BEPS Action Plan: Action 5 – Harmful tax practices

It is understandable that the OECD would wish to put the topic of harmful tax practices back on the agenda of its BEPS Action Plan. Commentary and links to content relating to action 5 are covered here.




24 September 2014

‘Substantial activity’ is the touchstone in the G20-approved report on harmful tax practices as…

it is throughout the BEPS Action Plan. The focus on aligning taxation with the “substance” of transactions seems to be defined as determining where people are located, and where the performance of significant people functions takes place. Nonetheless, determining the location of substantial activity is inevitably a subjective determination, making objective criteria difficult.

The report also voices concerns with regimes that apply to mobile activities and that unfairly erode the tax bases of other countries, potentially distorting the location of capital and services. There is some overlap of this work with that in the transfer pricing space relating to intangibles and risk and capital, as well as similar issues being addressed in the report on the tax challenges of the digital economy.

Proposals for improving transparency through compulsory spontaneous exchange on taxpayer-specific rulings related to preferential regimes contribute to the third pillar of the BEPS project, which is to ensure transparency while promoting increased certainty and predictability. It should also be noted that the word “compulsory” is understood to introduce an obligation to spontaneously exchange information wherever the relevant conditions are met, meaning this is a further step in moving more generally from exchange of information upon request to automatic exchange of information.

The work will now move on to consider the regimes of non-OECD members before then revising as required the existing harmful tax framework.


26 May 2014

The OECD’s webcast today noted that the Working Party/Task Force discussions had focused on…

resurrecting the previous work done in this area, initially using the same methodology, but working toward a realignment of the criteria.


16 April 2014

It now seems clear that the Action to be completed by September 2014 to review existing OECD Members will take place …

using the ‘old’ established criteria, so that no Discussion Draft will be expected in advance of that.

There will be a report of the OECD’s findings at this stage and that should help awareness and a ‘common understanding’ of the current position and options for change.


2 September 2013

As long as there is full transparency and sufficient economic activity, we believe states should be at liberty to develop tax regimes to encourage …

economic activity and investment. There’s likely to be a ‘read-across’ to this area from Action 13 on the requirement for MNCs to provide information regarding their global allocation of income, economic activity and taxes paid. In other words, if the bulk of an MNC's income were disclosed as arising in a tax haven (taking advantage of the absence of a corporate profits tax), that would almost certainly lead to a requirement for demonstration of appropriate substance there.

We believe that countries will indeed continue to adopt policies to suit economic needs, but may be smarter about designing them within certain boundaries (those that don’t may be ‘cold shouldered’ and businesses may think twice about the reputational impact of using such regimes).


6 August 2013

Lowly taxed regimes have been created in many countries, whether for example in relation to particular geographical development areas, sectors or income streams …

Evidence points to its being an increasing phenomenon rather than a decreasing one.

It’s possible that the OECD will seek to develop a commentary on regimes they think are harmful, which may discourage certain states from adopting or maintaining such regimes. However, a focus on the competitive behaviour of states, not companies, may make some states rather less co-operative in dealing with the issues raised. This may also mean that it becomes more difficult for the OECD to make progress on the issues raised.


26 July 2013

Notwithstanding the overall nature of the OECD BEPS undertaking, (i.e., the focus on the actions of corporates) there remain objections that it’s the privileged tax regimes …

created by states that are the source of much of the problem. It is therefore understandable that the OECD would wish to put the topic of harmful tax practices back on the agenda of its Action Plan. However, it still seems a little surprising that the proposal is largely to revamp the work (from the late 1990s and early 2000s) on harmful tax practices, given the struggle encountered at that time with developing a consensus within the OECD for this work.

Harmful tax practices archive

19 July 2013

Unlike the other actions in the Plan, this action point is concerned with the actions of states, not corporations. The discussion in the Plan refers to …

the original 1990s work of the OECD on harmful tax practices, and notes that the concerns raised 15 years ago on the mobile income tax base remain just as relevant today. It is stated that traditional ring-fencing (a major target of the OECD’s work some years ago) is less relevant now given the prevalence of across-the-board tax rate reductions on particular types of income. The February BEPS report calls for solutions to counter harmful regimes more effectively, taking into account factors such as transparency and substance: the work of the Forum on Harmful Tax Practices is now to be refocused to develop more effective solutions toward this goal.

There are three major elements to the work. First, there will be a review of member country regimes, to be completed within one year. Second, a strategy is to be developed to expand participation in this area to non-OECD members. Third, and more challenging, it is proposed that revised criteria on harmful tax practices will also be developed. Both of these latter actions are intended to be completed within approximately two years.

Explore additional BEPS action plans: