OECD reports action taken to amend preferential tax regimes

Governments have dismantled, or are in the process of amending, nearly 100 preferential tax regimes as a result of the introduction of the base erosion and profit shifting (BEPS) standards to improve the international tax framework, according to a progress report from the OECD

The study provides details on the outcome of peer reviews undertaken of 164 preferential tax regimes identified amongst the more than 100 jurisdictions participating in the OECD inclusive framework on BEPS.

The BEPS action five standard covers preferential tax regimes that apply to mobile business income, such as financial and services income and income from intellectual property, which the OECD says multinationals can shift with relative ease.

To avoid a race to the bottom and negative spillover effects on other jurisdictions' tax bases, all the 102 members of the BEPS inclusive framework have committed to ensuring that any regimes offered meet the criteria that have been agreed as part of this standard.  A key element is the requirement that taxpayers benefiting from a regime must themselves undertake the core business activity, ensuring the alignment of taxation with genuine business substance.

The action five progress report on preferential regimes includes a review of 164 preferential tax regimes conducted in the last twelve months. Of these, 99 require action, and for 93 of the 99, the required changes have already been completed or initiated. A third (56) of regimes do not pose a BEPS risk, while nine are still under review, due to extenuating circumstances such as the impact of the recent hurricanes on certain Caribbean jurisdictions.

Under the assessment relating to intellectual property tax breaks, the UK’s patent box regime was judged to be not harmful, as was Ireland’s knowledge development box, but Spain was required to amend some elements of its approach. Barbados was warned its international finance services regime was potentially harmful, as was its regimes for credit for foreign currency earnings and for overseas projects.

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said: ‘These outcomes demonstrate that the political commitments of members of the inclusive framework are rapidly resulting in measurable, tangible progress.

‘The jurisdictions concerned are already working to address the harmful tax practices in their preferential regimes. In fact, countries have already changed or are changing almost 95% of the regimes where action is needed.’

Jurisdictions whose regimes have harmful features are expected to adjust their regimes as soon as possible and generally no later than October 2018. The OECD will continue to publish the results of reviews of preferential regimes and the progress that jurisdictions are making to adjust them to reduce the risks posed to tax bases.

Harmful tax practices – 2017 report on preferential regimes is here.

Report by Pat Sweet

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