The OECD has issued a warning saying that low tax jurisdictions must prove that they are meeting the new economic substance requirements.
The international organisation wants no-tax and nominal-tax jurisdictions tos pontaneously report the activities of resident companies to the jurisdictions in which those companies' ultimate owners are residents.
Under OECD's base erosion and profit shifting (BEPS) action plan, jurisdictions can only maintain preferential tax regimes for businesses with "geographically mobile" income such as royalties if they meet the "substantial activities"requirements designed to show that these businesses have real economic presence there and are more than just a letterbox.
The substance requirement demands entities have substantial business activity locally; for example, in terms of staffed offices and management decisions made on the jurisdiction.
From 2020, low-tax jurisdictions will have to "spontaneously exchange information on the activities of certain resident entities with the jurisdiction(s) in which the immediate parent, the ultimate parent and/or the beneficial owners are resident", according to the OECD. 'This information will allow the tax authorities of these jurisdictions to assess the substance and the activities of the entities resident in no or only nominal tax jurisdictions."