In 2019 we are seeing specific laws being introduced in some jurisdiction to put in place “Economic Substance” legislation. In other jurisdictions, such as Mauritius, the local tax and corporate regimes have been adapted to ensure that economic substance is taken into account in a manner coherent with the OECD and EC objectives.
The adoption of BEPs (Base Erosion and Profit Shifting) measures has seen a number of changes to the framework of international tax including:
- increased transparency on tax matters with a confidential platform for exchange of tax related information that is available to taxing authorities in over 100 participating jurisdictions,
- improved standards of corporate tax governance, particularly in tax haven and nil tax jurisdictions with the elimination of a number of preferential tax regimes around the world,
- updated OECD guidance on the transfer pricing of intangible assets,
- adoption of measures to eliminate cross border tax reduction outcomes from hybrid mismatches and to counteract potential abuse of tax treaties, and
- the introduction of interest restriction measures, controlled foreign company rules and enhanced reporting of new tax planning ideas through mandatory disclosure regimes.
Whilst the legislation implemented is country specific, this is generally the direct result of a program of measures being driven by the G20, the G8, the OECD, the Financial Action Task Force (FATF), and the EU.
Since the start of the BEPS project, the FHTP has reviewed a significant number of preferential regimes. In 2017, commitments were made in respect of more than 80 regimes to be made compliant with the BEPS Action 5 minimum standard.
The legislation generally applies so that the economic substance requirements are applicable to legal entities carrying on the “relevant activities” below:
- banking business
- insurance business
- fund management business
- finance and leasing business
- shipping business
- holding business (defined as “pure holding companies”)
- intellectual property business
- distribution and service centre business
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