As more jurisdictions bring in economic substance regulation, Helen Swire asks what it means for practitioners and clients to comply

In recent years, remaining compliant and competitive in today’s world of increased transparency and regulation has been the name of the game for jurisdictions worldwide as they seek to continue to attract business and investment, while meeting the high international standards set by the OECD and other such bodies.

In 2018, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting introduced minimum global standards on jurisdictions’ economic substance to ensure that none were facilitating structures aimed at attracting profits without any real economic activity in the jurisdiction. By January 2019, numerous jurisdictions had enacted legislation, bringing into play enhanced economic substance requirements for tax purposes, while others have been drafting and consulting on legislation to introduce imminently.

Currently, these jurisdictions include: Anguilla, the Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, the Marshall Islands, Mauritius, the Seychelles, Turks and Caicos, the UAE and Vanuatu.

The setting of a base standard has been greeted broadly positively by practitioners. ‘The benefit for those companies who were already compliant is that it levels the playing field, while for those who did not fully comply, it provides clear guidance and certainty of what is expected of them in order to meet current international standards,’ explains Craig Brown, Managing Director at IQ-EQ Isle of Man. ‘It is a very important tool for international fiscal bodies and tax authorities in tackling unacceptable tax practices.’

The practicalities

The regulations encompass largely the same principles. For entities in most jurisdictions to be in scope for economic substance purposes, they must have tax residency and generate any gross income in the jurisdiction...