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On 6 February 2024, the Organisation for Economic Co-operation and Development (OECD) released an update on the results of the peer reviews of jurisdictions' domestic laws under Action 5 (harmful tax practices) of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. The updated results cover four preferential tax regimes. This latest review reflects that specific regimes in Hong Kong and the United Arab Emirates (UAE) have been amended to align with the standard and are now considered nonharmful and specific regimes in Albania and Armenia have been abolished.

The OECD also released updated results on the review of the substantial-activities factor in connection with the domestic laws of the 12 jurisdictions that have been identified by the Forum on Harmful Tax Practices (FHTP) as being a "no or only nominal tax jurisdiction." For eight jurisdictions, no issues were identified. For the remaining four jurisdictions (Anguilla, the Bahamas, Barbados and the Turks and Caicos Islands), the FHTP identified areas for focused monitoring. For Anguilla, recommendations for substantial improvement also were made.

Detailed discussion

Background

On 5 October 2015, the OECD released its final report on Action 5, Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance (the Action 5 Report) under its BEPS Action Plan.¹ The Action 5 Report covers two main areas: (i) applying the "substantial activity" criterion when determining whether tax regimes are harmful; and (ii) improving transparency. The Action 5 Report also includes a strategy for expanding the review of preferential regimes beyond the OECD and G20 countries.

This expansion has been executed through the Inclusive Framework on BEPS, which currently has 145 member jurisdictions.² Each member jurisdiction has committed to the 2015 BEPS package and its effective implementation, including fulfilment of the minimum standard under Action 5. The preferential tax regimes of the Inclusive Framework member jurisdictions have been reviewed based on the Action 5 criteria.

Since the OECD's publication of a 2017 Progress Report on Action 5,³ the FHTP has continued reviewing preferential tax regimes within the scope of BEPS Action 5. Prior to this 2024 update, the OECD released 10 earlier updates to the reviews of preferential tax regimes.

In November 2018, the Inclusive Framework adopted a standard on substantial activities applicable to jurisdictions that do not impose a corporate income tax or impose only nominal corporate income tax.⁴ The FHTP has identified 12 "no or only nominal tax jurisdictions" with the necessary domestic legal framework to meet the substance standard: Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands and the UAE. In 2021, the FHTP began an annual monitoring exercise to assess the effectiveness of the substantial-activities standard in practice.

Updated results of the preferential tax regimes review

The OECD released an update on the results of the peer reviews for four preferential tax regimes, as approved by the Inclusive Framework on 5 February 2024. According to the updated results for the regimes reviewed, the "industries incentive (software production/development)" regime of Albania and the "information technology projects" regime of Armenia were abolished. In addition, the new regime on "profits tax concessions for family offices" of Hong Kong and the new "free zones" regime of the UAE are not harmful.

Taking into account this update, the FHTP has reviewed a total of 322 tax regimes. The conclusions are as follows:

• One regime is currently harmful (the "free trade zone" regime of Trinidad and Tobago)
• Seven regimes are potentially harmful but not actually harmful
• 134 regimes are not harmful
• 12 regimes are in the process of being eliminated or amended
• Three regimes are not operational
• 123 regimes have been abolished
• 39 regimes have been found to be out of scope
• The remaining three regimes relate to disadvantaged areas (i.e., regimes designed to encourage development in disadvantaged areas)

Substantial-activities requirement for "no or only nominal tax" jurisdictions

In addition, the OECD released the conclusions from the third annual monitoring process of the effectiveness in practice of the substantial-activities requirements for jurisdictions with no or only nominal tax, which reflect the 2022 year. The released results also include the FHTP's review of legislation, regulations and guidance issued since its June 2019 meeting.

Based on the FHTP's review, the domestic legal framework of all 12 "no or only nominal tax jurisdictions" are in line with the substantial-activities standard and therefore are "not harmful." In addition, the update notes that this is the last monitoring year for UAE, as it has introduced a corporate income tax rate as of 1 June 2023.

The update indicates that, for the next annual monitoring, no issues have been identified with respect to eight out of the 12 jurisdictions. Anguilla, the Bahamas, Barbados and Turks and Caicos Islands were identified as jurisdictions that require focused monitoring in the areas of statistical data, compliance programs and exchange of information, which are described as minor areas for further improvement. For Anguilla, the update indicates that exchange of information was identified as an area that needs to be substantially improved by the next annual monitoring. Areas that need to be substantially improved by the next annual monitoring are those for which the jurisdiction has significant issues with respect to the effectiveness in practice.

The OECD stated that the next annual monitoring exercise with respect to the substantial-activities requirement will take place during the second half of 2024.

Implications

The release of the updated results of the review of preferential tax regimes and the annual monitoring of "no or only nominal tax jurisdictions" reflects the continuing focus of the Inclusive Framework on jurisdictions' implementation of the BEPS Action 5 minimum standard. These results will also shape the assessments conducted by the EU Code of Conduct Group, potentially impacting taxpayers through updates to the EU list of noncooperative jurisdictions.

Companies should continue to monitor developments with respect to preferential regimes and "no-tax or only nominal-tax jurisdictions" that are relevant to them.