Countries agree to crack down on tax havens that benefit multinationals with IP, other mobile income

An OECD-led coalition of 120+ nations has agreed that countries that impose no or only nominal taxes should be considered to have harmful tax regimes if multinationals are permitted to apply the country’s advantageous tax regime to intellectual property or other mobile business income without having “substantial activities” — such as employees or expenditures  — in the country. 

 

In a November 15 announcement, the OECD said that the coalition, called the “Inclusive Framework on BEPS,” agreed to the new rules in an effort to level the playing field between countries that operate preferential tax regimes and countries that have low- or no-tax regimes applicable to all businesses.

 

The Inclusive Framework on BEPS currently conducts peer reviews of preferential tax regimes under standards agreed to by nations in 2015 as a result of the OECD/G20 base erosion profit shifting (BEPS) project. Under these rules, a preferential tax regime is deemed harmful if it does not meet substantial activity requirements established under the BEPS rules; however, no such rules have been applied to countries offering zero or nominal tax rates for all businesses.

 

“This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location,” said Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration. “The Inclusive Framework’s actions will ensure that substantial activities must be performed in respect of 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,” Saint Amans said.

This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location,” said Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration.

An Inclusive Framework report accompanying today’s announcement said that, as is the case for preferential tax regimes, the new substantial activity restrictions for zero- and nominal-tax countries would apply only to income from geographically mobile activities.

 

Generally, these activities are headquarters, distribution centers, service centers, financing, leasing, fund management, banking, insurance, shipping, holding companies, and provision of intangibles, the report said.

 

To be considered not harmful with respect to mobile income other than IP income, the no- or low-tax jurisdiction would need to ensure that core income-generating activities are undertaken by the entity in-country, that staff and expenditures are adequate, and that the country can identify and enforces noncompliance.

 

The paper notes that the agreed-to nexus approach for IP assets is not easily applied in a country that has no or nominal taxation. Thus, instead, a similar approach to that applied for non-IP assets would be used.

 

For patent exploitation income, for example, the core income generating activity needed would be research and development; the company must have sufficient full-time employees and operating expenditures in the country for the no- or low-tax regime to be considered not harmful.

 

The treatment of marketing-related IP assets such as trademarks is more difficult, the paper says, because these items are not permitted to benefit from a preferential tax regime under the nexus rules. Core income generating activities would be branding, marketing, and distribution.

 

 

 

Since then, though, the BEPS action plan applied a substantial activities test to assess preferential tax regimes. As a result, there is now a concern that businesses will relocate to a no- or low-tax jurisdiction and avoid having to meet the substance requirements that apply to preferential tax regimes.