The Cayman Islands (‘Cayman’) Government (‘CIG’) has issued an Industry Advisory that the Organisation for Economic Co-operation and Development (‘OECD’) has confirmed that it had extended the ‘substantial activities’ requirement to ‘no or only nominal tax’ jurisdictions in its Base Erosion and Profit Shifting (‘BEPS’) Inclusive Framework (‘Framework’). The move is to prevent business activity avoiding the Substantial Activities Requirements which apply to all preferential regimes for geographically mobile income by relocating to a zero-tax jurisdiction. (Consult the new global standard on substantial activities in no or only nominal tax jurisdictions at www.oecd.org/tax/beps/resumption-of-application-of-substantial-activities-factors.pdf .)
NOTE - Definitions used in this piece have been updated. For more information please refer to links in our piece Cayman issues Industry Advisory on Economic Substance Regulations and Guidance v2.0.
What is the OECD’s announcement?
Announcing the extension to ‘no or only nominal tax’ jurisdictions, the Director of the OECD Centre for Tax Policy and Administration said:
"This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location. The Inclusive Framework's actions will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction."
What is the Framework?
The Framework brings together over 120 jurisdictions, including Cayman, to collaborate on the implementation of the OECD’s Action Plan on Base Erosion and Profit Shifting (‘Action Plan’). BEPS are tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity generating the profits.
How does this fit into the Action Plan?
Action 5 in the plan is ‘Counter harmful tax practices more effectively, taking into account transparency and substance’. The aim is to identify harmful tax practices and to improve transparency, including compulsory spontaneous exchange on rulings related to preferential tax regimes, including Intellectual Property regimes.
What is substantial activity?
The substantial activity requirement was to realign the taxation of profits with the substantial activities that generate them, and the approach taken is the ‘nexus approach’ relating profits to the taxpayer which undertook the core income generating activity. The detail of the agreed methodology to assess whether there is substantial activity is found in Action 5, Chapter 4 and in the 2017 review (Annex D).
Who monitors this?
The Forum on Harmful Tax Practices ‘(FHTP’) monitors progress and conducts reviews and assessments. It has reviewed 246 preferential regimes, abolished or amended 46, with 78 in the process of being eliminated or amended. For more information on the BEPS Action 5 peer review and monitoring process, here: or Consult the updated conclusions of regime reviews.
Solomon Harris has many years’ experience in the preparation of all types of Cayman investment and advising on new investment vehicles. We are able to assess and advise on regulatory or legal issues which may affect those vehicles contact Solomon Harris Partner Richard Addlestone or Senior Associate Tom Wright.
The information contained in this article is necessarily brief and general in nature and does not constitute legal advice. Appropriate legal or other professional advice should be sought for any specific matter.