Low-tax jurisdictions must prove they are meeting OECD’s ‘substantial activities’ requirement

The OECD has warned no-tax and nominal-tax jurisdictions that they must prove they are meeting its new ‘substantial activities’ standard through spontaneously reporting the activities of resident companies to the jurisdictions in which those companies’ ultimate owners are resident.

The demand is part of OECD’s base erosion and profit shifting (BEPS) action plan, under which jurisdictions can only maintain preferential tax regimes for businesses with ‘geographically mobile’ income such as royalties if they meet the ‘substantial activities’ requirements designed to show that these businesses have real economic presence there. The substance requirement is that core income-generating activities are undertaken by the entity in-country; staff and expenditures are adequate; and the country enforces non-compliance.

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