Article by: Alex Postma – First published on KluwerTaxBlog
The OECD recently issued a paper called: “Resumption of application of substantial activities for no or nominal tax jurisdictions”, which is a quite elaborate way of saying that the OECD going forward will require substance in low or no tax jurisdictions. Their stated reason is “leveling the playing field” between low or no tax jurisdictions and countries with preferential regimes. The question arises however whether this objective is met.
From the early 1998 beginnings of the Forum for Harmful Tax Practices (FHTP), an OECD specialist group that determines whether tax practices can be harmful to the tax base of other jurisdictions, focused only on tax rates, transparency and exchange of information to assess a country as “uncooperative”, leaving the element of substance out of the equation. The Global Forum on Transparency and Exchange of Information for Tax Purposes, another OECD team, then assumed the quest for transparency and exchange of information and the FHTP started focusing on tax regimes rather than tax systems. As a result, the requirement of substance was enforced only on high tax rate countries with preferential regimes and not on countries whose tax rate were nominal or absent in the first place. This – in the view of the OECD – provides an unfair advantage to countries with no or nominal profits tax. The “resumption” paper now seeks to address this incoherence and the resulting lack of “level playing field”. It tries to achieve this goal by first distinguishing between income from intangible property (IP income) and non-IP income. For non-IP income it requires that no or low tax countries introduce laws that:
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