The International Tax Cooperation (Economic Substance) Act reflected the Cayman Islands' commitment to its obligations as a member of the Organisation for Economic Cooperation and Development's global Base Erosion and Profit Shifting Inclusive Framework and corresponding EU requirements for no or nominal tax jurisdictions. This article summarises the key elements of the act and draws upon guidance issued by the Tax Information Authority.
The new Department for International Tax Cooperation (DITC) Portal launched in early November 2020. The DITC has also issued an advisory setting out details of a phased opening of the DITC Portal, confirming that it will initially be available for Common Reporting Standard and US Foreign Account Tax Compliance Act purposes, with functionality for economic substance and country-by-country reporting being launched in subsequent phases.
The Cayman Islands has comprehensive economic substance legislation, under which in-scope entities that carry on particular activities must demonstrate economic substance in the Cayman Islands. The Tax Information Authority, which is responsible for monitoring and enforcing the substance requirements in the Cayman Islands, recently published guidance on economic substance for geographically mobile activities.
For many Guernsey tax-resident companies, the onset of the COVID-19 pandemic created difficulties in complying with economic substance requirements. As such, in November 2020 the Revenue Service released guidance confirming that it will take a pragmatic approach when assessing whether the substance requirements have been met by a company during periods where government-imposed restrictions were in place (including restrictions imposed by governments in other jurisdictions).
The Taxation (Implementation) (International Tax Compliance) (Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures) (Jersey) Regulations 2020 are expected to come into force shortly. The regulations will primarily affect promoters and service providers of certain arrangements, implementing a 30-day window to report disclosable arrangements to the Comptroller of Revenue. Failure to comply may lead to financial penalties and, in some instances, criminal penalties.
In 2020 the comptroller of revenue issued practical guidance which stated that where a company had to alter its operating practices to compensate for the COVID-19 outbreak, the comptroller would not determine that such company had failed the economic substance test under the Taxation (Companies – Economic Substance) (Jersey) Law 2019. As such, fund managers have had to make a number of adjustments to ordinary business practices in line with this guidance.
In March 2020 the Comptroller of Revenue released a concession confirming that where companies had to alter their operating practices to compensate for the COVID-19 outbreak, the comptroller would not determine that such company had failed the economic substance test under Article 6 of the Taxation (Companies – Economic Substance) (Jersey) Law 2019. Given that the pandemic remains ongoing, the comptroller recently issued further guidance in relation to the concession.