On 29 January 2019 the OECD released a publication entitled “Harmful Tax Practices – 2018 Progress Report on Preferential Regimes”. This contains results to show that jurisdictions are pursuing their commitment to the standard on harmful tax practices, including the need to align tax preferential regimes with substance.
The OECD’s Forum on Harmful Tax Practices (FHTP) is carrying out assessments of the jurisdictions that are members of the Inclusive Framework. The latest assessment shows that in the case of 44 preferential tax regimes the jurisdictions have carried out their commitment to make legislative changes to abolish or amend the preferential regimes. All the IP regimes identified in the 2015 BEPS report on Action 5 are now considered not to be harmful regimes and to be consistent with the nexus approach that requires a connection between the income and expenses within the regime and the tax benefits offered.
Two further commitments were made to make changes to amend or abolish harmful preferential regimes, these commitments being given by Malaysia and Trinidad and Tobago. Three tax regimes in Thailand have been found to be potentially harmful.
Action 5 of BEPS also gave a mandate to consider revisions or additions to the FHTP framework, including the possibility of updating the criteria and guidance taken into account in assessing preferential regimes and the use of the substantial activities factor in the case of jurisdictions with no or only nominal tax.
Next Steps
The FHTP aims to continue creating a level playing field by continuing to review regimes identified as preferential, monitoring changes made to them and consider the effectiveness of the criteria used in assessing the regimes. In 2019 there will be a review of the substantial activities requirements for jurisdictions with no or nominal tax. This will be subject to a similar approach to that used for preferential regimes, with evaluation of the legal framework; open discussion with the relevant jurisdictions; and monitoring of the implementation of the requirements to ensure their effectiveness. The FHTP will cooperate with the working party dealing with the exchange of information and tax compliance to work out details for the specific spontaneous exchange of information.
The FHTP will also monitor IP regimes and potentially harmful regimes; disadvantaged areas regimes; and substantial activities with respect to non-IP regimes reviewed in 2017 and subsequently. There will also be monitoring of grandfathered non-IP regimes.
The FHTP will continue to review any preferential tax regimes that are still under review and preferential regimes of jurisdictions joining the Inclusive Framework in the future. Any newly introduced regimes will also be reviewed.
