Base Erosion Profit Shifting (BEPS) was first introduced in the OECD’s report published on 12 February, 2013 and refers to tax planning strategies that exploit gaps and mismatches in tax rules in order to artificially shift profits to low or no-tax locations where there is little or no economic activity.
Weakness in the current rules created opportunities for base erosion and profit shifting (BEPS). In an attempt to tackle profit shifting to tax heaven or low tax jurisdictions, the BEPS project was launched which has introduced tighter regulations to the international tax arena as a whole, with more focus on real economic activity and value creation. This has made it clear that establishing appropriate levels of economic substance in jurisdictions where there has previously been a limited presence will become a must for all business with international reach. At the same time it becomes necessary for the companies to rationalize the number of entities in their structures and to simplify their activities in jurisdictions where they can establish operational activity.
The below issues have to be carefully considered when companies operate internationally.
The Residency and Treaty Benefits
Given the global trend to tighten the criteria in eligibility for treaty benefits under BEPS and other unilateral and multilateral initiatives, a company should have sufficient substance and be in a position to demonstrate that is the beneficial owner of its income in order to mitigate the risk of challenges to the claiming of tax treaty benefits. Companies will need to demonstrate that their principal purpose of setting up operations in a specific location was based on commercial criteria and not just tax criteria. Governments are becoming stricter about confirming tax residency in the fear of being accused of promoting unjustified tax privileges.
The companies must be able to prove that they maintain fully fleshed offices in the low tax jurisdiction manned with qualified personnel who can make decisions and control the company’s risks. Important meetings and records must be maintained at the jurisdiction. Additionally the company should not be “a go through” entity but it is advisable when income is received at least part to be reinvested or used in company’s activities and not to be paid out to the shareholders immediately and as a whole upon collection.
It will be important for companies to have the capability to demonstrate that they have the substance in place to perform the required functions and control risks, in order to account the tax authorities from a transfer pricing perspective. Greater transparency, as a result of Country by Country Reporting, means that this is a key area that companies will need to focus on
CFC and Other Anti-Avoidance Provisions in Other Jurisdictions
As countries around the world are introducing or strengthening Controlled Foreign Company (CFC) and other anti-avoidance rules, it’s becoming increasingly important for subsidiaries of multinational groups to enhance substance in their place of operation and thus mitigate the risk of being caught by CFC and anti-abuse rules of other jurisdictions.
Exchange of Information
As exchange of information between jurisdictions is increasing under various developments in the global tax arena, it should be ensure that there is sufficient substance to be able to support the genuine business activities carried out and mitigate the risk of challenges by foreign tax authorities.
In view of the rapidly changing environment and the trend towards transparency and substance Cyprus must take advantage of the challenges arisen and attract more international businesses
Apart from the tax advantages and extensive network of double taxation treaties, the well developed legal and financial system, the qualified work force and high quality business infrastructure, Cyprus offers cost effective setting up and on-going operational services for business with substance.
Public and Private sector should work closely together to promote Cyprus as an ideal headquarter location and improve the efficiency of the public sector services connected with this industry.