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Low-tax jurisdictions must prove they are meeting OECD’s 'substantial activities' requirement

Monday, 4 November, 2019

The OECD has warned no-tax and nominal-tax jurisdictions that they must prove they are meeting its new 'substantial activities' standard through spontaneously reporting the activities of resident companies to the jurisdictions in which those companies' ultimate owners are resident.

The demand is part of OECD's base erosion and profit shifting (BEPS) action plan, under which jurisdictions can only maintain preferential tax regimes for businesses with 'geographically mobile' income such as royalties if they meet the 'substantial activities' requirements designed to show that these businesses have real economic presence there. The substance requirement is that core income-generating activities are undertaken by the entity in-country; staff and expenditures are adequate; and the country enforces non-compliance.

Last year, in order to ensure a 'level playing field', the OECD extended this requirement to include all jurisdictions with low rates of business tax, whether or not they offer preferential tax regimes.

From 2020, low-tax jurisdictions will have to 'spontaneously exchange information on the activities of certain resident entities with the jurisdiction(s) in which the immediate parent, the ultimate parent and/or the beneficial owners are resident', says the OECD. 'This information will allow the tax authorities of these jurisdictions to assess the substance and the activities of the entities resident in no or only nominal tax jurisdictions.'

Its new guidance sets out the timelines for the exchanges; the international legal framework; and clarifications on the key definitions, in order to make sure that jurisdictions receive 'coherent and reliable' information on offshore entities.

Earlier this year, the OECD Forum on Harmful Tax Practices concluded that 11 of the 12 countries on its list of low-tax jurisdictions were compliant with its standards for 'substantial activity' legislation and their tax regimes are therefore not harmful. The 11 were Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man, Jersey and the Turks and Caicos Islands, while the 12th, the United Arab Emirates, has since amended its law to comply.

Sources

Comments

Submitted by Natalie Glitzen... on Mon, 04/11/2019 - 18:43

So if Saint Lucia is not on the list of 12, why then are we scrambling to comply?