International Tax Cooperation
-Base Erosion & Profit Shifting (BEPS) [read]
- Action plan on base erosion and profit shifting, 2013a OECD [read]
- Addressing base erosion and profit shifting, 2013b OECD [read]
-Exchange of Information (EOI)
- Exchange of Information upon Request - EOIR [read]
- Article 26 of the model tax convention
- Tax information exchange agreement (TIEA)
- Automatic Exchange of Information - AEOI [read]
- CbC reporting
- Common reporting standard (the CRS)
- Foreign account tax compliance act (the FATCA)
- Spontaneous Exchange of Information
- Preferential tax regime [read]
- Forum of Harmful Tax Practice (FHTP)
- Exchange of tax rulings giving rise to BEPS concerns [read]
- Substantial activity (economic substance) requirement for no or nominal tax jurisdictions [read]
-Global Forum on Transparency & Exchange of Information for Tax Purposes [read]
- Beneficial ownership (controlling interest) [read]
Preferential Tax Regimes
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. An instance of these gaps and mismatches is one between full taxation and a preferential tax regime under which income is either tax-exempted in whole or in part, or taxed at a reduced rate. Most countries that impose corporate income tax establish preferential tax regimes to promote trade and investment. This changed with the creation of the OECD BEPS 15-point Action Plan, including the publication in 2015 of the Action 5 - 2015 Final Report: "Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance". In the wake of the Action 5 Final Report, countries that already have the preferential regime must comply with the economic substance requirement. In contrast, traditional offshore jurisdictions offering no or only nominal tax treatment, also referred to as the tax haven jurisdictions, do not impose any economic substance requirement on the same activities as those under the preferential tax regime. The existence of mismatches gives rise to BEPS concerns in that it creates the opportunity for tax avoidance.
The mismatches between tax rules not only create the opportunity for tax avoidance but also pose risks to the tax base of the host country that has the preferential regime in place. To address the level playing field issue arising from the different requirement for the economic substance, the Inclusive Framework agreed to apply the substanital activities to no or only nominal tax jurisdictions, in the same way as those having preferential regimes.
In order for a regime to be considered to be preferential, it must offer some form of tax preference in comparison with the general principles of taxation in the relevant country, including a reduction in the tax rate or tax base or preferential terms for the payment or repayment of taxes. The four key factors and eight other factors for considering whether a preferential regime is potentially harmful are set out below in the Action 5 Final Report:
The four key factors are:
a) The regime imposes no or low effective tax rates on income from geographically mobile financial and other service activities.
b) The regime is ring-fenced from the domestic economy.
c) The regime lacks transparency (for example, the details of the regime or its application are not apparent, or there is inadequate regulatory supervision or financial disclosure).
d) There is no effective exchange of information with respect to the regime.
The eight other factors are:
a) An artificial definition of the tax base.
b) Failure to adhere to international transfer pricing principles.
c) Foreign source income exempt from residence country taxation.
d) Negotiable tax rate or tax base.
e) Existence of secrecy provisions.
f) Access to a wide network of tax treaties.
g) The regime is promoted as a tax minimisation vehicle.
h) The regime encourages operations or arrangements that are purely tax-driven and involve no substantial activities.
Go back to the top page [read].
The Forum of Harmful Tax Practice
In response to the call in the Action 5 report Addressing Base Erosion and Profit Shifting (BEPS Report, OECD, 2013b) to develop solutions to counter harmful tax practices more effectively, taking into account the factors of transparency and substance, the Forum on Harmful Tax Practice (the FHTP) is the working party for countering the harmful tax practices.
The FHTP has been conducting reviews of preferential regimes since its creation in 1998 in order to determine if the regimes could be harmful to the tax base of other jurisdictions. To be within the scope of the 1998 Report, the regime must, firstly, apply to income from geographically mobile activities, such as financial and other service activities, including the provision of intangibles. Preferential regimes designed to attract investment in plant, building and equipment are outside the scope of the 1998 Report. Secondly, the regime must relate to the taxation of the relevant income from geographically mobile activities. Hence, the work is mainly concerned with business taxation. Consumption taxes are explicitly excluded.
