BEPS Action Plan: Action 3 – Controlled foreign Foreign company Company (CFC) regimes

Although OECD Member States generally apply CFC regimes, the OECD has done little work on this area in the past. In this section we discuss the elements in OECD’s BEPS Action Plan focused on strengthening CFC rules.



5 October 2015

No consensus was agreed in the final report on Action 3 on CFC rules, with the recommendations being…

in the form of the following six building blocks reflect the situation largely as previously reported, covering:

  • definition of a CFC
  • CFC exemptions and threshold requirements
  • definition of income
  • computation of income
  • attribution of income
  • prevention and elimination of double taxation.

The Report more clearly identifies that there are different policy drivers for CFC regimes. It also recognises that there is no ‘one size fits all’ solution even then, so provides only a more co-ordinated approach to countries looking to introduce CFC rules in the future.

Those with existing regimes are unlikely to introduce changes as a result solely of this Report.

5 May 2015

Our submission was one of 62 responses published by the OECD on Action 3.

1 May 2015

In our response to the discussion draft on BEPS Action 3, we refer to concerns in relation to the Discussion Draft as regards...

clarifying the overall aim of the Action and the Discussion Draft, as well as the huge potential for increased complexity, administrative burden and unrelieved double taxation which could arise under badly implemented CFC rules and the inadequately thought-through interactions with the other BEPS Actions.

In brief:

  • it may go too far and in particular we have concerns over both the scope of the CFC rules outlined in the document and the suggestion that a “secondary rule” be introduced
  • it is a potential extension to source country taxation rights and hence seems to be beyond what Action 3 was tasked with considering
  • the proposals appear to be far too broad to achieve consistency amongst nations (in particular the potential for CFC rules to challenge ‘foreign-to-foreign’ shifting) which may leave many territories with strict CFC rules and others with none and even more competition between nations (especially between OECD and non-OECD nations)
  • the interactions with the other Actions may lead to an unworkable international tax system
  • there could be a significant amount of double taxation arising as a result of interactions between the CFC rules, the CFC rules of non-member territories and the output from other Actions
  • we broadly agree with most of the ‘building blocks’ which are set out in the Discussion Draft but have particular concerns from a policy perspective in identifying the appropriate income to be apportioned to the parent territory (full inclusion and excessively broad partial inclusion systems go beyond what is necessary to prevent BEPS and furthermore, may ultimately impact negatively on international trade and growth)
  • the position for EU/EEA Member States is complex and we cover it in detail in an Appendix

7 April 2015

In a new discussion draft published over the Easter weekend, the OECD notes that many countries already have CFC rules but...

it suggests that these rules do not always counter BEPS in a comprehensive manner though they could reduce the incentive to shift profits to a third, low-tax country.

Harsher CFC rules will in principle lead to inclusion of more income in the residence country of the ultimate parent but a high level proposal to add a secondary form of taxation in another jurisdiction would add further complexity if it is taken forward.

This discussion draft considers all the constituent elements of CFC rules and breaks them down into the building blocks necessary for effective CFC rules. The building blocks include:

  • Definition of a CFC
  • Threshold requirements
  • Definition of control
  • Definition of CFC income
  • Rules for computing income
  • Rules for attributing income
  • Rules to prevent or eliminate double taxation

As with the discussion draft as a whole, the approaches to defining CFC income do not reflect a consensus view and there are clearly some material concerns from a tax competitiveness perspective.

One proposal MNEs will want to consider carefully is the an ‘excess profits’ approach under which income attributable under the CFC rules would be the profits in excess of a ‘normal return’, being a specific rate of return on the equity properly to be regarded as utilised in the business of the CFC.

2 September 2013

There are CFC regimes in all G20 member states, with the exception of four developing countries, two of which have announced an intention to adopt …

a CFC regime. The taxation of foreign income, derived directly or derived via a foreign subsidiary, is a key aspect of the fiscal policy of national governments to encourage economic growth, competitiveness and foreign investment. That is one of the main reasons why CFC rules vary so much between jurisdictions. It’s very unlikely that a common position on CFC rules can be achieved when sovereign nations have chosen such different ways to encourage economic activity. The best we are likely to see is some narrowing of practices on CFC rules.

For example, while it’s common for unrelated party passive income for example (relating to third party investments, etc.) to be subject to inclusion in amounts attributable back to the home territory, certain countries like the UK, US and Canada have an exemption for related party passive income. A proposed relaxation of Australian CFC rules to facilitate exemption for related party passive income has been deferred indefinitely. There is also continuing political debate in the US as to whether the check-the-box and ‘look through’ concessions to the CFC rules should be withdrawn.

7 August 2013

There are potential EU issues with extending CFC rules, given the Cadbury Schweppes decision that within the EU the concept can apply only to …

wholly artificial arrangements. While those outside the EU suggest change in this area should be considered, the prospect of getting agreement to a change at EU Treaty level is daunting.

19 July 2013

The comments in the Action Plan on the topic of strengthening CFC rules are very short. The Plan notes that the OECD has done no significant work …

in this area (presumably because it has been seen as a purely domestic issue). The indication is that the OECD wishes to see uniform CFC rules to counter BEPS in a more comprehensive manner. The Plan expressly refers to the positive “spill-over” effects of CFC rules due to the result that taxpayers would have a much reduced incentive to shift profits into a low tax jurisdiction.

The action point is to develop recommendations regarding the design of CFC rules. The work is due to be completed within two years.