BEPS Action 5: Countering Harmful Tax Practices More Effectively (Substance and Transparency)

Action 5 counters harmful tax practices, particularly preferential regimes (e.g. IP boxes, holding regimes) without substantial economic activity and lack of transparency on tax rulings.

• Minimum standard – mandatory for Inclusive Framework members
• Substance requirement: nexus-based approach for IP regimes
• Mandatory spontaneous exchange of information on tax rulings
• Peer review by the Forum on Harmful Tax Practices (FHTP)
• Annual review of preferential regimes

The OECD has been countering harmful tax practices since its 1998 report “Harmful Tax Competition: An Emerging Global Issue”. The Forum on Harmful Tax Practices (FHTP) has reviewed regimes since then. BEPS Action 5 modernised this approach through the nexus-based approach for IP boxes and rulings transparency.

The 2015 final report defined the nexus approach: only income from IP generated through own R&D activities qualifies for preferential taxation. New IP regimes had to comply with the nexus approach from adoption. Existing IP regimes were closed to new entrants from 30 June 2016; existing beneficiaries received grandfathering until 30 June 2021. The exchange of rulings started from 1 April 2016.

By 2024, the FHTP had reviewed over 300 preferential regimes across more than 140 jurisdictions. Numerous regimes were classified as harmful and subsequently amended or abolished. The peer review framework has been continuously expanded and now also covers non-IP regimes.

Action 5 as a minimum standard applies to all Inclusive Framework members. Covered areas include:

• Government preferential regimes (reduced tax rates for specific income types)
• IP boxes and similar intellectual property regimes
• Holding regimes and financial centres
• Cross-border rulings: preferential regime rulings, unilateral APAs, downward adjustments, PE rulings, conduit rulings, double-taxation relief rulings

• Nexus approach: IP regimes only for income from own or qualifying R&D activity
• Spontaneous exchange of information on rulings with affected states (within 3 months of issuance)
• Annual peer review of national preferential regimes by the FHTP
• Creation of ruling registers (transparency framework)
• Abolition or substantial revision of harmful regimes

3 corrections:
- IP regime amendment deadline wrong: end 2016 instead of differentiated transition periods
- Rulings exchange start date wrong: 1 January instead of 1 April 2016
- key_dates: IP regime deadline 2016-12-31 is incorrect
2 updates:
- last_amended date outdated: 2023-01-01 instead of more current peer review status
- official_url uses deprecated OECD URL format
2 clarifications.
2 notes.