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Governments Dismantling Harmful Tax Incentives Worldwide: BEPS Project Driving Major Changes To International Tax Rules

Governments have dismantled, or are in the process of amending, nearly 100 preferential tax regimes as part of the OECD/G20 BEPS (Base Erosion & Profit Shifting) standards to improve the international tax framework, according to a progress report released this month.

The report provides details on the outcome of peer reviews undertaken of 164 preferential tax regimes identified amongst the more than 100 jurisdictions participating in the OECD Inclusive Framework on BEPS.

The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to “disappear” or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues.

The BEPS Action 5 standard covers tax incentives (“preferential tax regimes”) that apply to mobile business income, such as financial and services income and income from intellectual property, which multinationals can shift with relative ease. To avoid a race to the bottom and negative spillover effects on other jurisdictions’ tax bases, all 102 members of the BEPS Inclusive Framework have committed to ensuring that any regimes offered meet the criteria that have been agreed as part of BEPS Action 5. Crucially, this includes a requirement that taxpayers benefiting from a regime must themselves undertake the core business activity, ensuring the alignment of taxation with genuine business substance.

The Action 5 Progress Report on Preferential Tax Regimes includes the review of 164 preferential tax regimes offered by Inclusive Framework members against the Action 5 standard.

Of the 164 regimes reviewed in the last twelve months:

  • 99 require action;
  • For 93 of these 99 regimes, the required changes have already been completed or initiated by Inclusive Framework members,
  • 56 regimes do not pose a BEPS risk,
  • 9 regimes are still under review, due to extenuating circumstances such as the impact of the recent hurricanes on certain Caribbean jurisdictions.

“Harmful tax practices are a particularly aggressive way through which jurisdictions can encourage the erosion of other jurisdictions’ tax bases,” said Martin Kreienbaum, Chair of the Inclusive Framework on BEPS. “It is critical that they be addressed, to protect the level playing field and prevent a race to the bottom. The Inclusive Framework’s peer reviews are resulting in real changes to these tax incentives, making it harder for multinationals to artificially shift their profits around the world for a tax advantage.”

“These outcomes demonstrate that the political commitments of members of the Inclusive Framework are rapidly resulting in measureable, tangible progress” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “The jurisdictions concerned are already working to address the harmful tax practices in their preferential regimes. In fact, countries have already changed or are changing almost 95 percent of the regimes where action is needed.”

Inclusive Framework members have agreed an ambitious timeline, whereby jurisdictions whose regimes have harmful features are expected to adjust their regimes as soon as possible and generally no later than October 2018. The OECD will continue to publish the results of reviews of preferential regimes and the progress that jurisdictions are making to adjust them to reduce the risks posed to tax bases.

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).