Countering Harmful Tax Practices: BEPS Action 5 - Global Tax Update

Past Progress and Prospects

Harmful tax practices (e.g., tax havens, preferential tax regimes, tax rulings) are characterised by the propensity to erode tax bases of other countries which allegedly leads to an undesirable race-to-the-bottom on taxation rates. Action 5 of the OECD Action Plan on Base Erosion and Profit Shifting ("BEPS"), therefore, addresses the detecting and coordinated countering of such harmful tax practices, with a renewed focus on transparency and substance requirements.

Background

In 1998, the OECD Committee on Fiscal Affairs published a report on Harmful Tax Competition ("1998 Report"), with the purpose of developing a better understanding of harmful tax practices around the world. In total, 12 factors were set out in order to determine whether a preferential tax regime could be harmful.

The four key factors are: (i) no or low effective tax rates on movable sources of income, (ii) ring-fenced from the domestic economy, (iii) a lack of transparency and (iv) no effective exchange of information.

Eight other, indicative factors are: (i) an artificial definition of the tax base, (ii) no adherence to international transfer pricing principles, (iii) an exemption for foreign sources of income, (iv) negotiable tax rate, (v) secrecy provisions, (vi) wide network of tax treaties, (vii) promotion of the preferential regime and (viii) encouragement of operations that are purely tax driven.

Also, the creation of the Forum on Harmful Tax Practices ("Forum"), operating under the auspices of the Committee on Fiscal Affairs, was first proposed in this 1998 Report. The 1998 Report was followed by subsequent publications describing the progress that had been made and the steps that needed to be taken next.

BEPS Action 5

In 2013, the work around harmful tax practices was revived with the 15-point BEPS Action Plan. Action 5 of this Action Plan commits the Forum to:

Revamp the work on harmful tax practices with a priority on (i) improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and (ii) requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework. (numbering and emphasis added)

The Forum is expected to deliver the following outputs, in three steps:

Review...