Preferential Tax Regimes – Harmful Tax Practices

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On 13 November 2018, the Inclusive Framework on BEPS approved updates to the results of reviews of preferential tax regimes conducted in connection with BEPS Action 5. The data below presents the conclusions of the work on regime reviews. The results are a consolidated update of the regimes reported in Harmful Tax Practices – 2017 Progress Report on Preferential Regimes.

Countries with harmfull tax practices – preferential tax regimes – are defined based on the following factors:

  • Where no or low effective tax rates (or negotiable tax rates or bases) are imposed on income from highly mobile assets and activities
  • Where the low tax regime is ring-fenced (separated) from the domestic economy
  • Where there is no transparancy and no exchange of information with other jurisdictions, eg. secrecy provisions
  • Where there is no requirement of substantial economic activities/substance

The Inclusive Framework on BEPS has decided to resume the application of the substantial activities requirement for no or only nominal tax jurisdictions. Originally a criteria set out in the harmful tax framework from 1998, it had not been applied to date. However, with the elevation of the substantial activities requirements in preferential regimes, and the broad-based membership of the Inclusive Framework working together on an equal footing, it was considered the right time to ensure that equivalent substance requirements apply in no or only nominal tax jurisdictions. This global standard means that mobile business income cannot be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location. In doing so, the Inclusive Framework will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction.