Starting from January 2021, the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices (FHTP) will begin to carry out annual compliance monitoring of the financial sectors of 12 jurisdictions (Anguilla, the Bahamas, Barbados, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Turks and Caicos Islands and the United Arab Emirates), with the goal to implement its economic substance rules.
The economic substance criterion established by the FHTP requires that jurisdictions operating a ‘no or only nominal’ business tax regime must impose a substance requirement on business entities based there. The aim is to ensure that companies conduct genuine business activity in the jurisdiction rather than just exploiting favourable tax regimes.
This meaning that these entities need to:
Furthermore, the country’s government must be able to enforce compliance.
The 12 jurisdictions have set up satisfactory legal frameworks, forcing companies to periodically provide economic substance reports. The FHTP is therefore making the next step for the effective implementation of the standard, as set out in Action 5 of the OECD base erosion and profit shifting (BEPS) initiative, by starting with an annual monitoring process to ensure compliance.
This will also entail passing information on the activities and income of the entities based in the 12 jurisdictions to the jurisdictions where these entities ultimate parents and beneficial owners are based, in order to assess if revenues are diverted to low-tax jurisdictions.
The 18 jurisdictions that are now in line with the BEPS Action 5 Minimum Standard, according to the latest report, are: Aruba, Belize, the Cook Islands, Curaçao, Dominica, Dominican Republic, Georgia, Hong Kong, Jamaica, the Maldives, Mauritius, Morocco, North Macedonia, Qatar, Saint Kitts and Nevis, San Marino, Switzerland and Tunisia.