Harmful Tax Practices - 2018 Progress Report on Preferential Regimes

Annex B. Monitoring data on grandfathered non-IP regimes

1. Introduction

1.  The Forum on Harmful Tax Practices (FHTP) undertakes the review of preferential regimes in respect of all Inclusive Framework members. In addition to the review of the regimes, the FHTP conducts yearly monitoring with respect to certain type of regimes. This covers the following areas:

• IP regimes (with respect to the granting of benefits to the third category of IP assets and the use of the rebuttable presumption);

• Potentially harmful but not actually harmful regimes;

• Disadvantaged areas regimes; and

• Substantial activities with respect to non-IP regimes reviewed in 2017 and thereafter.

2.  Guidance on the closing off of regimes and grandfathering for non-IP regimes reviewed in 2017 and thereafter is published in Annex B of the 2017 Progress Report (OECD, 2017[3]). It mandates certain monitoring with respect to these type of regimes. This Annex B sets out the data points and process for carrying out this monitoring.

2. Approach to monitoring grandfathered non-IP regimes

3.  The scope of this monitoring exercise applies to a non-IP regime reviewed in 2017 and thereafter, which presents harmful features, and the jurisdiction has abolished or amended the regime, and where the harmful features of the previous form of the regime are grandfathered. It does not apply to regimes which are under review, are still in the process of being amended or eliminated, are found to be not harmful, are found to be out of scope, are found to be potentially harmful but not actually harmful, or where there is no grandfathering provided.

4.  The purpose of the monitoring of grandfathering for non-IP regimes is for the FHTP to have increased and continuing visibility on how jurisdictions are implementing the grandfathering provisions in practice. This monitoring mechanism ensures that jurisdictions are enforcing and implementing their grandfathering provisions in an effective way. The number of taxpayers in the grandfathered regime should either stay stable or decrease, since new taxpayers are not permitted into the grandfathered regime. If this is not the case, further information from the jurisdiction is required to identify the cause of the increase and to identify any remedial steps that should be taken to address the issue. This is also the case where the amount of income significantly increases, as new activities and assets are also not allowed in the grandfathered regime.

5.  To ensure that grandfathering is applied appropriately, the FHTP agreed to monitor the data on a yearly basis. The monitoring process commences from the time at which the grandfathering period commences. For all regimes reviewed in 2017, the legislative process for amending or abolishing the regimes should be completed by 31 December 2018 at the latest, and it is only after this period that the grandfathering period would commence. The monitoring would cease after the data with respect to the end of the grandfathering period is reported. For the regimes reviewed in 2017, grandfathering will generally cease by June 2021 at the latest. Where the FHTP granted an exceptional extension of the grandfathering period as foreseen by paragraph 18 of the 2017 Progress Report (OECD, 2017[3]), no monitoring would be required as in those cases, additional spontaneous exchange of information requirements apply.

6.   There are two aspects to the monitoring: the data that should be collected, and the mode for making that data available to the FHTP.

3. Identifying the data that should be collected

7.  The information to be collected should include:

• A description of the mechanism to ensure new entrants (both new taxpayers and new assets/activities) entering the regime after the cut-off date (i.e. date of the FHTP’s decision) are not benefiting from grandfathering;

• A description of the mechanism to ensure that benefits are not granted to those entitled to benefit from grandfathering after the end of the grandfathering period;

• The number of taxpayers benefitting from the regime in the close-off year (i.e. the year the regime is amended/abolished) and subsequent years where grandfathering is allowed;

• The amount of gross income benefitting from the grandfathering in the close-off year and subsequent years where grandfathering is allowed;

• The number of new taxpayers entering the regime in the period from the cut-off date (i.e. date of the publication of the decision by the Inclusive Framework) to the close-off date (i.e. by no later than 12 months from the cut-off date or where necessary because of the legislative process, by 31 December of the calendar year following the cut-off date); and

• Where a regime grants benefits to specific assets or activities, the total number of new assets and new activities entering the regime in the period from the cut-off date (i.e. date of the publication of the decision by the Inclusive Framework) to the close-off date (i.e. by no later than 12 months from the cut-off date or where necessary because of the legislative process, by 31 December of the calendar year following the cut-off date).

8.  These data points are designed to balance the administrative burden for the jurisdictions included in the monitoring process, and at the same time to ensure that the FHTP is able to identify any risks and to prompt further enquiry where necessary.

9.  Information with respect to all years for which grandfathering is available should be provided. In order for the FHTP to be able to make a comparison with the period before the regime was closed-off, economic data from the fiscal year before the grandfathering period started should be provided as well.

10.  In order for the FHTP to confirm that no benefits are provided after the grandfathering period, jurisdictions should also provide data with respect to the fiscal period after the latest grandfathering date (grandfathering end date).

11.  There are various ways that the data could be collected. For example, jurisdictions could collect the data via the taxpayer’s tax returns, or they can introduce a specific annual reporting obligation for the taxpayer to the tax administration. If a ruling with respect to the preferential regime has been given to the taxpayer, information could be collected this way.

4. Mode for making the data available to the FHTP

12.  Annex B of the 2017 Progress Report (OECD, 2017[3]) states that the data on grandfathered non-IP regimes should be provided on an annual basis.

13.  The format for providing this data would be by way of a short questionnaire covering the above data points in paragraph 7. This would generally be completed in advance of the first FHTP meeting of each year by the relevant jurisdictions, starting from 2019. The compilation of questionnaires would generally be distributed for discussion at the first FHTP meeting of each year.

14.  If some of the statistical information is not yet available at the beginning of each year, for example because the tax return is filed later within the year, the jurisdiction would be asked to provide as much of the information as possible, and update the FHTP with the additional information as soon as it becomes available.

5. Possible outcomes of monitoring process

15.  The consideration of the monitoring data should be undertaken on a case by case basis, taking into account the relevant facts and circumstances. At the FHTP meeting where the monitoring data is presented, the FHTP would have the opportunity to ask questions relating to the grandfathered non-IP regime.

16.  If the jurisdiction’s explanation of the mechanism is found to be sufficient by the FHTP and the monitoring data indicates that the numbers are relatively stable or decreasing, it would be expected that no discussion is required.

17.  If the monitoring data indicates a significant increase in the use of the regime and/or the FHTP does not find the jurisdiction’s mechanisms and additional explanation to be sufficient, the FHTP should consider the types of additional data and information that is needed from the jurisdiction providing the grandfathering. Additional data and/or information should be provided in advance of the subsequent FHTP meeting. If there is no appropriate justification for the increase, the FHTP should give the jurisdiction a recommendation to address the issue and to ensure no tax benefits are granted inappropriately (or to reverse the granting of such tax benefits), as appropriate on a case-by-case basis. If the jurisdiction does not take steps to respond to the recommendation by the subsequent FHTP meeting, the FHTP could revisit the conclusion on the regime with respect to the grandfathering period. Any decision on the regime would be made on the basis of consensus minus one. In the event the jurisdiction does not provide the relevant information to the FHTP necessary to give the FHTP sufficient comfort on the implementation of the grandfathering provisions in practice, the jurisdiction would need to explain this and the FHTP may need then consider appropriate next steps.

References

[3] 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.

[2] 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 (2004), Consolidated Application Note - Guidance in applying the 1998 report to preferential tax regimes, OECD, Paris, http://www.oecd.org/tax/transparency/about-the-global-forum/publications/1998-consolidated-application-note.pdf.

[1] OECD (1998), Harmful Tax Competition: An Emerging Global Issue, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264162945-en.