Twenty nations’ tax laws may aid multinational profit shifting, OECD report says

by Julie Martin

Twenty countries have tax laws that are potentially considered harmful preferential regimes, facilitating tax avoidance by multinationals and reducing the tax base of other countries, an OECD report released Monday revealed.

The review, conducted by the OECD Forum on Harmful Tax Practices (FHTP), assessed countries’ tax laws against internationally-agreed standards set in Action 5 of the 2015 OECD/G20 base erosion profit shifting (BEPS) plan agreements. Altogether, 164 tax regimes were reviewed. Both the report and the BEPS standards have been endorsed by the “BEPS inclusive framework,” a coalition of over 100 countries.

According to the FHTP report, the following nations have one or more tax regimes that are or potentially are harmful preferential tax regimes contrary to BEPS Action 5 standards: Spain, Switzerland, Andorra, Barbados, Belize, Botswana, Costa Rica, Curaçao, France, Hong Kong (China), Macau (China), Italy, Mauritius, Malaysia, Panama, San Marino, Seychelles, Thailand, Trinidad and Tobago, and Uruguay.

The government of each country has pledged to cure the noncompliance, except for the governments of France and Italy, the report said.

Commenting during an OECD webcast today, Achim Pross, Head of the International Co-operation and Tax Administration division within the OECD’s Centre for Tax Policy and Administration, said that France has an intellectual property tax regime that does not meet the new BEPS “modified nexus” standard. Under that standard, a country may not offer tax breaks for intellectual property income, such as a patent box, unless underlying research and development occurred in the country.

Pross said that Italy’s noncompliance is a transition issue. The country allowed entrants into its former IP regime after a cut off date. Going forward, Italy’s IP regime is not harmful, Pross said. Pross said that the good news is that there is worldwide uptake of the nexus standard for IP regimes.

All listed countries, except for Trinidad and Tobago, are BEPS Inclusive Framework members, and thus have generally agreed to adjust their tax regimes to meet the harmful tax practices standards as soon as possible, and generally no later than October 2018. The OECD will continue to monitor and review the implementation of countries’ commitments to eliminate or amend regimes to ensure consistency with the Action 5 standard, the report said.

Most countries on the FHTP list have several different tax regimes that fail the OECD standards. For example, Barbados is listed as having 9 different preferential tax regimes.

The FHTP report also said that during the two-year review period, the following seven countries abolished tax regimes identified as harmful: Colombia, Luxembourg, Liechtenstein, Malta, San Marino, Singapore, and Malaysia.

A tax regime is considered “abolished” if no new entrants are permitted into the tax regime, a definite date for complete abolition of the regime has been announced, and the regime is transparent and has effective exchange of information.

Further, the report deems several tax regimes “potentially harmful,” which means that the regime has features of a harmful regime but economic assessment of harm caused by the regime is not yet complete. Others are categorized as “potentially harmful but not actually harmful,” because the regime has harmful characteristics but does not have significant economic consequences.

The BEPS standards on preferential tax regimes are designed to stop countries from offering tax breaks for geographically mobile income that facilitate base erosion and profit shifting.

Besides intellectual property tax regimes, the BEPS standards seek to abolish certain harmful headquarters regimes, financing and leasing regimes, banking and insurance regimes, distribution and service center regimes, shipping regimes, holding company regimes, fund management regimes, and miscellaneous other regimes.

“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.”

Reacting to the report on Monday, Singapore’s Minister for Finance Mr Heng Swee Keat noted that his countries’ tax incentives meet the international tax standards.

“We will continue to create a conducive environment where businesses at various stages of growth can use Singapore as a base to build deep capabilities, grow and internationalise. In the process, we can create a range of good jobs and expand opportunities for our people,” the minister said.

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Julie Martin

Founder & Editor at MNE Tax

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].

@mnetax

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Julie can be reached at [email protected].