The OECD on April 3 released a discussion draft that provides recommendations on how countries can design effective controlled foreign companies (CFC) rules to combat base erosion and profit shifting (BEPS).
Released in response to action 3 of the OECD/G20 BEPS plan, the discussion draft identifies and makes recommendations concerning the following seven “building blocks” considered necessary for effective CFC rules: (1) definition of a CFC, (2) threshold requirements, (3) definition of control, (4) definition of CFC income, (5) rules for computing income, (6) rules for attributing income, and (7) rules to prevent or eliminate double taxation.
The draft proposals are designed to prevent both the stripping of the parent jurisdiction’s base and stripping of third countries’ bases.
Included is a recommendation to add modified hybrid mismatch rules to prevent entities from circumventing CFC rules by being treated differently in different jurisdictions. The draft also suggests that countries adopt low tax thresholds to the application of CFC rules based on effective tax rates and that the threshold be set at a tax rate that is meaningfully lower than the tax rate of the country applying the CFC rules.
The draft also notes that some countries have proposed further rules that would tax in the source country or in another jurisdiction income that is earned by CFCs that did not give rise to sufficient CFC taxation in the parent jurisdiction. The OECD’s Committee on Fiscal Affairs has not yet decided whether this proposal should be taken forward.
Comments on the draft should be submitted by May 1; a public consultation on the draft, which will be broadcast live on the Internet, will be held May 12.
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