The latest move by the European Union to address perceived harmful tax practices takes the form of imposing economic substance requirements on international financial centres (IFCs). In response, rather than face EU blacklisting, the majority of IFCs have recently introduced legislation mandating substance requirements for certain entities based in their jurisdictions.

The Drive for Substance

Notwithstanding the fact that the majority of the affected jurisdictions have already met the OECD standards for transparency, Base Erosion and Profit Shifting (BEPS), FATCA, Common Reporting Standards (CRS) and country-by-country reporting, by imposing economic substance requirements the EU has once again taken aim at low-tax jurisdictions.

The push for economic substance began in 2017 when the Council of the EU established a Code of Conduct Group for business taxation, which investigated the tax policies of both EU member states and third countries. Following that assessment, the EU published a list of 13 IFC jurisdictions which were required to address their concerns relating to demonstrating economic substance, or be placed on an EU blacklist.

In June 2018 the EU issued a scoping paper which set out the economic substance requirements that the targeted IFCs were required to adopt before 2019 with regard to relevant entities based in those jurisdictions. It is now anticipated that these economic substance requirements will become a global OECD standard as they were recently endorsed by that body’s Forum on Harmful Tax Practices.

This article was first published in Legal Business.

Stay current with our latest legal insights and subscribe today