The current work of the FHTP comprises three key areas.
- Firstly, the assessment of preferential tax regimes 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.
- Secondly, the peer review and monitoring of the Action 5 transparency framework through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns
- Thirdly, the review of substantial activities requirements in no or only nominal tax jurisdictions to ensure a level playing field.
Framework for Improving Transparency in relation to Tax Rulings
The Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan, OECD 2013) identified 15 actions to address BEPS in a comprehensive manner. In October 2015, the G20 Finance Ministers endorsed the BEPS package which includes the report on Action 5: Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance (2015 Action 5 Report, OECD 2015).
The 2015 Action 5 Report (OECD, 2015) is one of the four BEPS minimum standards. Each of the four BEPS minimum standards is subject to peer review in order to ensure timely and accurate implementation and thus safeguard the level playing field. All members of the Inclusive Framework on BEPS commit to implementing the Action 5 minimum standard, and commit to participating in the peer review. The Forum on Harmful Tax Practices (“FHTP”) is commissioned to undertake the peer review of the Action 5 minimum standard.
On 1 February 2017, the OECD released the Terms of Reference and Methodology for peer reviews on the Action 5 standard for the exchange of information on tax rulings (the "Transparency framework"), which was then approved by the Inclusive Framework on BEPS. The FHTP will conduct the peer review and monitoring process in accordance with the Terms of Reference and Methodology, with all members participating on an equal footing.
The FHTP decided to take forward the work on improving transparency in three steps while promoting increased certainty and predictability:
a) The first step focused on developing a framework for compulsory spontaneous information exchange in respect of rulings related to preferential regimes.
b) In the second step of the work, the FHTP has considered whether transparency can be further improved and has considered the ruling regimes in OECD and associate countries. This approach builds on the fact that Action 5 is not limited to exchanging information on rulings related to preferential regimes but allows for broader transparency. In this context, the FHTP focuses on specific instances where the absence of exchanges can cause BEPS concerns rather than suggesting that in all such instances the country providing the ruling operates a preferential regime. For instance, there is no suggestion that a unilateral advance pricing arrangements (APAs) program is by itself a preferential regime. However, a preferential regime, especially one of an administrative nature, may be operated, in whole or in part, via an APA or advance tax ruling (ATR) regime. In such cases, it is only once information on the ruling is exchanged that a fully informed decision can be made. In this regard, the FHTP noted that under Action 13 on transfer pricing documentation APAs and ATRs are to be included in the local and the master file and felt that the spontaneous exchange of key information on such APAs and ATRs between tax administrations would provide a useful crosscheck with the information provided by the taxpayer.
c) In a third step, the FHTP developed a general best practices framework for the design and operation of ruling regimes.
Combining the first and the second steps described above, the Action 5 Final Report sets out the agreed OECD framework for the compulsory spontaneous exchange of information with respect to rulings. This includes six categories of taxpayer-specific rulings which in the absence of compulsory spontaneous exchange of information could give rise to BEPS concerns. These six categories are
(i) rulings relating to preferential regimes;
(ii) unilateral APAs or other cross-border unilateral rulings in respect of transfer pricing;
(iii) cross-border rulings providing for a downward adjustment of taxable profits;
(iv) permanent establishment (PE) rulings;
(v) related party conduit rulings; and
(vi) any other type of ruling agreed by the FHTP that in the absence of spontaneous information exchange gives rise to BEPS concerns.
This does not mean that such rulings or the legal or administrative procedures under which they are given represent preferential regimes. Instead, it reflects jurisdictions’ concerns that a lack of transparency can lead to BEPS, if jurisdictions have no knowledge or information on the tax treatment of a taxpayer in a specific country and that tax treatment affects the transactions or arrangements undertaken with a related taxpayer resident in their country. The availability of timely and targeted information, which was agreed and included in a template contained in Annex C of the Action 5 Report (OECD, 2015), is essential to enable tax administrations to quickly identify risk areas.
