New economic substance rules introduced by “tax havens” brought into force from 1 January 2019
What does this mean to businesses?
In December 2017, the European Union (EU) Code of Conduct Group assessed the tax policies of jurisdictions with no or only nominal tax (NOONs) against the criterion of ‘economic substance’. The criterion stated that a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction. A list of ‘non-cooperative jurisdictions for tax purposes’ was published, under which a number of NOONs were grey-listed (i.e. they had committed to meet this criterion within a year, in order to avoid being blacklisted).
In November 2018, the Organization for Economic Cooperation and Development (OECD) announced a new global standard on Base Erosion and Profit Shifting (BEPS) Action 5 for inclusive framework jurisdictions to prevent business activities from being relocated to NOONs to avoid the substantial activities requirement that applies to preferential regimes for geographically mobile income.
In response to the above, and to circumvent reputational concerns, governments of the following NOONs enacted legislation introducing enhanced economic substance requirements for tax purposes, bringing the rules into force as from 1 January 2019:
- British Virgin Islands (BVI)
- Cayman Islands
- Isle of Man
Deloitte has compiled a summary document setting out an overview of what the new economic substance rules broadly look like and the key takeaways for MENA based multinationals.