From 31 March 2021 twelve low tax jurisdictions have begun exchanging information under the global standard on substantial activities.

The OECD’s Inclusive Framework aims to ensure through application of the global standard that substantial activities must be performed in relation to 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. Under the global standard, mobile business income cannot arise in a zero tax jurisdiction unless the core business functions have been carried out by the same business entity, or in the same location.

The mobile activities under consideration would include financial and other service activities, including the provision of intangibles. The OECD’s Forum on Harmful Tax Practices has for some years been considering the relevant issues and has generally identified geographically mobile activities as including headquarters, distribution centres, service centres, financing, leasing, fund management, banking, insurance, shipping, holding companies and the provision of intangibles.

Following a review of low-tax jurisdictions, the Inclusive Framework released guidance in October 2019 on the framework for spontaneous exchange of information gathered under the standard by no or only nominal tax jurisdictions. The guidance dealt with practical issues such as the deadlines for exchange, the international legal framework and important definitions, and set out the standardised IT format to be used for exchanging information.

With effect from 31 March 2021 twelve jurisdictions (Anguilla, Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands, United Arab Emirates) commenced the exchange of information under the global standard.

The information exchanged between jurisdictions provides important data in relation to the level of economic substance and the activities of entities operating in jurisdictions with no or only nominal tax. This information is valuable for the jurisdictions in which the ultimate parent company and the beneficial owners of the entities are located.

A tax administration receiving the relevant information can carry out appropriate risk assessments and using the data received can apply its international tax rules such as controlled foreign company (CFC) rules; transfer pricing legislation; and other rules to counter base erosion and profit shifting.

The FHTP has begun the monitoring procedure to assess compliance with the standard by the twelve low-tax jurisdictions exchanging the information. The FHTP will be monitoring the legal and practical implementation of the standard through annual peer reviews in relation to Action 5 of the OECD/G20 project on base erosion and profit shifting (BEPS). The results of the next annual peer reviews are due to be released in December 2021.