"Economic Substance" tests

By: Dave Olenzak. President and Founder of TWC.

The OECD’s Forum on Harmful Tax Practices has developed under the Base Erosion and Profit Shifting (BEPS) Action Item #5 on Harmful Tax Practices the “Substantial Activities in No or Only Nominal Tax Jurisdiction” Guidance.  This is more commonly known as “Economic Substance” tests.

There are two types of firms identified for exchange:

High Risk IP holding companies and those that have highly mobile activities.  A High Risk IP company has acquired an intellectual property asset from a group entity and licenses the IP to one or more entities.  The goal here is to identify holding companies that are used to “park” IP in low or no tax jurisdiction and through licensing agreements shift profits away from higher tax jurisdictions.

Core Income Generating Activities that are highly mobile are: banking, distribution and service centre business, finance and leasing business, fund management business, headquarters business, holding entity business, insurance business, IP holding business, and shipping business.  These highly mobile activities can easily be moved from higher taxed jurisdiction into low or no tax jurisdictions.  One of these relevant activities doesn’t necessarily require exchange provided there is adequate infrastructure and management support for those activities.

See also:

What is the EU Tax Blacklist?
What is the Common Transmission System (CTS) and how does it affect me?