OECD releases roadmap for corporate tax overhaul

The 129 members of the OECD/G-20 Inclusive Framework on Base Erosion and Profit Shifting have agreed on a timeline for reaching a new global agreement for taxing multinational enterprises by the end of 2020.

The Cayman Islands is a member of the body, which approved a 40-page document that outlines how the digital economy can be taxed around two pillars.

The proposals under Pillar 1 are likely to result in a shake-up of taxing rights that will benefit larger importing countries by re-allocating some of a corporation’s profits to jurisdictions where its customers or users are located.

Pillar 2 seeks to introduce a minimum effective corporate tax rate for multinationals globally.

The OECD has taken the lead to address the problem that especially digital companies may have significant market share in a country without having any physical presence and as a result escape corporate taxation there.

The solutions under consideration all involve significant changes to corporate taxation globally by altering the nexus, or on what basis companies are taxed, and how taxable profits are allocated.

Moving away from the concept of physical presence as the basis for taxation to a new system of profit allocation will result in a significant shift of global corporate tax revenues.

It is therefore no surprise that there is currently no agreement among the Inclusive Framework members about the preferred method of profit re-allocation or changes to the tax nexus.

One of the proposals aims to allocate taxing rights to the country where a company’s active users are based, on the premise that users play a significant role in value creation, for example, by providing their personal information, which is then monetised.

Another approach argues that a company generates value and makes profit by engineering, marketing and selling its product and that the value created by this ‘marketing intangible’ should be recognised in the jurisdiction where the product is marketed.

A third proposal combines a company’s significant economic presence with sales to determine where taxes should be paid.

While the measures are aimed primarily at digital companies, the problems of separating digital businesses from traditional ones make it unlikely that measures such as the minimum global corporate tax rate would be limited to digital businesses.

The OECD said the minimum level of tax would give countries a new tool to protect their tax base from profit shifting to low- and no-tax jurisdictions and aims to address remaining issues identified by the OECD/G-20 BEPS initiative.

The Paris-based organisation said the Globally Effective anti-Base Erosion measure (GloBE) is intended as “a backstop to Pillar One for situations where the relevant profit is booked in a tax rate environment below the minimum rate”.

However, some Inclusive Framework members have argued that the proposed GloBE rules would “affect the sovereignty of jurisdictions that for a variety of reasons have no or low corporate taxes”.

Crown dependencies to introduce public ownership registers

The British Crown Dependencies Jersey, Guernsey and the Isle of Man announced in June they would make information on the true owners of companies in their jurisdictions more transparent.

In a joint statement, the dependencies outlined a series of steps that will move their respective centralised beneficial ownership registers “towards developing international standards of accessibility and transparency in the coming years”.

The islands’ registers will be first connected to those within the EU for access by law enforcement authorities, then opened up to financial services businesses that require access for corporate due-diligence purposes and subsequently to the public, in line with the EU’s Fifth Money Laundering Directive.

The EU directive eliminated the need to demonstrate a legitimate interest for access to beneficial ownership information, except for trusts and similar legal arrangements, and proposed an EU-wide linking of national beneficial ownership registers.

UK parliamentarians have long pushed for company ownership information to be made accessible to the public, claiming that non-public registers were enabling money laundering, tax evasion and corruption. While the UK Sanctions and Anti-Money Laundering Act, passed last year, included a clause that will force the Overseas Territories to make this type of information public, the British Crown Dependencies were excluded from the requirement.

The UK is threatening an order in council, effectively imposing the establishment of public registers in the Cayman Islands and other territories, if they have not implemented them by the end of 2020. The UK government later agreed with the overseas territories that under such circumstances the public registers would be operational by the end of 2023.

The Cayman Islands government maintains that it would only make the beneficial owners of companies public if and when that becomes a global standard. The Crown dependencies had previously warned that a similar move by the UK regarding their islands would lead to a “constitutional crisis”.

Conservative MP Andrew Mitchell and Labour MP Margaret Hodge, who called for public beneficial ownership registers in the Crown dependencies by 2020, said the plans were “an important first step”, but contained “a number of get out clauses” and an “unacceptably long timetable”.

EU revises tax blacklist

The European Union removed Aruba, Barbados, Bermuda and the Caribbean island of Dominica from its list of uncooperative jurisdictions in tax matters.

Barbados has made commitments at a high political level to remedy EU concerns regarding the replacement of its harmful preferential regimes by a measure of similar effect, while Aruba and Bermuda have implemented their commitments, the EU Council said.

The EU is targeting offshore financial centres for enabling structures that attract profits without having corresponding economic activity locally. To avoid a blacklisting, many jurisdictions committed to introduce new economic substance legislation that required companies engaged in relevant activities to prove that they have sufficient staff, office space, expenditures and management locally.

Bermuda adopted additional amendments to its Economic Substance Regulation and thereby resolved an issue flagged by the EU related to the wording of core income-generating activities for intellectual property assets.

Dominica implemented its commitments and addressed EU concerns regarding the automatic exchange of financial information after it ratified the OECD Multilateral Convention on Mutual Administrative Assistance. As a result, Dominica will exchange tax information under the common reporting standard with all EU member states from December 2019.

Only 11 jurisdictions remain on the tax blacklist. They are American Samoa, Belize, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad and Tobago, the United Arab Emirates, the US Virgin Islands and Vanuatu.

Technical guidance for economic substance of funds

The Bahamas, Bermuda, the British Virgin Islands and the Cayman Islands all addressed EU concerns over economic substance by introducing new legislation requiring certain companies to demonstrate that they have sufficient economic activity on island in terms of management, staff and expenditure to justify the amount of profits they make in these jurisdictions.

However, all four countries remain grey-listed by the EU, after they committed to comply with further economic substance requirements for collective investment vehicles that the EU might require before the end of this year.

In March, the EU Council said further work will be needed to define acceptable economic substance requirements for collective investment vehicles asking the Code of Conduct Group to provide technical guidance. According to this technical guidance, released in May, the Code of Conduct Group will scrutinise the legislation for funds in the Bahamas, Bermuda, the British Virgin Islands and Cayman against four pillars. They include the authorisation and registration of funds; supervision and enforcement; valuation, accounting and auditing of funds; and depositary rules.

“In line with the principles of the EU listing process, the requirements in relation to funds legislation for third country jurisdictions do not go beyond the standards applicable in member states,” the technical guidance said.

The assessment of the legislative framework would have to take into account specific factual and legal circumstances in each jurisdiction, the Code of Conduct Group said.

OECD claims tax transparency initiative delivers ‘impressive results’

The automatic exchange of tax information (AEOI) under the common reporting standard are improving tax compliance and delivering concrete results, according to data released by the OECD.

More than 90 jurisdictions, including the Cayman Islands, are participating in the global tax transparency initiative through 4,500 bilateral relationships since 2018. They have now exchanged information on 47 million offshore accounts with a total value of approximately 4.9 trillion euros.

The automatic exchange of information initiative has thus resulted in the largest exchange of tax information in history.

OECD Secretary-General Angel Gurria, who unveiled the data before the meeting of G-20 finance ministers in Fukuoka, Japan, in June, said the OECD-designed transparency initiatives had uncovered a deep pool of offshore funds that can now be effectively taxed by authorities worldwide.

Voluntary disclosure of offshore accounts, financial assets and income in the run-up to full implementation of the AEOI initiative had resulted in more than 95 billion euros in additional revenue in terms of tax, interest and penalties for OECD and G-20 countries over the 10-year period from 2009 to 2019. This cumulative amount is higher by 2 billion euros since the last reporting by the organisation in November 2018.

The OECD said the preliminary analysis, which draws on a methodology used in previous studies, showed the “very substantial impact AEOI is having on bank deposits in international financial centres”.

Deposits held by companies or individuals in more than 40 key international financial centres increased substantially over the 2000 to 2008 period, reaching a peak of US$1.6 trillion by mid-2008. But these deposits had fallen by 34%, or US$551 billion, over the past ten years as countries adhered to tighter transparency standards.

The automatic exchange of tax information accounted for about two thirds of the decrease, the OECD said. It also caused a decline of 20% to 25% in bank deposits in international financial centres, according to preliminary data.

The study, however, noted that the extent to which the decline can be attributed to decreased tax evasion in response to tax transparency and exchange of information, reduced base erosion and profit shifting activity, or other non-tax factors such as changes in financial regulation, cannot be established with precision.

Offshore insolvency petitions decline

The total number of winding up petition filings in offshore jurisdictions dropped by more than a third last year compared to 2017, a trend that continued in 2019, offshore law firm Appleby noted in its Offshore Corporate Insolvency and Restructuring report.

The analysis examined company petition filings and related court orders in Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man and Mauritius.

In the six offshore jurisdictions, 193 compulsory winding up petitions were presented to the local courts in the course of 2018, down 35% from the previous year. A further 62 were filed so far in 2019.

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Michael Klein
Michael Klein Editor Compass Media Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: [email protected] Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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