In January 2021, the OECD Forum on Harmful Tax Practices (FHTP) will begin a move to the 'effective implementation' of its economic substance rules, with annual compliance monitoring of the financial sectors of the 12 jurisdictions affected.

The FHTP introduced its economic substance criterion in November 2018. It requires that jurisdictions operating a 'no or only nominal' business tax regime must impose a substance requirement on business entities based there. The requirement is that the entity conducts its core income-generating activities in the country, its staff and expenditures are adequate for this and the country's government enforces compliance. The aim is for companies to prove that they conduct genuine business activity in the jurisdiction rather than being there just for tax reasons.

The jurisdictions affected are Anguilla, the Bahamas, Barbados, Bahrain, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Turks and Caicos Islands and the United Arab Emirates.

All these jurisdictions have now set up a satisfactory legal framework requiring companies to make economic substance reports, says the FHTP in its latest progress report. Its focus is therefore moving to the effective implementation of the standard, as set out in Action 5 of the OECD base erosion and profit shifting (BEPS) initiative......