The OECD’s Forum on Harmful Tax Practices (FHTP) has decided to assess the preferential tax regimes of all zero- or low-tax jurisdictions on their substantial activity requirements, as well as on the transparency of their tax rulings.
All preferential regimes for ‘geographically mobile’ income such as royalties must now meet the OECD’s Substantial Activities Requirements. It is thus essential, says the OECD, to ensure that such business activities do not simply relocate to a zero-tax jurisdiction in order to avoid the substance requirements. That, it says, would tilt the playing field against those jurisdictions that have now changed their preferential regimes to comply with the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), and jeopardise the progress made to date, says the OECD.
It has therefore decided that all jurisdictions operating a ‘no or only nominal’ business tax regime must also meet the Substantial Activities Requirements, whether or not they have a preferential tax regime. The substance requirement is that core income-generating activities are undertaken by the entity in-country; that staff and expenditures are adequate; and that the country enforces compliance.
‘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’, commented Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration. ‘It 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’s latest progress report on preferential tax regimes has failed to find any such regimes that are actually deemed ‘harmful’ in terms of encouraging profit-shifting by multinational companies, with one exception. This is France’s policy of granting tax relief on long-term capital gains and profits from the licensing of intellectual property rights.
The FHTP has identified certain other potentially harmful practices by other jurisdictions, but they have almost all been determined either to be not actually harmful, or they have been abolished or are in the process of being removed. 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.