OECD issued discussion draft to counter profit shifting
The OECD has released discussion draft on Action 3 to design a global CFC (controlled foreign company) framework in order to counter ‘artificial’ profit shifting to subsidiaries in countries with low effective tax rates.
CFC rules generally try to counter tax structures that have no real business purpose or substance in the low tax jurisdiction. The common mechanism for tax authorities is to tax the (undistributed) income of controlled foreign subsidiaries in the hands of resident shareholders.
The discussion draft considers all the constituent elements of CFC rules and breaks them down into the “building blocks” that are necessary for effective CFC rules. These building blocks would allow countries without CFC rules to implement recommended rules directly and countries with existing CFC rules to modify their rules to align more closely with the recommendations, and they include:
I. Definition of a CFC
II. Threshold requirements
III. Definition of control
IV. Definition of CFC income
V. Rules for computing income
VI. Rules for attributing income
VII. Rules to prevent or eliminate double taxation
Although this is still a discussion draft, it is clear that many countries are already announcing the implementation of earlier recommendations included in previous discussion drafts of the OECD. Companies should clearly review the substance of their subsidiaries in tax havens that are involved in ‘passive income’ transactions (like licensing, financing etc.) and closely monitor the announcements of governments. We are always willing to perform a BEPS sanity check to validate tax structures and determine the risks and recommended actions.back to overview