Recent Tendencies in the Development of Preferential Tax Regimes

It is widely known that the course of development of the international taxation system and any introduction of “preferential” regimes for certain areas of business by countries are being actively monitored and regulated by the world community. In particular, this is the area of interest of the OECD/G20’s Inclusive Framework on BEPS (the OECD’s action plan to counter the erosion of the taxable base and the withdrawal of profits from taxation), which brings together 139 countries and jurisdictions.

The current work of the Forum on Harmful Tax Practices (FHTP), aimed at the implementation of the BEPS plan, comprises the following key areas: assessment of preferential tax regimes to identify features that can facilitate base erosion and profit shifting; peer review and monitoring of the Action 5 of the BEPS Action Plan transparency framework through the compulsory spontaneous exchange of relevant information on taxpayer-specific requirements; review of substantial activities in no or only nominal tax jurisdictions.

Since the launch of the BEPS plan, the Forum has already revised and issued opinions on 309 preferential tax regimes, as a result of which 106 tax regimes have been banned, i.e., the “Patent Box” regime in Malta, the “IP box” in Liechtenstein, international business companies in Saint Lucia, Cook Islands, Barbados, etc.

The BEPS initiative aims to deter governments from implementing tax business practices that encourage harmful redistribution of profits across jurisdictions.

What Conclusions Were Made at the Forum in 2021 and in the OECD/G20’s Peer Review on BEPS

25 regimes were recognized as those implementing the BEPS Action 5 “Harmful Tax Practices” minimum standard. Specific updates worth noting are:

• Two newly introduced regimes (Hong Kong and Georgia) were concluded as “not harmful”. In particular, the Georgian international companies’ regime received a status of the one meeting the FHTP’s standards.
• The “IP Box” regime in Hungary was also recognized as “not harmful”, along with the “Innovation Box” regime in the Netherlands and “Patent Box” regime in Britain.
• The FHTP reviewed 12 regimes for the first time and classified them under the “under review” category. The following projects are expecting experts’ recommendations on their implementation: Armenia’s tax reliefs for free economic zones and information technology (IT) projects; Eswatini’s special economic zones; Honduras’ ZOLI free zones and ZEDE economic development zones; Lithuania’s favourable tax treatment of large-scale investment projects and Pakistan’s export regime for IT.
• The Australian offshore banking regime has now been abolished, with grandfathering provided to existing taxpayers under the FHTP’s conditions.
• The Philippines will remove its regional operating headquarters regime as of 1 January 2022, and the country’s regime is currently classified as “potentially harmful but not actually harmful”.
• The United States has confirmed its intention to abolish the foreign derived intangible income (FDII) regime, which has therefore been classified as “in the process of being eliminated”.
• Government commitments were made for six regimes that are now “in the process of being amended/eliminated”, among which there are Dominican Republic, Gabon, Saint Marten and Jordan.
• Trinidad and Tobago was not able to fulfil its commitment to abolish its special economic zone regime within the agreed timelines, so it is now considered “harmful”.

Sources and FHTP’s reports of April 2021:

https://www.oecd.org/tax/beps/harmful-tax-practices-peer-review-results-on-preferential-regimes.pdf

https://www.oecd.org/tax/beps/progress-towards-a-fairer-global-tax-system-continues-as-additional-countries-bring-their-preferential-tax-regimes-in-line-with-international-standards.htm

https://www.oecd.org/tax/beps/beps-actions/action5/

https://www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparency-framework.pdf