by Julie Martin
Turkey’s technology development zone tax regime is harmful to the tax base of other countries while new Singapore, Luxembourg, Lithuania, and Slovakia tax laws favoring intellectual property (IP) are not, a May 17 report prepared by the OECD Forum on Harmful Tax Practices (FHTP) concludes.
The new report, which updates an October 2017 FHTP report, also reveals that Barbados has agreed to abolish a tax regime after discussions with the FHTP about its harmful aspects.
The FHTP is assessing whether tax incentives offered to multinationals by countries aimed at attracting to their shores geographically mobile activities, such as financial and other service activities and the provision of intangibles, are harmful to other countries’ tax bases under standards agreed to by countries in 2015. The international standards were developed as an outcome of the OECD/G20 base erosion profit shifting (BEPS) plan.
Over 100 countries that make up the “Inclusive Framework on BEPS” have agreed to be bound by these standards and be reviewed for compliance by the FHTP. The FHTP is also assessing compliance by countries that are not framework members to pressure them to change their ways.
The FHTP update concludes that Turkey’s technology development zones regime, previously considered “potentially harmful,” has now been deemed harmful insofar as the law extends to new entrants between July 1, 2016, and October 19, 2017. The regime is not consistent with the internationally-agreed “modified nexus” approach for IP regimes and Turkey has not agreed to cure the noncompliance.
Thus, Turkey, an Inclusive Framework on BEPS member, joins France and Italy as the only countries identified by the FHTP as having a harmful preferential tax regime.
The FHTP also said that Turkey is in the process of amending other aspects of its technology development regime. If the amendments become final, those aspects will not be considered harmful.
It should be noted that other countries may also have preferential regimes with harmful features on the books but, if they have pledged to amend or abolish their laws in the future, these countries are not deemed by the FHTP to have a harmful tax regime. Should these countries not make sufficient progress, the FHTP will later brand those laws harmful, too.
New IP regimes
According to the FHTP update, new IP tax regimes established by Lithuania, Singapore, and the Slovak Republic and an IP regime under review by Luxembourg’s parliament are compliant.
The four countries’ laws meet the BEPS report’s requirement of transparency, exchange of information, ring-fencing, and substantial activities and are thus not harmful, an OECD release said.
The report further reveals that Barbados authorities have agreed to eliminate a shipping regime in the light of discussions with the FHTP. Aspects of the regime are of concern and the FHTP could eventually label the regime as harmful if insufficient progress is made to fix it.
Malaysia’s Labuan leasing regime and Uruguay’s shared services regime were amended following discussions with the FHTP about aspects of the regimes that could be harmful, the FHTP reports.
Further, Chile’s business platform regime has been abolished beginning 2022; the FHTP has now deemed the regime potentially but not actually harmful for periods before that.
Further, the group determined that Kenya’s export processing zone regime and Vietnam’s export processing zone and industrial parts/zones incentives are out of the scope of the FHTP’s work. The three regimes do not relate to geographically mobile income and/or are not concerned with business taxation, as such posing no BEPS Action 5 risks, the OECD release explained.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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