The OECD's Consolidated Application Note specifically refers to advance tax rulings or unilateral APAs providing for a downward adjustment that is not reflected in the company’s financial accounts as being examples that could result in a lack of transparency where the tax authority does not notify the other tax authority of the existence of the ruling. Moreover, it is recognised that regimes that allow negative adjustments to profits could be preferential regimes.
Go back to the top page. [read]
Economic Substance Legislation for selected jurisdictions
The legal rules of the economic substance require any legal entity that carries on any relevant activity during a financial period to comply with the economic substance requirements in relation to each of those activities.
The Forum of Harmful Tax Practice (the FHTP), a sub-body of the OECD BEPS Inclusive Framework, is responsible for assessing and monitoring the BEPS Action 5, which imposes the substance requirement for all member jurisdictions of the OECD BEPS Inclusive Framework, including the UK Crown Dependencies and Overseas Territoires (the UK CDOT's). All the UK CDOT's that impose no or nominal tax on income, including the British Virgin Islands (the BVI) and the Cayman Islands, are brought into the scope of work of the FHTP. The CDOT stands for the Crown Dependencies and Overseas Territories.
Comparing the Adoption of ES Legal Rules in Preferential Regimes
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The British Virgin Islands [read]
Economic Substance (Companies and Limited Partnerships) Act and administrative rules; including the amendment to 2017 BOSS Act
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The Cayman Islands [read]
The International Tax Information (Economic Substance) Law and Regulations
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- Economic Substance (Companies and Limited Partnerships) Act, 2018
- Economic Substance (Companies and Limited Partnerships) (Amendment) Act, 2019
- Rules on Economic Substance in the Virgin Islands, 9 Oct 2019
- Entry into force and scope of application
- Core Income Generating Activities
- Economic Substance Requirement
- Determination by Competent Authority
- Penalties
- Striking off
- Notification and Reporting
- Spontaneous Exchange of tax information
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- The International Tax Co-operation (Economic Substance) Law, 2018
- The International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018
- The International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2019
- The International Tax Co-operation (Economic Substance) (Amendment of Schedule) (No. 2) Regulations, 2019
- The International Tax Co-operation (Economic Substance) (Amendment of Schedule) (No. 3) Regulations, 2019
- Entity Under Scope of Economic Substance Test
- Core Income Generating Activities (Cayman Islands CIGA)
- Economic Substance Test
- Notification and Reporting
- Tax Information Authority's Function
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Comparing terms and definitions in the legal rules relating to the Preferential Regimes
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The BVI
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Cayman Islands
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ES Laws
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Economic Substance (Companies and Limited Partnership) Act, 2018
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The International Tax Cooperation (Economic Substance) Law, 2018 and its amendments
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ES Regulations
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s17. (1) The Minister, with the approval of the Cabinet, may make regulations with respect to any obligations imposed by this Act or prescribing anything requiring to be prescribed under this Act, including:
(a) expanding upon the meaning of any of the terms defined or referred to in section 2;
(b) making more detailed provision for how a legal entity is to meet the economic substance requirements.
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ES Regulations means the regulations made by Cabinet under the ES Law:
- The International Tax Co-operation (Economic Substance) (Prescribed Dates) Regulations, 2018
- The International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2019;
- The International Tax Co-operation (Economic Substance) (Amendment of Schedule) (No. 2) Regulations, 2019
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ES Rules
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Rules on Economic Substance in the Virgin Islands, 9 Oct 2019
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Guidance for the International Tax Cooperation (ES) Law, 2018, 30 April 2019 [the Guidance]
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Entity
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See “Legal entity”
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See “Relevant entity”
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Competent authority
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Competent authority means the International Tax Authority established under section 3 of the International Tax Authority Act of 2018
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Authority means the Tax Information Authority designated under section 4 of the Tax Information Law (2017 Revision)
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Economic substance
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Economic substance requirement shall be understood within the context of section 8 of the ES (CLP) Act, 2018
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Economic Substance test should be construed in accordance with section 4 of the ES Law
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Holding company business
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Holding business means –
The business of being a pure equity holding entity.
