Preferential regimes continue to be a key pressure area. Current concerns are primarily
about preferential regimes which can be used for artificial profit shifting and about
a lack of transparency in connection with certain rulings. The report sets out an
agreed methodology to assess whether there is substantial activity. In the context
of IP regimes such as patent boxes, agreement was reached on the “nexus approach”
which uses expenditures as a proxy for substantial activity and ensures that taxpayers
can only benefit from IP regimes where they engaged in research and development and
incurred actual expenditures on such activities. The same principle can also be applied
to other preferential regimes so that such regimes are found to require substantial
activity where the taxpayer undertook the core income generating activities. In the
area of transparency, a framework has been agreed for the compulsory spontaneous exchange
of information on rulings that could give rise to BEPS concerns in the absence of
such exchange. The results of the application of the existing factors applied by the
FHTP, and the elaborated substantial activity and transparency factors, to a number
of preferential regimes are included in this report.
Base Erosion and Profit Shifting (BEPS) refers to 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, resulting in little or no overall corporate tax being paid.