BEPS Action 5 is one of the four BEPS minimum standards which all Inclusive Framework members have committed to implement. One part of the Action 5 minimum standard relates to preferential tax regimes where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions.
This progress report is an update to the 2015 BEPS Action 5 report and the 2017 Progress Report. It contains the results of review of all BEPS Inclusive Framework members’ preferential tax regimes that have been identified since the BEPS Project. The results are reported as at January 2019.
In addition, the Inclusive Framework agreed on a new standard for substantial activities requirements for no or only nominal tax jurisdictions. This report includes the details of this new standard and the other work on additions to and revisions of the harmful tax practices framework. Finally it contains next steps for the work on harmful tax practices.
Harmful Tax Practices - 2018 Progress Report on Preferential Regimes
Abstract
Executive Summary
1. BEPS Action 5 is one of the four BEPS minimum standards applicable to all members of the Inclusive Framework on BEPS and any jurisdictions of relevance.1 At present, 127 jurisdictions have joined the Inclusive Framework and three jurisdictions of relevance have been identified and included in the review process.
2. Since the start of the BEPS project, the Forum on Harmful Tax Practices (“FHTP”) has reviewed a significant number of preferential regimes. The results of these regimes are published in the BEPS Action 5 report (OECD, 2015[1]), the 2017 Progress Report (OECD, 2017[2])and on a regular basis on the OECD’s website as new results become available.
3. Since the publication of the 2017 Progress Report (OECD, 2017[2]) in October 2017, the FHTP has further continued its work on the review of preferential regimes in the scope of BEPS Action 5. In 2017, commitments were made in respect of more than 80 regimes to be made compliant with the BEPS Action 5 minimum standard. In 2018, jurisdictions have in almost all cases delivered on these commitments, with details by jurisdiction contained in Chapter 3 of this Progress Report. In addition, the FHTP has started the review of preferential regimes of new Inclusive Framework members, as well as newly introduced regimes, bringing the total number of regimes reviewed since the start of the BEPS project to 255.
4. The results to date show that all IP regimes are, with one exception, now either abolished or amended to comply with the nexus approach. These changes mean that it is no longer possible to shift income from IP assets into a preferential regime without having undertaken the underlying research and development activity to create that IP. At the same time, almost all non-IP regimes now contain substantial activities requirements, in order to better ensure the alignment of taxation with the place of value creation.
5. Where necessary, other changes have been made to comply with the standard. For example, ring-fencing features which were designed to attract investment while protecting the domestic tax base have also been removed by almost all jurisdictions, either by abolishing the regime altogether or opening the regime to the domestic market. In addition, regimes that lacked transparency have also been amended to ensure that the conditions for entry to the regime are clear and known in advance. Finally, all grandfathering provisions will end by 30 June 2021 at the latest.
Figure 1. Results of preferential regime reviews – 255 regimes reviewed as at January 2019
6. In addition, in 2018 the Inclusive Framework has advanced the work on considering additions or revisions of the framework for harmful tax practices as mandated by the BEPS Action Plan. In this process, the FHTP agreed on a new standard for substantial activities requirements within no or only nominal tax jurisdictions, ensuring a level playing field between those introducing substantial activities requirements in preferential regimes, with those offering a general zero or almost zero corporate tax rate. In addition, in light of the BEPS project and the FHTP’s experience in reviewing regimes, it has clarified a number of important issues, including the revision of the key factors and the other factors and providing guidance on the application of these factors for assessing regimes. Annex A of this Progress Report presents the detailed outcomes of this work.2
7. Furthermore, the FHTP has undertaken the second annual review of the transparency framework with results published separately in late 2018 (OECD, 2018[3]).
8. This Progress Report first sets out the detailed results of the review process by individual regime. It then sets out the next steps to be undertaken by the FHTP in 2019. This includes commencing its work to review the new global standard on substantial activities in no or only nominal tax jurisdictions. The FHTP will continue its work on all relevant issues of harmful tax practices, such as the application of the no or low effective tax rate factor and whether further consideration is needed with respect to territorial tax systems, taking into account the ongoing work within the Inclusive Framework, including on the digital economy. In addition, the FHTP will continue its work to ensure the effectiveness of the standard by expanding the scope of monitoring regarding implementation. One aspect is the grandfathered non-IP regimes, for which details of the relevant data points and process are included in Annex B. Finally, Annex C contains an overview of the work on harmful tax practices that has been published from the 1998 Report (OECD, 1998[4]) until today.
References
[3] OECD (2018), Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264309586-en.
[2] OECD (2017), Harmful Tax Practices - 2017 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264283954-en.
[1] OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264241190-en.
[4] OECD (1998), Harmful Tax Competition: An Emerging Global Issue, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264162945-en.
Notes
← 1. Some preferential regimes with harmful features may be offered by jurisdictions that are not members of the Inclusive Framework. In order to ensure a level playing field, such jurisdictions are able to be identified by the members of the Inclusive Framework as being relevant to the work and are reviewed according to the same criteria as applies for all other jurisdictions. These are “jurisdictions of relevance”.
← 2. A part of this work on the resumption of the application of the substantial activity factor to no or only nominal tax jurisdictions, has already been separately published in November 2018 but is incorporated here again for the sake of providing a comprehensive picture of the FHTP’s activities.
