On 1 February 2017, the OECD released the Terms of Reference and Methodology for peer reviews on the Action 5 standard for the exchange of information on tax rulings (the “transparency framework”), approved by the Inclusive Framework on BEPS. The peer review and monitoring process will be conducted by the Forum on Harmful Tax Practices (FHTP) in accordance with the Terms of Reference and Methodology, with all members participating on an equal footing.
The Terms of Reference are broken down into four aspects, which capture the key elements of the transparency framework:
- Information gathering process;
- Exchange of information;
- Confidentiality of information received;
- Statistics.
The methodology sets out the procedural mechanisms by which jurisdictions will complete the peer review, including the process for collecting the relevant data, the preparation and approval of reports, the outputs of the review and the follow up process. The methodology contemplates collecting the data points relevant to the peer review by using standardised questionnaires, sent to the reviewed jurisdiction as well as the peers (i.e. the other members of the Inclusive Framework on BEPS).
The Inclusive Framework on BEPS has decided to resume the application of the substantial activities requirement for no or only nominal tax jurisdictions. Originally a criteria set out in the harmful tax framework from 1998, it had not been applied to date. However, with the elevation of the substantial activities requirements in preferential regimes, and the broad-based membership of the Inclusive Framework working together on an equal footing, it was considered the right time to ensure that equivalent substance requirements apply in no or only nominal tax jurisdictions. This global standard means that mobile business income cannot be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location. In doing so, the Inclusive Framework will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction.
In July 2019, the Inclusive Framework released the results of the review of no or only nominal tax jurisdictions.
In October 2019, the Inclusive Framework released guidance on the framework for the spontaneous exchange of information collected by no or only nominal tax jurisdictions pursuant to the standard. The guidance addresses the practical modalities regarding the exchange of information requirements of the standard, including the exchange timelines, the international legal framework and clarifications on the key definitions. The guidance also contains the standardises IT-format to be used for the exchanges, the NTJ XML Schema.
The results of the review conducted in relation to the BVI was that the jurisdiction is not harmful. Economic substance requirements were introduced taking effect from 1st January, 2019 and the domestic legal framework meets all aspects of the standard. The monitoring will be ongoing by the FHTP.
The Economic Substance requirements were introduced in the Virgin Islands via the Economic Substance (Companies and Limited Partnerships) Act, 2018 and amendments to the Beneficial Ownership Secure Search System Act, 2017. Please click on the link below for unofficial consolidations of the laws relating to Economic Substance and other resources issued by the ITA in reference to the Economic Substance requirements.
To access legislation and rules click here