Forum for Harmful Tax Practices has reviewed multiple regimes to identify which system is harmful to the tax base of other jurisdictions. The focus of the review was to determine the regime which provided preference for the geographically mobile business income.
Criteria for assessing whether the preferential regime is harmful:
- A regime imposing low or no effective tax rates on income from intangibles and mobile financial and other service actives is a crucial feature of the harmful tax regime. However, this does not alone determine the regime as harmful but a starting point for analysis.
- A preferential regime designed to be wholly or partially insulated from the domestic economy, which is known as ring-fencing, is another critical feature of the preferential tax regime. The local economy protects its jurisdiction from the harmful spillover effects of the adverse tax regime.
- The regime lacks transparency in financial or regulatory disclosures.
- The regime has no active exchange of information with other jurisdictions, which hampers the effectiveness of other jurisdictions’ tax enforcement.
- The regime encourages operations and arrangements which do not involve substantial activities or manufacturing.
- An artificial definition of the tax base.
- Failure to adhere to international transfer pricing principles
- Foreign source income exempt from residence country taxation
- Negotiable tax rate or tax base
- Existence of secrecy provision.
- Access to an extensive network of tax treaties
- Promotion of the regime as the tax minimization vehicle.