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It means the business of a pure equity holding company [the Guidance]
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Non-resident company
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Non-resident company means a company which is resident for tax purposes in a jurisdiction outside the Virgin Islands which is not on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes.
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Tax resident outside the Islands [Section II.A.2.c. of the Guidance]
A company, limited liability company or limited liability partnership incorporated or established in the Islands is not regarded as a relevant entity for the purposes of the ES Law if it is tax resident outside the Islands. The Authority will regard an entity as tax resident in a jurisdiction other than the Islands if the entity is subject to corporate income tax on all of its income from a relevant activity by virtue of its tax residence, domicile or any other criteria of a similar nature in that other jurisdiction. Additionally, in the event that the entity is a “disregarded entity” for U.S. income tax purposes, and has a U.S. corporation as its parent, the Authority will consider the entity as tax resident outside of the Islands if satisfactory evidence is provided.
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Pure equity holding entity
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Pure equity holding entity means –
A legal entity that only holds equity participations in other entities and only earns dividends and capital gains.
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Pure equity holding entity means –
A company that only holds equity participations in other entities and only earns dividends and capital gains.
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Relevant activity and Core Income Generating Activity
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The BVI
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Cayman Islands
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Relevant Activity
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"Relevant activity" has the meaning given in section 6 of the ES (CLP) act.
In this Act, unless the context otherwise requires, "relevant activities" mean any of the following activities:
- banking business;
- insurance business;
- fund management business;
- finance and leasing business;
- headquarters business;
- shipping business;
- holding business;
- intellectual property business;
- distribution and service centre business.
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In accordance with the International Tax Cooperation (Economic Substance) (Amendment of Schedule) Regulation, 2019, "Relevant activity" means:
- Banking business;
- Distribution and service center business;
- Financing and leasing business;
- Fund management business;
- Headquarters business;
- Holding company business;
- Insurance business;
- Intellectual property business; or
- Shipping business;
But does not include investment fund business.
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Core Income Generating Activities
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See Virgin Islands CIGA
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See Cayman Islands CIGA
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Legal Entity vs Relevant Entity
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"Legal entity" means a company and a limited partnership.
A company includes
a) a company within the meaning of section 3(1) of the BVI Business Companies Act, 2004;
b) a foreign company within the meaning of section 3(2) of the BVI Companies Act, 2004 which is registered under Part XI of that Act,
But does not include a non-resident company.
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"Relevant entity" means –
- A company, other than a domestic company, that is –
- Incorporated under the Companies Law (2018 Revision); or
- A limited liability company registered under the Limited Liability Company Law (2018 Revision),
- A limited partnership that is registered in accordance with the Limited Liability Partnership Law, 2017;
- A company that is incorporated outside the Islands and registered under the Companies Law (2018 Revision),
But does not include –
- An investment fund; or
- an entity that is tax resident outside the Islands.
