The Organisation for Economic Co-operation and Development (OECD) Inclusive Framework (IF), in follow-up work related to BEPS Action 5, has released new global standards that apply to ‘no or only nominal tax’ jurisdictions and that require ‘substantial activities’ in order for the tax regime not to be considered a ‘harmful tax practice.’ The objective is to prevent such low-tax jurisdictions from attracting profits from certain mobile activities without corresponding economic activity. The types of mobile activities covered include headquarters, distribution centers, service centers, financing, leasing, fund management, banking, insurance, shipping, holding companies, and the provision of intangibles.
This document sets out the background, rationale, and detailed information around reinstating the substantial activities factor. Barbados, Bermuda, and Cayman Islands have announced new domestic laws intended to meet the substance requirements.
Taxpayers should monitor how each relevant jurisdiction implements the new substance requirements (both law changes and future regulations), and be prepared to demonstrate that certain ‘core income generating activities’ are occurring within low-tax jurisdictions commensurate with the profits being reported in those jurisdictions.