Harmful Tax Practices - 2018 Progress Report on Preferential Regimes
Inclusive Framework on BEPS: Action 5
BEPS Action 5 is one of the four BEPS minimum standards which all Inclusive Framework
members have committed to implement. One part of the Action 5 minimum standard relates
to preferential tax regimes where a peer review is undertaken to identify features
of such regimes that can facilitate base erosion and profit shifting, and therefore
have the potential to unfairly impact the tax base of other jurisdictions.
This progress report is an update to the 2015 BEPS Action 5 report and the 2017 Progress
Report. It contains the results of review of all BEPS Inclusive Framework members’
preferential tax regimes that have been identified since the BEPS Project. The results
are reported as at January 2019.
In addition, the Inclusive Framework agreed on a new standard for substantial activities
requirements for no or only nominal tax jurisdictions. This report includes the details
of this new standard and the other work on additions to and revisions of the harmful
tax practices framework. Finally it contains next steps for the work on harmful tax
Published on January 29, 2019Also available in: French
The assessments of preferential tax regimes are conducted by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 130 member jurisdictions of the Inclusive Framework. Since the start of the BEPS Project, the FHTP has reviewed almost 290 preferential tax regimes. The results of these reviews have been updated since the 2018 Progress Report.
The latest assessment by the FHTP has yielded new conclusions on 56 regimes.
The 2018 Progress Report also delivers on the Action 5 mandate for considering revisions or additions to the FHTP framework, including updating the criteria and guidance used in assessing preferential regimes and the resumption of application of the substantial activities factor to no or only nominal tax jurisdictions. This report includes two important annexes:
Annex A. The output of BEPS Action 5 mandate for considering revisions or additions to FHTP framework
This annex includes the new global standard on substantial activities in no or only nominal tax jurisdictions, as was already published in November 2018. The Inclusive Framework on BEPS has decided to resume the application of the substantial activities requirement for no or only nominal tax jurisdictions. Originally a criteria set out in the harmful tax framework from 1998, it had not been applied to date. However, with the elevation of the substantial activities requirements in preferential regimes, and the broad-based membership of the Inclusive Framework working together on an equal footing, it was considered the right time to ensure that equivalent substance requirements apply in no or only nominal tax jurisdictions. This global standard means that mobile business income cannot 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. In doing so, the Inclusive Framework 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.
In addition, the outcome of the work contained an update on the FHTP’s criteria and guidance used in assessing preferential regimes.
Annex B. Monitoring data on grandfathered non-IP regimes
The Action 5 minimum standard consists of two parts. One part relates to preferential tax regimes, where a peer review is undertaken to identify features of such regimes that can facilitate base erosion and profit shifting, and therefore have the potential to unfairly impact the tax base of other jurisdictions. The second part includes a commitment to transparency through the compulsory spontaneous exchange of relevant information on taxpayer-specific rulings which, in the absence of such information exchange, could give rise to BEPS concerns.