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- See more on OECD Action 5 - 2015 Final Report: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. [read]
- Go back to the top page. [read]
Beneficial Ownership
Country Rules: Beneficial Owners, Ultimate Beneficial Owners, Significant Controllers, Registrable Controllers, People of Significant Control
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Jurisdictions / threshold
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Requirement to identify B.O. or controller
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Relevant sections
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Legal texts
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BVI Company
(10%, 25%)
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From 1 July 2017, registered agents have the duty to identify beneficial owners; corporate and legal entity have the duty to keep beneficial ownership information up to date
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BVI Anti-money Laundering Regulations, 2018
BVI BOSS Act, section 9, and section 12
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Beneficial Ownership Secure Search System Act, 2017 and its subsequent amendments
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Cayman Islands Company
(25%)
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From 1 July 2017, companies shall take reasonable steps to identify any individual who is a beneficial owner of the company, all relevant legal entities in relation to the company
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Company Law, Part XVIIA, Section 247, and 248
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Cayman Islands Companies Law, 2018 and subsequent amendments
The Beneficial Ownership (Companies) Regulations, 2017 and subsequent amendments
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China, Foreign Investment Enterprises
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As from 30 June 2018, on application of establishing a Foreign investment Enterprise (FIE), applicant filing ownership structure identifying the ultimate beneficial owners of the FIE, filing changes in the UBO after the establishment of the FIE.
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Article 8(7), Article 9, Administrative Decree No. 6 [2018], Ministry of Commence
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商务部令2018年第6号 关于修改《外商投资企业设立及变更备案管理暂行办法》的决定
The Decision to Amend the Provisional Administrative Measures Regarding the Establishment of Foreign Investment Enterprises and Record Filing for Changes in the Registration of Foreign Investment Enterprise
http://www.mofcom.gov.cn/article/b/f/201806/20180602761078.shtml
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Hong Kong Company
(25%)
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As from 31 March 2018, each applicable company must keep a register of its significant controllers (SCR); the applicable company should notify Registrar of change in the place where the SCR is kept
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Part 12, Division 2A, Section 653H, and section 653N, Companies Ordinance
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Companies Ordinance (Cap 622), and amendments
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Seychelles Company
(25%)
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Obligations relating to beneficial owners, effective from 1 Dec 2018
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Companies Act,
Part XX, Section 355 to 360
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International Business Companies Act, 2016 and amendments
https://seylii.org/sc/legislation/act/2016/15
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Singaporean Company
(25%)
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From 31 March 2017, companies, foreign companies and LLPs (unless exempted) will be required to maintain beneficial ownership information in the form of a register of registrable controllers, and to make the information available to public agencies upon request.
386AG — (1) A company or foreign company must take
reasonable steps to find out and identify the registrable
controllers of the company or foreign company.
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Part XIA
Sections 386AB, 386AG;
Sixteenth Schedule - Meanings Of "Significant Control" and "Significant Interest"
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Register of Registrable Controller
https://www.acra.gov.sg/legislation/legislative-reform/companies-act-reform/companies-amendment-act-2017/register-of-registrable-controllers
Companies (Amendment) Act 2017
Limited Liability Partnerships (Amendment) Act 2017
https://www.acra.gov.sg/legislation/legislative-reform/companies-act-reform/companies-amendment-act-2017
Companies Act (Chapter 50), Sixteenth Schedule
https://sso.agc.gov.sg/Act/CoA1967#Sc16-
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UK Company
(25%)
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From 30 June 2016, companies will have to declare who owns or controls them to Companies House (People of Significant Control)
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Companies Act, Part 21A of and Schedules
1A and 1B to the Companies Act 2006;
Schedule 3, Small Business, Enterprise and Employment Act 2015
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the Companies Act 2006 (as inserted by the Small Business Enterprise and Employment Act 2015)
Small Business, Enterprise and Employment Act 2015, Schedule 3
https://www.legislation.gov.uk/ukpga/2015/26/schedule/3
The Register of People with Significant Control Regulations 2016;
Information about People with Significant Control (Amendment) Regulations 2017;
Register Of People With Significant Control - Guidance For People With Significant Control Over Companies, Societates Europaeae, Limited Liability Partnerships And Eligible Scottish Partnerships
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https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/753028/170623_NON-STAT_Guidance_for_PSCs_4MLD.pdf
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Reference:
- Exchange of Notes between the Government of the United Kingdom and the Government of the Virgin Islands in Respect of the Sharing of Beneficial Ownership Information [read]
- New Cayman Islands Beneficial Ownership Requirement [read]
Go back to the top page. [read]
