United States While there is the concept of economic substance, it takes on a different meaning or approach that other countries in the US. The doctrine of economic substance in the US is a tax-related law for preventing tax abuse where transactions must demonstrate substantial purpose and economic effect. It is regulated by the Internal Revenue Services. In the same year economic substance was codified, 2010, the US Congress enacted the Foreign Account Tax Compliance Act (FATCA) to target non-compliance of foreign accounts by U.S. taxpayers using foreign accounts.In order to regulate compliance, FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers. Moreso, reporting was required where a U.S. taxpayer holds a substantial ownership interest in foreign entities. Reporting was achieved by submitting information directly to the IRS or through the local government of the FFIs under FATCA Intergovernmental Agreements (IGA).
European Union Other nations took a similar yet different approach than the US, sampling the concept of FATCA. For example, the European Union and the United Kingdom have signed with the Organisation for Economic Co-operation and Development (OECD) in the fight against base erosion and profit shifting (BEPS). BEPS is a term that refers to “corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties”. Given that the OECD, an international organization, works to improve policies, it took the lead in developing the Common Reporting Standard (CRS) to obtain information from jurisdictions’ financial institutions and automatically exchange it with other jurisdictions annually. Like FATCA, financial account information is reported to relevant jurisdictions on the different types of accounts and much more.
Economic Substance is a further approach to combating the erosion of tax. The policy seeks to establish a business purpose and/or legitimate substance for the business’ existence and adequate presence.
Caribbean In the Caribbean, many countries have agreed to FATCA, CRS and Economic Substance requirements with various adaptations based on economic and government objectives. There is a greater focus on the implementation of these policies and requirements given the attractiveness of the Caribbean by persons resident or citizens of a taxpaying jurisdiction.
Countries engaging in FATCA and CRS, must report directly to the appropriate authority or through their local government. The information generally consists of financial account information, ownership and taxpayer details. This is an overly simplified explanation. Each jurisdiction takes advantage of exemptions and waivers based on other structures of reporting in place. The same goes for implementing economic substance legislation that varies from country to country. Overall the relevant activities that are scrutinized exist across the countries; however the treatment of each does vary.
