Written by David Blake  

This article was first published in ‘Briefings for Brexit’ and we re-publish with their kind permission. You can read Part I here.

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Imposing ‘economic substance’ rules

Another example relates to the EU imposing so-called ‘economic substance’ rules on what it regards as ‘offshore’ centres.  In December 2017, it introduced a list of jurisdictions (known as the ‘Grey List’) which ‘facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity (“substance”) in the jurisdiction’.

A jurisdiction can get itself removed from the Grey List if it cooperates with the EU in ensuring that entities established in those centres have economic substance and that the jurisdictions show commitment and compliance towards standards set by the EU.

The substance requirements apply to geographically mobile service activities, such as banking, insurance, shipping, fund management, financing and leasing, headquarters, distribution and service centres, holding companies, and intellectual property.

A number of jurisdictions introduced economic substance legislation by the end of 2018 in order to be removed from the Grey List. These comprise: Andorra, Bahrain, Faroe Islands, Greenland, Grenada, Guernsey, Hong Kong, Isle of Man, Jamaica, Jersey, Korea, Liechtenstein, Macao SAR, Malaysia, Montserrat, New Caledonia, Panama, Peru, Qatar, San Marino, Saint Vincent & the Grenadines, Taiwan, Tunisia, Turks & Caicos, and Uruguay.

The following Grey List countries have agreed to comply with the legislation before the end of 2019: Albania, Anguilla, Antigua & Barbuda, Armenia, Australia, Bahamas, Bosnia & Herzegovina, Botswana, British Virgin Islands, Cabo Verde, Costa Rica, Curacao, Cayman Islands, Cook Islands, Eswatini, Jordan, Maldives, Mauritius, Morocco, Mongolia, Montenegro, Namibia, North Macedonia, Nauru, Niue, Palau, Saint Kitts & Nevis, Saint Lucia, Serbia, Seychelles, Switzerland, Thailand, Turkey, and Vietnam.

Countries which fail to comply are put on the EU ‘Black List’: American Samoa, Aruba, Barbados, Belize, Bermuda, Dominica, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad & Tobago, United Arab Emirates, the US Virgin Islands, and Vanuatu.

One of the EU’s declared purposes for introducing these rules is to stop money laundering and to block offshore centres that have become tax havens.  We can all be sympathetic to that. But most of the service activities are perfectly legitimate – so this is just another attempt to restrict competition. The rules that the EU is seeking to have introduced in these centres are ones which mimic EU rules; and one of them is that they are properly applied, leaving open the door for the EU to withdraw its approval down the line if the application of the rules is not done to the EU’s liking – thereby creating levers for future control.

Even if you believe that it is reasonable for countries to have to compete fairly on a level playing field, the devil is in the detail of how that playing field is defined. What the EU is really seeking, as judged by its actions, is for all countries to apply EU rules – its details – as interpreted by and applied in the EU. But this is not a level playing field: it’s straightforward imperialism.

In addition, there is potentially something deeply sinister about the EU’s approach, as an adviser to some of these offshore centres told me:

The offshore centres have to negotiate with the EU in order to satisfy the economic substance rules.  This gives rise to two significant problems:

  • There aren’t enough people living in some of these centres to provide economic substance if the EU plays hard. I don’t think they’ll take such an approach in the first instance, and will allow onshore individuals to have, for example, multiple directorships, but down the line the EU could well play it tough and this would kill off the centres.
  • The EU requires the centres not only to have statutory powers to its liking over the entities, but also to enforce them. In due course, I foresee the latter point being used to control how the offshore centres use their laws, and effectively to exercise quasi-governmental control over those centres.

Implications for Brexit

All this will have important implications for the UK after Brexit.

First and foremost, the EU will now view us as an offshore centre. It will try to exercise control over our laws and activities in the same way that it is trying to do with Switzerland and the other offshore centres. In short, it will try to use the same ‘level playing field’ rules to stop us competing against it. This is made perfectly clear in the Withdrawal Agreement and Political Declaration.

This would turn us into the EU’s second colony. We know from the BBC4 fly-on-the-wall documentary Brexit: Behind Closed Doors broadcast in May 2019 that a member of Verhofstadt’s private office views us precisely as a colony. This needs to be resisted vigorously. The UK must remain in full control of its laws and taxes.

Second, the EU has stated that ‘equivalence’ is the only regime that it is willing to offer the UK financial services industry in order to allow it continued access to EU clients.  However, a regime which can be withdrawn without notice or explanation would be entirely unacceptable to a global financial centre like the UK – which does six times more business in the EU than vice versa.

We should instead insist that our future relationship with the EU is based on a different regulatory regime, either:  ‘enhanced equivalence’ (proposed by Barney Reynolds), which cannot be withdrawn without notice or explanation – or another form of ‘mutual recognition’, where two countries agree to recognise each other’s regimes as being of similar standard, but not necessarily identical.  The key is the enhancement of existing arrangements.

Given that London is Europe’s financial centre and will remain so after Brexit, either of these two regimes should be perfectly acceptable to the EU if we are to believe its promises to use its ‘best endeavours’ to ‘develop, in good faith, agreements giving effect to’ the future relationship between the UK and EU (to use the language of the Political Declaration).  They are also the only way to avoid being gradually sucked into the EU’s economic substance whirlpool.

There is now widespread horror and embarrassment by many in this country about the British Empire. Yet the very same people are apparently more than willing to sign up to the EU’s new Empire.

The rest of us need to resist any further attempts by the EU to exercise its bullying imperial power over us. But we can only do this once we fully understand what the EU’s real game is.

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