On 15/11/2018, the OECD reported international efforts to curb harmful tax practices and prevent the misuse of preferential tax regimes are having a tangible impact worldwide, according to new data it release at that time.

The latest progress report, from the 115 nation Inclusive Framework on BEPS, covers the assessment of 53 preferential tax regimes, demonstrating those jurisdictions’ continuing resolve to ensure that tax breaks are only offered to substantive activities and only if they do not pose risks of harmful competition to others. The 115 nations include about 80 developing nations (whose interests include avoiding harmful tax practices).

The assessment process is part of ongoing implementation of Action 5 under the OECD/G20 Base Erosion and Profit Shifting Project. The assessments are undertaken by the Forum on Harmful Tax Practices (FHTP). Action 5 revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes.

The latest batch of assessments includes:

  • 18 regimes where jurisdictions have delivered on their commitment to make legislative changes to abolish or amend the regime (Andorra, Curaçao, Hong Kong (China), Mauritius, San Marino and Spain).
  • Four new or replacement regimes that have been specifically designed to meet Action 5 standard (Lithuania, Mauritius and San Marino).
  • New commitments to make legislative changes to amend or abolish a further 10 regimes, by Aruba, Australia, Maldives, Mongolia, Montserrat, the Philippines and Saint Lucia.
  • An additional 17 regimes that have been brought into the FHTP review process (Aruba, Brunei Darussalam, Curaçao, Gabon, Greece, Jordan, Kazakhstan, Malaysia, Panama, Paraguay, Saint Kitts and Nevis and the United States).
  • Four other regimes that have been found to be out of scope, not yet operational or were already abolished or without harmful features (Aruba, Kenya, Paraguay).

Australia’s potentially harmful tax practice was its system for ‘Offshore banking units, which it has (apparently) agreed to amend.

The cumulative picture of the Action 5 regime review process (having now reviewed 246 regimes) is as follows.

Cumulative picture of the Action 5 regime review process

These results indicate the extent of continuing work to end harmful tax practices, and ensures that in the future all preferential regimes require real substance.

Substantial Activities Requirements to be applied to ‘no or low tax jurisdictions

Given that 115 ‘inclusive’ list of nations have resolved that geographically mobile income must meet the Substantial Activities Requirements, it is essential to ensure that business activity does not simply relocate to a zero tax jurisdiction in order to avoid the substance requirements. This would tilt the playing field for those that have now changed their preferential regimes to comply with the standard.

Against this backdrop, the Inclusive framework has decided to apply the Substantial Activities Requirement for “no or only nominal tax” jurisdictions.

  • “This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location,” said Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration.
  • “The Inclusive Framework’s actions will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction.”

Having said that, most of the ‘no or low tax’ countries are not part of the Inclusive Framework, enforcing this will have its challenges but the basis plan, at present, is for all ‘inclusive framework nations to use tax return powers to get holding companies or ultimate owners, to complete information on ‘downstream’ entities, to see if they are in ‘no or low tax’ regimes and take what action they can.

For more information on the BEPS Action 5 peer review and monitoring process, visit: www.oecd.org/tax/beps/beps-action-5-peer-review-and-monitoring.htm

FJM 13.12.18

[OECD website: Nov 18 Updated Harmful Tax Practices Report; Substantial Activities Requirements; LTN 223, 19/11/18; Tax Month – November 2018]


CPD questions (answers available)

  1. Is BEPS Action item 5 involve revamping the prior work on harmful tax practices to improve transparency, exchange on rulings and new ‘substantial activity’ requirements for preferential regimes?
  2. How many regimes have been reviewed in the latest tranche?
  3. Did Australia feature as a jurisdiction that agreed to change a potentially harmful tax practice?
  4. What was it?
  5. Has the ‘Inclusive Framework’ of (over 115 nations) resolved to apply the ‘substantial activity’ requirement to ‘no or low tax’ countries?

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