The year 2015 has witnessed a number of changes in international tax legislation. For instance, the G20 countries have endorsed the final Organisation for Economic Cooperation and Development (OECD) recommendations relating to the Base Erosion and Profit Shifting (BEPS) project, and the Common Reporting Standard (CRS) has moved into implementation phase in some countries opting for early adoption.
The BEPS project and CRS are in line with international efforts to counter tax evasion, tax avoidance and fraud; it aims at making it more difficult for companies that have legal entities registered in low-tax jurisdictions to take advantage of the favorable fiscal benefits that legitimately exist. These companies must now meet the minimum 'substance requirements' in order to be considered taxable in the host country.
A proper understanding of the minimum substance requirements is key to fully grasping the implications of the changes in international legislation. The Managing Director of Cim Tax Services, Gary Gowrea, shares some insight into the topic.
1. Compliance with “substance requirements” is laid out in various tax legislation worldwide. Could you tell us what this term means?
There are concerns that have been raised with regard to structures which have been set up as conduit companies for the sole purpose of enjoying tax treaty benefits. These are also known as 'postbox' offices or shell companies. The OECD proposes certain measures to address the issue under Action 6 (Preventing the granting of treaty benefits in inappropriate circumstances) of the Base Erosion and Profit Shifting (BEPS) Action Plan as endorsed by the G20.
From a layman's point of view, substance would relate to the activities that are carried out in a jurisdiction or how the presence of an entity can be substantiated. In Mauritius, a Category 1 Global Business Licence company is deemed to be tax resident if it is incorporated or has its central control and management in the country. The Financial Services Act sets out six mandatory and one optional requirement that must be satisfied to demonstrate that the company is controlled and managed from Mauritius.
It should be noted that from a tax perspective, substance is a moving goalpost; the more conditions that an entity satisfies, the better it is. It takes more than merely prescribing a specific set of rules to ensure adequate substance, one must look at the operations in a holistic manner.
The OECD seeks to address the issue from an international perspective by requiring the inclusion in all treaties of a principal purpose test and/or limitation on benefits (LOB) test to demonstrate that tax resident companies are eligible to tax treaty benefits. This is a mammoth task, which would have an impact on 3,500 tax treaties in place.
2. Will the changes to international tax legislation put an end to the practice of companies having subsidiaries in low-tax jurisdictions?
Many companies use intermediary jurisdictions for a whole range of commercial reasons and not purely for tax purposes. For instance, a company will invest in Africa through Mauritius due to its proximity to the countries on the continent, the absence of foreign exchange control, its Investment Promotion and Protection Agreements, its rule of law with an independent judiciary and the Privy Council in the UK as ultimate court of appeal, to name just a few reasons.
Therefore, if a company is engaged in substantive business operations in Mauritius with activities such as procurement, marketing, sales, treasury functions, etc., then it can clearly demonstrate that it does have bona fide commercial operations. Personally, I think that 'postbox' companies – where they still exist - are set to disappear.
3. How can Cim Global Business help clients meet the substance requirements?
Cim as a group is well-positioned to assist our clients. We have various business units ranging from property, finance, investment management, foreign exchange dealership and so on.
For instance, Cim Property has purpose-designed office space available to offer with a suite of support services such as IT and conference rooms for board meetings. Cim Forex can assist in foreign currency transactions. For example, if a shareholder has sent US dollars and wants to invest in South Africa, we can convert the dollars into Rand at a favorable rate. For staff recruitment and payroll management as well as other associated HR matters, our Human Resources Department team extends their assistance. Our asset management company can help in fund management as well as investment acquisitions in the local market or placing excess cash in high-yield products.
Over the years, our in-house legal team has also developed expertise in drafting constitutive documents as well as preparing the particulars for listing on the Stock Exchange of Mauritius, and the list goes on and on.