OECD cracks down on misuse of preferential tax regimes

The OECD says international efforts spearheaded by its base erosion and profit shifting (BEPS) project to curb harmful tax practices and prevent the misuse of preferential tax regimes are having a tangible impact worldwide, according to its latest report on progress

The assessments are undertaken by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 120 member jurisdictions of the BEPS inclusive framework. This assessed 53 preferential tax regimes in relation to action 5, which focuses on a number of activities designed to improve transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and requiring substantial activity for preferential regimes, such as IP regimes.

The report found 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).

Lithuania, Mauritius and San Marino have designed new or replacement regimes specifically to meet Action 5 standards, while Aruba, Australia, Maldives, Mongolia, Montserrat, the Philippines and Saint Lucia have all made new commitments to make legislative changes to amend or abolish a further 10 regimes.

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 US). Four other regimes were found to be out of scope, not yet operational or were already abolished or without harmful features (Aruba, Kenya, Paraguay).

Following the latest set of reviews, the OECD says the action 5 regime review process has now reviewed 246 regimes in total. Of these, three were judged to be harmful, three were assessed as potentially harmful and five were viewed as potentially but not actually harmful.

The assessment shows 30 regimes are under review, 78 are in the process of being eliminated or amended, 46 have already been amended or abolished, while 23 are out of scope and 53 have been judged not harmful.

The OECD said that given that all preferential regimes for geographically mobile income must now 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.

It says this would tilt the playing field for those that have now changed their preferential regimes to comply with the standard and jeopardise the progress made in action 5 to date. In view of this, the BEPS inclusive framework has decided to apply the substantial activities requirement for ‘no or only nominal tax’ jurisdictions.

Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration said: ‘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.

‘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.’

The FHTP will next meet in January 2019, to assess continuing reviews on the remaining regimes for which commitments to amend or abolish were made in 2017. Further discussion on all other regimes will take place through the FHTP review process in 2019. The FHTP will also work on the next steps for assessing compliance with the global standard for no or only nominal tax jurisdictions.

Resumption of Application of Substantial Activities Factor to No or only Nominal Tax Jurisdictions Inclusive Framework on BEPS: Action 5 is here

Report by Pat Sweet

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