experts to the country to analyze the legislation, who will identify shortcomings, and countries will be obliged to eliminate them.
• Economic consequences – countries may lose their attractiveness for investors and businesses, which may have a negative impact on the economy, because cooperation with offshore carries risks for both partners and contractors.
• Sanctions – the international community may impose sanctions on offshore countries to pressure them to change their tax policies. For example, it may be a ban on trade, a ban on investment, banking services, the abolition of benefits and privileges.
• Reputation – the status of an offshore zone can affect the perception of the country in the world community, in particular, cause public criticism and suspicions of tax evasion.

Risks of cooperation with offshore companies for business

For business,  cooperation or work in a country that is recognized as an offshore also carries serious risks. In particular, this can lead to:

– An increase in the tax burden for business, as the company may be deprived of tax benefits.

– An increased risk of reputational loss for the business, as an attempt at tax evasion or money laundering may be detected.

– Tax audits of businesses that cooperate with offshore zones. Such an audit may lead to claims from the tax authority and, as a result, to fines and penalties.

– Restriction of access to credit resources. Banks can restrict access to credit resources for businesses that cooperate with offshore zones. This is due to the increased risk of loan default on the part of such companies.

– Problems with the conclusion of contracts with partners. Partners may refuse to conclude contracts with a business that cooperates with offshore zones and is registered there.

Here are some examples of the consequences of tax evasion among well-known companies:

• Amazon was fined €2.8 billion in 2022 for tax evasion in the UK. The company used offshore zones to register its European subsidiaries and redirect profits to these jurisdictions.
• Apple was fined €13 billion in 2021 for tax evasion in Ireland. The company used the offshore zone to obtain income tax benefits.
• Google was fined €9 billion in 2020 for tax evasion in France. The company used offshore zones to register its European subsidiaries and redirect profits to these jurisdictions.

These examples show that registering a company in an offshore zone or cooperating with offshore zones can have serious consequences for a business. Therefore, companies must carefully weigh the risks and benefits of such cooperation.

Final Recommendations

Thus, there is now a growing focus on transparency and the fight against tax evasion. Many countries are improving their tax systems and strengthening measures against offshore practices, which leads to a reduction in the number of offshore zones in the world. This is due to the efforts of international organizations to combat the illegal use of offshore companies. As a result, many countries that were previously considered offshore zones have taken steps to correct shortcomings in their financial system and no longer meet the criteria for inclusion in the list of offshore zones.

As part of this, it is important for businesses to monitor the updating of the lists of offshore companies maintained by both international organizations and their countries of residence in order not to tarnish their reputation by cooperating with offshore companies or not to fall under sanctions or other restrictions at all.