In 2015, the OECD initiated an international campaign against base erosion and profit shifting (BEPS). This included BEPS Action 5: “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”.
On July 23, the OECD published a progress report on how extensively BEPS Action 5 is being implemented. This follows a series of reviews of countries’ domestic laws conducted by the OECD Forum on Harmful Tax Practices (FHTP). The review covered both preferential tax regimes in onshore countries and substantial activities in “no or only nominal tax jurisdictions.”
Review of substantial
activities in “no or only
nominal tax jurisdictions”:
After agreeing in November 2018 to a new “substantial activities” standard for “no or only nominal tax jurisdiction,” the 12 “no or only nominal tax jurisdictions” identified by the FHTP introduced the necessary domestic legal framework to meet the standard. The standard requires that for certain highly mobile sectors of business activity, the core income generating activities must be conducted with qualified employees and operating expenditure in the jurisdiction.
The FHTP has now reviewed the new domestic laws of the 12 “no or only nominal tax jurisdictions.” For 11 of these jurisdictions – Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, and Turks and Caicos Islands – the FHTP concluded that the domestic legal framework is in line with the standard and therefore “not harmful.” Regarding the remaining jurisdiction – United Arab Emirates – there is one technical point outstanding, which is being amended.
From 2020, the FHTP will start an annual monitoring process for the effectiveness of jurisdictions’ mechanisms to ensure compliance with the standard in practice.
Review of preferential tax regimes:
During its June 2019 meeting, the FHTP made new and updated decisions on 56 regimes, some of which were reviewed for the first time, as follows:
• 13 regimes were abolished (Cabo Verde, Malaysia, Mongolia, Montserrat, Morocco, Switzerland, Thailand).
• Three regimes were amended to remove the potentially harmful features (Cabo Verde, Malaysia, Mauritius) and four new regimes were classified as “not harmful,” as they were specifically designed to meet the Action 5 standard (Malta, Poland, Thailand).
• Four regimes are in the process of being amended (Aruba, Greece, Kazakhstan).
• Eight regimes were found to be out of scope for the FHTP (Cabo Verde, Nigeria, Paraguay and Vietnam).
• Two regimes have been found potentially harmful but not actually harmful (Aruba, Viet Nam) and one regime is not operational (Paraguay).
• One regime has been found actually harmful (Jordan).
• 21 additional regimes have now been placed under review (Cook Islands, Dominica, Dominican Republic, Jamaica, Morocco, North Macedonia, Qatar).
THE FHTP has reviewed 287 regimes since the start of the BEPS Project. Altogether, 76 have been abolished, five were amended and 15 soon will be eliminated or amended. The FHTP will continue these reviews in December 2019, and in 2020.
What’s going on in Jordan?
There are 16 development zones in Jordan (see: https://www.jic.gov.jo/en/development-zones/). A registered enterprise there may benefit from any tax exemptions in force in Jordan relating to exports of goods and services outside the Kingdom. In other cases, income tax is 5% of the taxable income from economic activity within the development zone. The implication of the OECD seems to be that you may not need many people on the ground in such a zone.
What about Israel?
In a section on intellectual property regimes, the OECD reports that the Israeli amended preferred enterprise regime is not harmful. Substance requirements (nexus/people approach) are in place.
In practice, expenditure, particularly on R&D personnel, must take place in Israel for the income of a preferred to qualify for low tax rates (typically 6%-16% company tax).
Comments:
Abusive tax regimes are largely history, except in Jordan. Now if you want to go offshore, you and the offshore jurisdiction must meet new criteria. Some do so, others stay at home and enjoy moderate tax breaks now available in Israel, the US, the UK and elsewhere. Anyone with international business or investments should check out the new situation.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.
leon@h2cat.com